Q1 2022 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 2022 first quarter results.
As participants all participants have been placed in a listen only mode.
After management's prepared remarks, there will be a question and answer session.
Additional instructions will be given at that time.
As a reminder, today's conference call is being recorded.
Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings.
Thank you.
Good morning, everyone and thank you for joining us.
With me on the call today are Denise kilometers, President and Chief Executive Officer.
I will tell me as Chief Financial Officer.
Before we begin I will remind everyone that we have made our 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 1995.
Actual results may differ materially from those indicated by these forward looking statements.
As a result of various important factors.
Including those 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 on this call represent our views only as of today.
And we undertake no obligation 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 its website.
Now I'd like to turn the call over to Denise to begin the formal remarks.
Thank you, Jeff and good morning, everyone.
We're pleased to begin the new fiscal year with solid financial results, which reflect strong demand for our core categories of color and care among both DIY enthusiast and professional pilots.
Our first quarter performance also reflects our ability to navigate and effectively manage macro headwinds from inventory and supply chain challenges, which has enabled us to maintain a healthy level of in stocks.
I'm proud of our team for continuing to prioritize our customers and remaining focused on delivering a superior experience at every turn and believe we are well positioned to capitalize on the ongoing demand for our products and services.
Notably we're managing through the current.
Cycle, which is having various impacts globally due to restrictions and closures in certain countries.
As this latest variant and gain traction in the final weeks of the quarter. We continued to prioritize the health and safety of our team and our customers I am proud of how our teams rose to the challenge to serve our customers, while navigating a number of mitigation actions around staffing store hours and fulfillment.
In the first quarter of fiscal 2022 comparable sales grew six 1% net sales grew four 7%.
Gross margin increased to 51% and.
And adjusted EPS was up 26% year over year.
With this strong start to the year and favorable industry dynamics supporting our roadmap for 2022, we remain on track to achieve our full year guidance.
When we spoke to you last quarter I had been on the ground for just over one month.
With another 12 weeks at the company I've had the opportunity to dive deeper into the organization and has found the customer first culture talent and capabilities here at Sally to be remarkable.
We're just beginning to leverage the infrastructure and extensive resources that were put in place over the past four years as we execute against our four strategic growth pillars.
As a reminder, these include leveraging our digital platform.
Driving loyalty and personalization.
Delivering product innovation and advancing our supply chain.
I'm going to spend some time updating you on progress within each pillar.
On the digital front, we're creating a robust omnichannel platform for our DIY enthusiasts and silos.
Our Sally and BSG customers are utilizing our full suite of services across ordering and delivery, which allows them to get products, how and when they want it in as little as two hours.
During the first quarter, we completed the work to connect our cosmic <unk> App to our BSG store network to further enhance our fulfillment options of Bovis and two hour delivery for our stylists community.
Additionally, we are seeing increased engagement on the education section of the refresh of ESG website, as well as improved customer satisfaction rate around functionality and ease of use.
On the Sally side, we launched another convenience for our customers a virtual color consultant currently being piloted in approximately 35 Sally stores in the Dallas Fort worth area.
By way of a live video call conducted onsite. This new service provides an incrementally higher level of touch and expertise for our Sally customers seeking color and care advice and education.
Initial response has been positive and further strengthens our position as the leading expert in professional color.
Overall, we're continuing to increase our digital velocity this quarter e-commerce sales increased 22% versus a year ago, driven mainly by Bsg's refreshed ecommerce platform.
And represented eight 3% of total sales in Q1.
During the most recent quarter, our Sally U S and Canada stores fulfilled 35% of E Commerce sales.
As focused COVID-19%.
Rapid two hour delivery represented 10%.
And ship from store accounted for 6%.
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.
Moving to our second growth pillar loyalty and personalization.
In the first quarter, approximately 75% of sales at Sally U S and Canada came from our loyalty program.
In fact active member count continues to decline and stood at an all time high at the quarter end. Additionally.
Additionally, approximately 9% of our BSG sales in Q1 came from our Nathan and rapidly growing rewards credit card as compared to 8% in the previous quarter.
This represents yet another way, we are becoming increasingly engaged with our stylist community due to us as the go to resource for helping them profitably run their business.
Theres no.
Question that our customers are our biggest asset and we have the luxury of knowing who our customers are disadvantage coupled with our growing data and customer insight capabilities will feel more efficient marketing and position us to deliver increased personalization and create stronger connections with our customers.
All of which support accelerating revenue and increased customer lifetime value.
On the marketing front, we will be investing further in digital marketing and social media campaigns to drive traffic and sales in fiscal 2022.
As we aim to expand consider is consideration and acquisition of new customers into the Sally beauty funnel, we plan to broaden our footprint in three key areas that represent critical touch points to BD discovery.
First we're investing in brand ambassadors, who are viewed as authoritative voices on Instagram in tick tock that drive brand awareness and create content for their followers.
Beginning in Q3 will also be building our own Sally community of DIY Micro Influencers. This is a grass roots organic community building initiatives that will incorporate smaller influencers, who receive samples new products and invitations to events.
Lastly, we're creating a DIY 2.0 education platform for Youtube that is expected to launch in the third quarter.
Turning now to our third growth pillar product innovation.
The pipeline of innovation slated for fiscal 2022 is rich and we expect this to be a significant driver of growth throughout the year a few noteworthy callouts.
At Sally our new vivid color line Strawberry Leopard continues to gain traction both in stores and online on our dedicated Strawberry electric website.
Additionally, in the first quarter, we launched dashing, David glaze and at home, Joe manager as well as the IR unlocks turbocharged dryer are.
The high end Hairdryers that goes head to head with the best in Tech brands at a more affordable price point.
We have more innovation coming in higher end appliances in the second half of the year and we'll also be introducing strawberry leopard hair care products to supplement the recent color launch.
At BSG.
Q1 launch of the new four P. Tony Shampoo was among the best new product launches, we've seen from the <unk> brand.
Another key partner to us as well, which represents <unk> largest color brand.
This month, we'll see an exciting launch from their sub brand <unk>, which adds glossing to color.
This is expected to be the biggest launch for BSG in 2022.
Overall, a great deal of excitement around innovation and much more to come during the year.
With the customer at the forefront of our strategy, our fourth and final growth pillar is supply chain.
Our mission is to be in stock in color and care every time and we've made great progress towards building a highly automated integrated supply chain network that will take us well into the future and allow us to meet growing demand.
We're in the final phase of <unk> implementation and as of this week the system will be up and running in all Sally and BSG location.
The remaining step is fully integrated with our next talk next North Texas DC.
Once completed will be positioned to leverage and scale, our new capabilities across inventory forecasting localized assortment pricing and promotion.
As Louis shorten ship to me fulfillment times for 15% to 20% of our customers.
As we look ahead, even with the uncertainties that COVID-19 create we continue to have a great deal of confidence in fiscal 2022, and believe we are well positioned to continue driving topline growth at structurally higher operating margins in the years to come.
We are reiterating our financial outlook for fiscal 2022, and expect the business to generate strong cash flows and provide meaningful capital allocation optionality moving forward.
In addition to the four growth pillars I discussed we're focusing on building out additional opportunities that will fuel our business and create meaningful shareholder value over the long term.
I'd like to express my thanks to our talented and passionate team are committed to delighting, our customers and drive our confidence in the future.
With that I'll turn the call over to Marlin to discuss the financials and then we'll look forward to taking your questions.
Thank you Lee and good morning, everyone. We are pleased to start the new fiscal year with solid performance across our key financial metrics.
For the first quarter comparable sales rose six 1% and net sales increased four 7%, reflecting strong consumer demand.
As a reminder, effective this quarter, we replaced our same store sales metrics with comparable sales, which include sales from our full service divisions and franchise operations, including any related E Commerce sales.
First quarter traffic and conversion remained fairly consistent with recent trends as customers continue to shop less frequently but spend more when they transact with us on the whole <unk>.
Traffic was down but units per transaction average unit retail and average ticket all increased versus prior year.
Global E Commerce sales increased 22% to $81 million.
Representing eight 3% of total net sales.
The year over year increase reflects ongoing strength, especially with our recently refreshed BSG E. Commerce site as we continue to scale, our digital capabilities and utilize our new tools and resources to drive customer engagement.
Looking at gross profit first quarter gross margin came in at 51% up 70 basis points to last year, reflecting strength in both Sally and BSG segment.
Which both delivered increases in product margin that was partially offset by higher distribution and freight costs.
Moving to expenses.
First quarter SG&A totaled $386 million.
Up 6% versus a year ago.
The year over year increase is primarily attributable to higher labor costs increased expenses in our international markets related to reopening this year and planned increases in marketing spend.
As anticipated from a rate perspective, SG&A increased modestly.
Of 30 basis points versus a year ago.
We continue to expect that our store optimization program will begin serving as an offset to wage inflation beginning in the latter part of 2022.
Turning now to earnings we delivered strong profitability in Q1.
Adjusted operating margin increased 70 basis points to 11, 9% adjusted EBITDA margin increased 50 basis points to 14, 8% and adjusted diluted EPS rose 26% to 63.
Looking at segment results at.
As Sally beauty consumer demand was strong across the us Europe and Latin American markets.
Comparable sales increased four 4% and e-commerce sales totaled $32 million for the quarter.
For the global Sally segment, the color category increased 5%, while hair care grew by 17%.
For Sally U S and Canada vivid colors grew by 12% and represented 27% of our total color sales.
Gross margin at Sally expanded 70 basis points to 58, 4% compared to the prior year as we continued to generate solid product margins driven primarily by pricing leverage.
Segment operating margin was also strong up 50 basis points to 17, 9% compared to the prior year.
And the BSG segment comparable sales increased eight 6% and salons were essentially operating at full capacity in the U S and Canada.
E Commerce sales totaled $49 million for the quarter, representing growth of 47% compared to the prior year.
The color category grew 12%, while hair care was up 10% compared to the prior year.
Gross margin and profitability at BSG improved significantly on a year over year basis.
Segment gross.
Margin was up 120 basis points to 41, 1% compared to the prior year driven by improved product margins as a result of pricing leverage while operating margin expanded by 150 basis points to 14%.
Moving to the balance sheet and cash flow.
We ended the first quarter in strong financial condition with $298 million of cash and cash equivalents and zero balance outstanding under our asset based revolving line of credit.
At December 31 inventories were approximately $1 billion.
Up 12% versus a year ago and as we discussed on our last earnings call. We plan to continue building inventory levels and made the strategic decision to pull forward purchases in order to mitigate from ongoing supply chain disruption.
We expect our inventory levels to remain elevated in the short term and come down in the second half of the year.
For the quarter cash used from operations was $5 $7 million driven by the expected carryover of working capital requirements from the fourth quarter of fiscal 2021 as well as the planned buildup of inventory during the first quarter of fiscal 2022.
Capital expenditures in the quarter totaled $26 4 million.
We expect the business to generate strong operating cash flow in fiscal 2022, primarily in the second half of the year.
Importantly, we remain focused on prioritizing strategic growth investments as well as returning cash to shareholders.
Last quarter, we stated our intention to restart our share repurchase program.
During the first quarter, we used excess cash to repurchase three 7 million shares at an aggregate cost of $75 million.
This leaves more than $600 million remaining under our current authorization.
At the end of the first quarter, our net debt leverage ratio was 187 times.
We are pleased to have entered the year with strong momentum as we remain focused on our core growth pillars to drive the business forward.
We are reiterating our full year 2022 outlook against the backdrop of a dynamic macro environment.
Including the recent omicron surge and supply chain challenges.
While we experienced some impact to traffic and sales in January we expect this surge to pass quickly similar to recently.
In addition, with nearly two years of pandemic experience under our belts.
Our teams know how to execute and navigate during these dynamic periods.
Our guidance for 2022 includes 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 fiscal year 2021.
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.
You will hear a tone acknowledging that you have been placed in Q you may remove yourself by pressing the same at one zero command once again, one and then zero for your questions or comments.
Your first question will come from the line of <unk> with Oppenheimer.
Your line is open.
Good morning, and thanks for taking my question, So just going back to the commentary on the variant so it sounds like it didn't have much of an impact on your Q1, but you expect it to have an impact on Q2 is that about the right way to think about that.
Hey, good morning, <unk>. Thanks, so much for asking the question and we certainly saw a little bit of impact at the end of the end of our first quarter, particularly the last two weeks of December .
Things, where we just had the employees that were needing to be out sick and that change kind of rippling through we've seen a little bit more impact in January but I think for us. The big part is is it looks like this wave went and increased very quickly it looks like it's coming down quite quickly and we really figured out how to navigate our way through this so while we haven't seen as great.
As a result in January as we might have hoped we're very pleased with where we are and think we're well set up for the rest of the year.
Okay, Great and then maybe just a related question to that I know with your loss last call. You guys mentioned that you expect sales to be a stronger higher in the first half of the year than the back half and I think you also mentioned that you expect the majority of your expansion in the back half of you on the gross margin line. If you can just update us in terms of how to think about quarterly cadence for sales and.
Going forward, yes, so thank.
Take you through the various lines of the P&L.
Starting with our sales pacing.
As we've mentioned Q1 was a great start to the year. So again feeling really good about the full year.
Given the surge in omicron in January .
We are looking at Q2 sales.
Being a little bit lower than Q1, Q2, historically hasnt been our lowest volume quarter as well so.
So we do have that planned out a bit.
Still growth, but the growth just on a year over year basis is going to be as strong as Q1.
As Denise mentioned, we see the search you'll come in in the quarter, but we also expect and actually are starting to see a paper. We think that we're starting to see cases peak in a lot of geographies. So expect to move past it but as I mentioned Q2.
From an overall perspective will be a little bit lower from a growth rate perspective in Q1 was when we look at the back half those comparisons get a lot tougher when we're looking at it from a year over year basis keep in mind last year high at the beginning of the year is when we had some significant closures and restrictions and then that starts to loosen and we go.
Into reopened markets in the back half of the year. So we have more normalized comparisons when youre looking at the back half all of that said, our full year or full year outlet outlook contemplates all of this and.
And we have confidence in the full year guidance that we have.
When we look at the gross margin line.
We did have a really strong performance here in Q1, having a good benefit from pricing leverage that we were able to execute.
So we're looking at on a full year basis expansion of 40 to 50 to 60 basis points.
That is relatively consistent consistent from here on out.
As we look at the quarters and then just a.
Finishing out with the SG&A.
On a full year basis, we do expect as we've.
As we've highlighted in the past to increase year over year that'll be increase in dollars and then rate will be up slightly.
And our expectations on this line takes into account the.
Inflationary pressures, we've been talking about mainly from labor and we're seeing high freight costs as.
As well we also have increased expense planned in our international markets as we reopen those markets in 2022.
And then we also are investing in our growth initiatives.
As well as marketing, so I'm looking to get back to more normalized marketing rates.
We did have increased marketing dollars in Q1, we made a little bit of progress towards that more normalized rates, but.
They'll have more room to go there. So we will still work towards increasing that to that investment as we go throughout the year.
So as planned.
SG&A dollars are expected.
To be relatively consistent from Q2 on out a little bit of a step up from Q1 to Q2.
And then so from a full year basis that puts us in a great position to deliver.
Full year operating margins pretty much in line with where we've been last year.
Okay, great. Thank you for all the color.
Thank you. Our next question comes from the line of Steph Wissink with Jefferies and your line is open.
Thank you good morning, everyone I had a follow up on your comments on pricing I'm wondering if you're willing to quantify the level of price that you took and saw in the first quarter any incremental pricing you plan to take in the second quarter, just trying to reconcile some of the inflationary pressures within the gross margin line.
Yes. So this is Denise I will just start with some broader commentary and then Marilyn can fill in any additional details I think importantly for us the way that we're really thinking about pricing is ultimately looking to stay in line with the market cover costs that we see coming through and then strategically price, where we can and we're really able to do that with a new set of tools.
<unk> available to us in a stronger set of analytics around price elasticity and what we're seeing so while it is while pricing is a very important lever for us we take it equate to prudently to be sure that we're making those choices and staying in line with what the consumer expects in general our price inflation has been trending.
Moving towards with CPI has been we're not particularly outsized so no surprises there from the customer perspective, and look forward to continuing to use the tools to do more as we go I think importantly, what I'd mentioned is in the first quarter. Our sales growth was balanced it came from both price and volume improvements, which is what we're really looking to.
To be able to deliver.
Do you want to add anything to that yes, and I guess just to reiterate Q1. The expansion of 70 basis points that was driven largely by the pricing actions that we took were also having to overcome the inflationary pressures both in the margin line, we talked about it in the SG&A line, but we also have.
Rising freight and DC costs that we're overcoming on that margin line. So really pleased with the with the delivery by the team to be able to expand the margins. They were strong at both Sally and BSG.
And then just in terms of the way that we think about it going forward I think to Denise. This points those are our pricing objectives, but I think what gives us confidence is just our ability and our advantages to take advantage of a when the market moves we can move.
And some of those things are if you think about our core categories. They are highly inelastic.
Our and highly differentiated core and care product Assortments at Sally we're the only ones that really do pro colored for home use 45% of our assortment from owned and exclusive brands and then on the BSG side, where the largest wholesale distributor to the Siloed stylus and we have over 50% of those sales coming from exclusive so.
We have a highly differentiated assortment, we have sticky and loyal customers. It's a unique position in the market that we are able to leverage and then as Denise mentioned continuing to build on our strategic pricing and promotion capabilities and tools and I. Just finally to say we have a proven track record of executing these price increases and we really haven't seen a notable change.
<unk> and the customers' behavior.
That's very helpful. If I could just follow up on loyalty and marketing I think that was one of your big strategic pillars talk a little bit about the marketing investment you made in the quarter I know traffic was down but other kpis were up so maybe help us reconcile how youre thinking about the return on investment on that marketing investment and also on the <unk>.
<unk> program advancement that you've seen thank you.
Yes, absolutely one of the things that I came into the company and was still impressed by is the number of our customers that we actually know and can associate to customers about 75% of our sales in Sally and 100% in BSG.
Our opportunity with our marketing investment while we can do want to continue to reach our existing customers a big opportunity for us is to put more people in the top of the funnel and understand who else that we can attract so when you think about investments that we made in Q1 and it really was around digital and performance marketing and in the pushes that we could do important.
Ali I think we did try to push a little bit harder upper funnel versus just to the customers that we knew and so when we think about the return on the investment there. We know it's a little bit lower return when we go after top of funnel, but we do want to see that customer base, increasing and I think a really strong point to that as we finished the quarter with a record level of loyalty customers.
In our pool that number went up again from the end of Q4 to Q1, and we have over 17 million customers on the Sally side that we can talk to you and we've got about 9% of our sales on the BSG side coming through our credit card, so where we're trying to reach people and get them to be stickier. The metrics that we can measure we feel.
Pretty good about the trajectory that we're on.
Thank you very much.
Thank you. Our next question comes from the line of Oliver Chen with Cowen <unk> Company and your line is open.
Thank you Heidi.
The Sally comp.
Little bit.
A relevant issue.
What are some.
Catalyst.
Going forward.
And as we think about you.
Although there'll be up right.
Yeah.
Would ultimately.
Reverse themselves.
Oliver I think unfortunately, you're breaking up could you try to repeat your question.
Sally Division.
Comp and.
And key drivers at the Sally Division.
Oh, certainly so if we think about the business and how our comp sales for.
Performed in the quarter and we saw particularly strong sales on the BSG side of the business as salons were really fully reopen lapping last year.
Where there were still a fair amount of.
Challenge for a number of stylists in a number of states in operating their businesses. When we think about what our performance was at Sally we should feel quite good about our performance performance is pretty consistent across geographies. Sally is the business, where we saw a little bit more slowdown or at the very end of December with the uptick in COVID-19 .
And we needed to have a few shorter store hours and things like that.
But overall felt good about where we were and what we're lapping and where we came out with that business care was particularly strong in delivering in the quarter.
<unk> good growth with our Strawberry leopard products continued growth with color, which are all the indications of us that we've got a very healthy business in that valley gene to go forward.
And then you think about our Europe , and Latin America businesses, they were actually up against a little bit easier compares to last year. So that helps the number in the beginning of the year and that tapers as we go through the year. So.
All in all <unk> felt good about our solid performance.
Thank you.
Thank you.
Next we will go to the line of Simeon Gutman with Morgan Stanley and your line is open.
Morning, everyone I wanted to follow up first on <unk> in January .
Can you give us a sense of now that maybe the back half of the month seems like things have gotten better at least in January and if thats. The case are you seeing a recovery.
As rapid as the variance is going and can you talk about the.
Maybe the cadence of BSG versus.
<unk> SBS, if there was any nuance there and how all mcdonalds was handled by the consumer.
Sure I'll start and then if <unk> wants to add anything in terms of what we're seeing I think in the last week or so you can definitely see an improvement in traffic trend. We also see an improvement in the amount of our associates, who might be out sick or experiencing other challenges in their lives. So we do see that.
That normalization is starting to happen.
We still have fairly high case counts, so I won't say, it's completely behind us at this point I think that theres, a little bit more to go and in general I think Sally because it's just a retail business and has a lot more stores in a lot more.
Team members day to day operating in that environment, it's a little bit more pressure than the BSG business did.
The stylus business stayed pretty sticky in terms of our sales in.
Progress as we've gone through omicron, not to say that there wasn't a dip.
But I think we're seeing the same general pattern up and down the BSG trend was just probably a little less.
Noticeable than what we saw on the Sally side of the business.
One thing Thats unique this time in Europe that is different than prior times is this time, we really only saw true lockdowns or shutdowns and a very small part of our geographies. The Netherlands for example, actually locked down again, but compared to other variance where that was a regular course of business for a lot of our European markets. This time.
While they certainly had some additional restrictions they didn't go as far as shutting down businesses in most parts of Europe . So that was a that was a pleasant surprise to us and just in terms of how the variance being managed.
Thanks for that and then my follow up is can you talk about the elasticity.
And both of the businesses on the surface and this is just an observation it looks like BSG seems to be more inelastic given how the topline is performing in some of the margin gross margin flow through whereas it looks like SBS. It looks like there's maybe some pullback.
Pullback in units I know you said units I know you are up I don't know I don't know how you are classifying those across the brand.
And then as it is.
A follow up within that follow ups. So sorry about all the follow up is there any anything you can share within your full year guidance is anything changing between BSG and SBS based on how Q1 played out.
And you can start with the inelastic question.
So, yes, I would say from both businesses.
Have some advantage in terms of the in.
Elasticity.
But in different ways. If you think about the Sally side. When you think about the Sally customer the Sally really is the only provider of pro color for home use I mean, I would say, it's at least 80% market share when you look at the at the market share.
Statistics, and so you think about where does the customer go if not Sally so their choices either they trade down to box color and.
And youre not going to get the quality results or youre trading up to a silo stores lawn treatment.
Now, we're talking about going from an <unk>.
All in call it seven or $8 to buy a tube of color and if you need to buy the bull and everything else you might be at $15 going up to $150 service. So.
So it's just such a uniquely positioned place in the market. If you trade down to the box color you may save $5, but you're really going to get not as good a result, and so for a $5 difference on us on its 10 or $15 purchase.
That's where we see the stickiness and the loyalty of the of the Sally consumers. So once we give them the confidence and teach them how to use the product.
They're very loyal so at that point really we have moved prices quite a bit over the last.
For sure six months and almost up to a year.
In various ways and really haven't really seen that customer change behavior.
And then I think you had a follow up question there and is there anything changing on our full year guidance based upon what we saw in Q1 and I would say in general no.
I think the cadence of the year is likely to play out the way that we expected I think importantly, Marlow mentioned, we always plan every year that the second quarter is a little lighter quarter than the first quarter in terms of sales.
We're seeing that play out and we would expect the rest of the cadence of sales to be to be what we expected I think the one piece is a little bit different as we would say we had stronger gross margin performance in the first quarter with the strength of pricing really coming through and working to offset some of the other costs. So I think the one piece is a bit more.
<unk> is our gross margin gains throughout the year are going to be fairly consistent quarter over quarter and versus before assuming that they were going to be a little bit more back half weighted yes, I will say, we did have some supply chain challenges. This quarter, we talked about the salary there was some pressure in the electricals and the styling tools and so.
We've been dealing with these challenges and disruptions for some time now one move we did make differently and we started to talk about this on our call last quarter was really to frontload the year with the inventories our inventory levels going upward the healthiest place we've ever been for the pandemic so with that.
We feel good about being able to deliver to visa b full year sales at the cadence that we've talked about.
Okay. Thank you both.
Thank you.
Our next question comes from the line of Olivia Tong with Raymond James and your line is open.
Great. Thanks, good morning.
And to follow up a little bit put a little bit of a finer point on your expectations for this quarter. So based on your modeling.
Do you have a sense on when you think you can get back to sort of what your pre on our current expectations.
<unk> and whether you know on top of all Macquarie and you've got whether you've got inflation macro et cetera et cetera.
Sort of.
Falloff of stimulus I'm, just wondering if you could touch on that a little bit and then just following up.
With respect to the store footprint optimization.
Have you identified the let's call. It 50 to 100 doors, you're planning to close in and what do you think is sort of the right run rate or ending expectation. There is there a continued calling of the store base or or is it sort of once you do this you feel like we're back to.
Sort of stabilization in terms of the new store count. Thank you so much.
Maybe I'll start with the first one which is where we are and what did <unk> do to us that we didn't know going into the planning process.
We came into this year expecting the world to be dynamic we've been living this this up and down in this choppiness.
For two years now.
We had expected some pressures whether that'd be labor disruption, whether that be supply chain disruption or are just uncertainty around the pandemic. So I don't think again, we're seeing a whole lot of difference in the way that we're thinking in a way that we're planning in the way that we expect the numbers to play out we do think theres more pressure just in January .
Like we mentioned, but we also have lived through these waves and our teams know how to navigate and deal with these challenges and again I think with our positioning with what we've done to get past and try and combat a lot of these supply chain disruptions with the earlier Poland.
I, just think we're really well positioned.
To really deal with all these puts and takes in all of the dynamics that are going on.
You look at last year, it's it's just as Crazy you mentioned stimulus you mentioned weather.
You mentioned Covid waves, we've experienced at all and we know how to deal with it. So we're feeling pretty good about about what we've planned and.
Not a lot has changed other than we are learning new ways to deal with this with the ups and downs.
And then I will jump in a bit on the store optimization question the in throughout.
When we think about the store optimization opportunity for us a big opportunity is really to focus on where we can get sales transfer. So I think as we've talked about before.
Our stores are generally all profitable the opportunity for us is to shift the sales that will be able to reduce the cost base a bit to help offset other pressures and have that be.
Positive to the business overall.
Been running a test we continue to be pleased with the results of the test, which is about a 90 store closure.
We will make will continue to read out a little bit longer, but specifically for the stores that we have identified for closure. This year. All those stores are identified so the path that we have for 2022 is very well known as the 100 plus stores that will close partially offset by some new openings is the markets that make sense for us to be in but that.
It is a path that we were already planning to go down and feel good about the selection of those stores I think when we bridge into the longer term and where this could go I think we want to continue to understand the sales transfer from the test and also understand that compared to where we are today and the operating margin of the company and the efficiencies of the company.
Our stores now service and more of our e-commerce customers with both us and two hour delivery.
And overall profitability has gone up as we've been able to carry through pricing, while still managing our cost base. So that profitability in a number of our stores is even healthier than what it was before.
So we'll read both of those and we would expect as we get later in the year to have a strong review post 2022.
Where our path might take us here, but overall feel good with what we've done so far.
Got it that's helpful and then on the Sps.
The people, who are who are buying an SBS, but theyre not loyalty members by 25% of customers.
Can you kind of give a little bit more color on why you think they arent members and have you done any diagnostic about why they may not be joining or if they're just new to the.
New to the store would love a little bit more color there.
There could be all types of reasons I'll throw out a few of one I think when you first see customers come and shop in the store if they're a new customer to Sally we wouldn't really expect them on day, one to sign up for our loyalty program and we do continue to have new customers come into the store on a regular basis, so that certainly a fraction of it.
There are some other folks who honestly just arent as comfortable signing up for our loyalty program in terms of what the dollar amount of spend is when they come in.
As of sharing information, we think there'll always be a population of people that if they are not actually required to participate that day, because he might not choose to participate in in all honesty, that's completely fine with us we love those customers still coming in and shopping with us Jenna.
Generally speaking our customer who is not a loyalty customer has a little bit smaller basket than what we would see if a customer who has an average loyalty customer clearly our best loyalty customers.
Outside baskets and outside frequency and so overall no specific other drivers about design of program or something that we need to be offering more or less to get them to sign up I think it's much more macro issues as to why they might not have signed up for an account at this point in time.
On your Sir Thank you so much appreciate it.
Thank you. Our next question will come from the line of William Reuter with Bank of America and your line is open.
Hi, So I have two questions. The first is you.
You mentioned that you've been pushing through all the price increases the vendors have been.
Way I guess what types of increases in price have you seen or maybe are you seeing on a year over year basis at this point.
Yes.
Yes, I'd say, just one thing to point out too from vendor price increases that is a very normal thing vendors do this at least annually, sometimes more often than that so when you think about it on the BSD side.
That's another thing to point out for the stylus, they're used to price increases. This is this is a normal recording recurring part of.
Their lives from and in terms of the actual amount again, it's mostly keeping up with CPI and inflationary pressures I would say it's been.
Probably lower than past years, some a little bit on the higher side, and maybe a little bit more often more than once a year. Several times a year has been kind of more than <unk> of the cadence and kind of recent history, but again, the shopping behavior hasnt changed especially for the stylists.
Their main concern is to keep their clients happy and they know how to do that through the products that they have confidence and comfort with and again very loyal to that and so pricing really hasnt changed their shopping pattern.
Okay, I guess, the 6% comp does that mean units were relatively flattish is that fair.
So Denise was pointing out that it's coming from both pricing and volume.
Okay. The second is your net leverage is down below two times and you have a two five times target you repurchased $75 million of shares in the quarter I guess, what does this say about the pace of your share repurchases and I guess, how focused you are on getting to that target of two five times.
So maybe to rephrase I am not sure we put a target out there.
I think what we would say is our leverage ratio at 187 to one.
$1 87 is a great place to be we're really pleased with with where we are you know I would just go back to the the overall our businesses such as strong cash flow.
<unk> generating model.
Our team is just really came through.
The pandemic and dealing with all the dynamics in this environment to really post a really strong balance sheet. So we've got $300 million of cash on the balance sheet. Historically, we would usually run around $200 million. So we.
We definitely have some excess on the balance sheet, we don't have anything outstanding on the ABL.
So we're positioned well in terms of deploying excess cash will continue to prioritize.
We will continue to prioritize our.
Growth initiatives, we did like you say restart the repurchase program.
We've got <unk>.
$95 million deployed that was about 3% of the company I think we purchased there.
Got $650 million left on that.
And then we have further opportunities to optimize our capital structure, you've seen us do that in the past, where we can maybe maybe get some additional interest savings on the P&L. So you.
Put all that together you think about where we are in terms of free cash flow generation $200 million is what we are predicting for this year that will be back half loaded, but $200 million of cash on the extra cash on the balance sheet $200 million of cash generation and certainly sets us up well to to continue to return value to <unk>.
Our holders through share buybacks as well as optimize the capital structure.
Great. Thanks for taking my questions.
Yes.
Thank you. Our next question will come from the line of Jenna Giannelli with Goldman Sachs and your line is open.
Hi, there thanks for taking my question.
On the inventory balance of being up at kind of a healthy amount year over year and said youre comfortable are very comfortable with it now just curious if you can comment a little bit more on how that looks across categories and if there are any where you're kind of looking to still fill out or or replenish on their back in some of the industry supply chain headwinds.
Yes, so I'll start and let Marilyn jump in I think that we're really pleased with what we've been able to pull forward and be sure that we can service our customers when we think about where.
Some of that inventory really when it's into our core products. It's our fastest moving products. It heavily supports our BSG business around color also our Sally business on the color front, but much much focused on that core category of.
Of color and being sure that we're in stocking and cross the entire line for what people are looking for and be able to continue to manage that demand. So very focused in terms of where the step up has been our opportunity. We have a few categories, where styling tools and some other things might be a little lower than where we need to be but as we're able to get those in.
In <unk> and into the system, we believe that's going to be offset by that color inventory being appropriately utilized through the through the business and through the quarters.
Okay excellent. Thank you and then just one additional question you emphasize kind of the strong market share, particularly on the on the Sally side right now call. It 80% that's a good place to be I.
I guess just comment a little more on the broader competitive landscape, whether it's you know mass or even Amazon professional that's been quiet, but any updates there on on either of those and the broader competitive landscape. Thanks.
There really hasn't been much new news I think we feel like we're watching all the competitors are certainly all the same players are out there that have been out there before and we keep an eye on what is happening there.
Haven't seen any of them meaningfully step closer to what our core offering is I think that if we looked at it the other way and said how are we really looking to position ourselves for the future I mentioned on our prior call. The work. We're doing this year is to really start to say how do we expand our view of what we can stand for leveraging <unk>.
Capabilities and our skills, so while we're watching competitors, who might be looking a little bit more closely at places that we play although havent seen any any new traction there.
We're also really open to looking for places that now that the transformation is complete.
Set on our growth agenda, we have the data and analytics that we need to be driving our business forward that is the opportunity that we can also look for new areas of growth for ourselves.
Makes sense. Thank you so much.
Thank you and with that Oh, we have no further questions. We'll speakers if you have any closing comments.
I'd just like to thank all of you for joining the call today, and importantly, I'd like to thank all of our associates around the world.
Is never without a lot of effort that our customers are so well served and I. Appreciate all that they do to serve us well and drive our profitable business and growth in the future. So thank you all for joining the call today.
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