Q4 2022 Sally Beauty Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2022 fourth quarter results.
All participants have been placed on a listen only mode. After management's prepared remarks there'll be a question and answer session. If you have a question. Please press one zero to place your line in Q.
As a reminder, this conference is being recorded for replay.
Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Please go ahead Sir.
Thank you.
Everyone. Thanks for joining us.
With me on the call today are Denise <unk>, President and Chief Executive Officer, and Marlo Cormier 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 at our investor site at Sally Beauty Holdings Dot com.
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.
Adding 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 obligations to update them.
The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measure measures in its earnings press release and on its website.
Now I would like to turn the call over to Denise to begin the formal remarks.
Thank you, Jeff and good morning, everyone.
In fiscal 2022, we delivered full year net sales of three 8 billion.
Gross margin over 50% and adjusted EBITDA of more than $500 million.
We did this by leveraging our people platforms and scale to delight, our for Sally beauty customers and BSG amidst the persistent inflationary pressures and supply chain disruption.
I'm, particularly proud of our team's ability to navigate the numerous macro challenges over the past few years, becoming more agile and focused organization overall.
Importantly, during our transformational period from 2017 to 2021, we built the infrastructure and key foundational elements to take our business well into the future, including our CRM platform, our advanced digital commerce capabilities and our enhanced supply chain.
On today's call, we'll be sharing our vision for the Sally beauty holdings of the future, including new strategic initiatives will be focused on.
Long term and will provide long term growth algorithm. So it will be executing towards over the coming years.
Ahead of US, let me take a moment to comment briefly on the current operating environment as well as share a few highlights from fiscal 2022.
First the operating environment.
As we ended fiscal 2022 inflationary pressures continue to influence customer and solid behavior.
And Sally U S and Canada.
Inflationary environment continues to cause some of our customers to color less frequently and reduced the size of their basket when they shop with us.
While the situation of Bakken crude.
We believe our focus on customer service and our pro quality for less marketing is resonating limiting additional pressure on sales.
In BSG ourselves or focus on saving time and maximizing profitability.
We continue to see them purchasing closer to need while responding favorably to promotional bundles and education for express services.
We believe farms had a healthy back to school season, followed by some softening of demand once customers transitioned into their fall routine.
On the supply chain front, while improving some of our vendors are still experiencing raw material shortages, which is impacting stock levels and a few of our top performing skus.
As we look to fiscal 2023, we're expecting a similar operating environment, what we saw at the end of fiscal 2022.
Turning to wins in fiscal 'twenty, two I'm pleased to share several highlights.
Throughout the year, we remained at the forefront of product innovation across the Sally and BSG segment.
This includes our strong partnerships with Premier brands like Wella matrix Joy code, all the books and we done that.
What was owned brands like Ireland and Strawberry leopard.
We also grew our loyalty program.
As you know our loyalty program drives the majority of our sales at Sally U S and Canada and is an important indicator of customer retention.
As of year end, the number of Sally U S and Canada active loyalty members was $17 million and represented 77% of sales for the fiscal year.
At BSG, a rewards credit card continues to benefit our pro customers and helping them manage their working capital needs for their business.
The rewards credit card comprised 9% of BSG sales for the fiscal year.
New conveniences and increased personalization enable us to better serve our customers.
Initiatives, ranging from sally's virtual teller expert and to our deliveries.
Personalized shopping journey were met with tremendous customer response and continue to gain traction.
Another important means for better serving our customers is the advancement of our supply chain.
As a top destination shop with professional color and care.
Our goal is to be in stock in these core categories every time for our customers and.
And we made great strides last year towards increasing speed to market and improving our in stock levels.
Standing macro related supply chain disruption.
The underlying strength of our supply chain and also allowed us to significantly expand our partnership with Regis salons during the latter part of 2022.
After a multi quarter rollout, we now have full distribution for all 5000, plus three dislocation.
Finally, we further strengthened the balance sheet in fiscal 2022 with the full repayment of $300 million outstanding under our senior secured notes, while returning $130 million to shareholders through the repurchase of almost 7 million shares.
Our historically strong cash flow generation and our healthy balance sheet leave us well positioned to invest in new business models and services to drive growth and return value to shareholders.
As I shift my comments to our longer term vision and strategic initiatives I think it's important to reiterate that underpinning our advancements in fiscal 2022 is our operating model centered on owning professional hair color and care for both the DIY enthusiasts and professional stylist.
At Sally beauty were distinguished by our differentiated core in color and care for home use and this is supported by the unparalleled expertise education and content, we provide to our customers.
At BSG, where the largest north American distributor of professional color and care and we offer stylists and salon. The most extensive portfolio of third party brands in the market most of which are under exclusive distribution right.
Beginning in fiscal 2023, we will be leveraging and building upon these core competencies and competitive advantages as we embark on our new strategic initiatives to drive growth and profitability.
Our three strategic initiatives are as follows.
Enhancing our customer centricity.
Growing high margin owned brands at Sally beauty and amplifying innovation.
And increasing the efficiency of our operations and optimizing our capabilities.
Moreover, we will also be focused on advancing our ESG and our diversity inclusion and belonging commitment.
Let's dive into our strategic initiatives.
Our first initiative is enhancing our customer centricity.
I'll start with how this comes to life at BSG.
Designed to drive continued growth in BSG, we are building a services ecosystem for our stylist community designed to empower them to operate more value added and profitable businesses.
This fall our first step in these efforts was the launch of a new strategic partnership with foreign HQ.
Which enables our stylists to increase retail sales through.
Through strategic customer engagement, while carrying less inventory.
One introduce customizable digital storefront platform gives us the ability to carry the product selection from thousands of choices and enable clients to purchase directly from their shops without having to hold inventory.
By providing ourselves with a digital storefront, a seamless funnel and powerful support for they will have the ability to sell the full line of BSG products and increase the profitability of their business.
In addition, stylus informed we will be able to engage with their customers using advanced marketing tool.
Present product recommendation and follow up on previous orders.
The initial response from the South community has been tremendous and the concept is gaining traction.
As we look beyond fiscal 2023 for BSG. In addition to our stylists platform a salon HQ, we're exploring additional value, creating services, while continuing to amplify innovation and leverage our exclusive distribution rights to help our stylists to grow their businesses.
On the retail side of our business, we know how much our customers value the inspiration education and advice they get from Sally.
We're leveraging this core competency to create an unrivaled platform for the future.
We already have certified color consultants, who provide in store education and advice.
And for more complex needs Sally customers can access next level expertise by connecting with our virtual color experts through our live video calls conducted onsite in our stores.
We began piloting this convenience in the first quarter of last year and have found that our Sally customer loves this incrementally higher level of touch and California.
We currently have 45 stores offering virtual power expert and plan to expand this to approximately 30 additional stores as well as our Sally website in fiscal 2023.
Building upon this high touch service offering we've created studio by Sally.
Our new concept store that includes a DIY centric salon.
Studios I Sally allows for personalized appointments with a licensed stylists, who will train and educate the consumer on how to color their own hair and achieve their desired result.
This is a new and inventive way to engage educate and empower consumers using interactive experiences to showcase our on trend color and care expertise and insurers drive product sales.
We conducted extensive market research to vet this concept and the results tell us that there is a great deal of excitement among not only our core customers, but also lapsed customers and non Sally customers alike.
Studio by Sally will have a digital first focus from virtual check in and digital education throughout the store to DIY definitely streaming at the storefront and take home videos from individual forlorn teaching session.
We plan to pilot an initial six stores in fiscal 2023 and believe there is an opportunity to grow this concept to 100 locations throughout the U S. Over the next three years to four years.
Turning to our second initiative growing our high margin owned brand penetration and amplifying product innovation.
While you note the delivering product innovation has been a core tenant of our operating and growth model for years. This remains of crucial importance for our company and you can expect to see us build upon our already strong track record in the quarters and years ahead.
Indeed innovation has been a key differentiator for both Sally and BSG and is expected to be an important driver of growth going forward.
We will continue to cultivate differentiated products through strong relationships with the best innovators and beauty companies in the world.
We see our customers and stylish reach is an exceptional asset and driving joint growth with our vendor partners.
As part of this effort, we will also be prioritizing secondary categories, notably now too.
To ensure that we're on trend and in stock with focused assortments beyond our core.
Additionally, we see great opportunity to grow our high margin owned brands.
This includes powerful brands that we've built from the ground up like ion, which today is a $280 million brand.
February Leopard is another Great example of our innovation engine, we're pleased with the traction we gained with it in just one year.
We will continue to be highly selective in our approach to developing proprietary brands focusing on areas, where we can leverage our expertise to fill a void in the marketplace and garner meaningful share.
Our latest innovation bonfire showcases this strategy.
As we announced back in October .
<unk> is a new line of pro quality bonding products that we're bringing to market a tremendous value to customers.
I'm incredibly proud of this innovation, which leverages, our vast knowledge of hair care.
Addresses the growing consumer demand for powerful hair repair solution and fills a void in the market for bonding products at accessible price points.
As we look ahead, we believe the owned brand penetration as Sally can increase from 33% of sales in fiscal 2022 to over 50% in the next four to five years.
Now I'll turn for our final strategic initiative, increasing the efficiency of our operations and optimizing our capabilities.
We will focus on three opportunities in this area, including optimizing our store base.
Consolidating and leveraging our enhanced supply chain.
Capturing efficiencies by rethinking the way we work.
First store optimization.
Our investments in recent years allowed us to build a robust omnichannel platform that will service well into the future.
As we focus on delivering a seamless omnichannel experience.
We've enhanced our digital offerings to meet customers, where and when they want it.
In turn our channel mix has shifted and we expect it to continue to evolve.
In response to the shifts and continued expense inflation during the past year, we conducted a 90 store optimization pilot, which yielded positive results with sales transfer exceeding our targets.
After extensive analysis of those sample stores, we've made the decision to accelerate our store optimization program and closed approximately 350 additional locations with the majority closing in December of 2022.
Most of the clothing stores, our Sally stores based in the U S.
This authorization program allows us to improve productivity and profitability, while delivering a convenient omni channel experience that benefits our customers.
Moving on to our supply chain the progress we've made in modernizing our supply chain enables us to increase efficiency, while supporting growth.
On the efficiency side will be closing two small distribution centers in Oregon in Pennsylvania, and transferring the volumes to larger distribution centers.
While continuing to delight our customers. These actions will enable us to realize cost savings and serve as an important offset to inflationary headwinds.
Further the muscle we've built within our supply chain in recent years has become a source of growth.
Notably it has enabled us to significantly grow our regional partnership with sales volume expected to double from fiscal 2022 to fiscal 2023.
The visibility and strategic importance of this expanded relationship raises our profile among other brand partners and establishes a solid foundation for future chain growth.
Last but certainly not least we launched our fuel for growth initiative that is focused on rethinking the way we operate our business over the longer term supporting our longer term operating profit margin objective.
Our teams are energized by our new strategic initiatives and remain committed to delivering innovation to both our Sally and BSG customers across product services and education.
Over the long term, we believe these initiatives will enable the business to generate low to mid single digit net sales growth.
Gross margins over 50%.
And low double digit operating margin.
I'm confident our strategies and impressed by our teams, whose passion perseverance and creativity are allowing us to build upon our core strengths and create new pathways for growth growth in the face of a highly dynamic external environment.
Looking ahead, I have tremendous conviction that our ability to leverage our infrastructure and capabilities, while introducing exciting new initiatives will set us up to deliver improved top line growth and profitability.
We appreciate the support of our shareholders as we embark on a new set of initiatives to drive growth and create long term shareholder value.
Now I'll turn the call over to Mario to cover the financials.
Thank you Denise and good morning, everyone.
Our fourth quarter results saw trends remained steady with sales landing around our expectation.
We concluded the year with fourth quarter net sales of $962 million.
Down two 8% and comparable sales of approximately flat to last year.
The results reflect a few key factors first the transitory pressures that Denise outlines.
The ongoing effects of inflation impacting consumer behavior in both our retail and professional divisions as well as the continued supply chain disruptions at BSG, although improving as we anticipated.
Additionally, we are operating 117 fewer stores at the end of the period compared to a year ago.
Foreign currency translation had an unfavorable impact of 170 basis points on consolidated net sales for the quarter.
And comparable sales held flat on growth of our E Commerce business, our extended <unk> partnership at BSG and positive comp growth in our Sally International business.
Our constant currency global E Commerce sales increased 30% to $90 million, representing nine 3% of total net sales.
E Commerce is beginning to comprise a larger percentage of the business as we scale, our digital capabilities and utilize our new tools and resources to drive customer engagement.
Looking at gross profit.
We maintained adjusted gross margins north of 50%.
Compared to a year ago fourth quarter, adjusted gross margin decreased 60 basis points as higher product margin from pricing leverage at Sally beauty was more than offset by a sales mix shift between Sally beauty, and BSG, and we incurred higher distribution and freight costs in both segments.
Moving to operating expense.
SG&A totaled $398 million.
That's up about $11 million versus a year ago, and can primarily be traits to increase labor costs, partially offset by lower bonus expense.
In fiscal 2023, we expect our distribution center consolidation and store optimization program to serve as a partial offset to wage inflation.
As we announced today, we expect our distribution center consolidation and store optimization acceleration plan to generate expense savings of approximately $50 million in fiscal 2021.
The sales recapture rate is expected to be strong and similar to our pilot. However.
However, the store closures will result in some reduction in overall sales.
The net result is we expect a positive impact to adjusted operating income of approximately $10 million.
In the first quarter of fiscal 2023, we expect to incur an additional charge of approximately $20 million to close out these optimization efforts.
Turning now to earnings we maintained our healthy gross margin profile and continued to deliver good cost control with prudent spending focused on investments for strategic priority.
Fourth quarter adjusted operating margin was eight 7%.
Adjusted EBITDA came in at $112 million and.
And adjusted diluted EPS was <unk> 50.
For the full year on an adjusted basis, we delivered operating margin of 10, 3%.
EBITDA of more than $500 million.
And diluted EPS of $2 16.
Looking at segment results Sally beauty net sales declined five 4%, primarily reflecting inflationary pressures that impacted our lower income Sally customer.
Additionally, foreign currency headwinds had an unfavorable impact of 270 basis points and.
And we had 110 fewer stores in operations versus a year ago.
Comparable sales were down 1% with the sales decline concentrated in the U S and Canada, which had a negative comp of 2% and accounted for 80% of segment net sales in Q4.
Constant currency segment ecommerce sales increased 20% to $33 million.
Or 6% of segment net sales for the quarter.
For the global Sally segment color was up 2% and care declined 7%.
As Sally U S and Canada color increased by 6% with great coverage of 9%. Although this were up 1% and comprised 27% of the total color category.
While total transactions and units per transaction were down at Sally U S and Canada.
Average unit retail and average ticket increase.
These dynamics have been fairly consistent for the past three quarters as our Sally customers stretch their visits and minimize basket as in response to the inflationary environment.
Adjusted gross margin of Sally expanded 60 basis points to 58, 3%.
Electing solid product margins, driven primarily by pricing leverage partially offset by higher distribution and freight costs.
Segment operating margin came in at 14, 5%.
We delivered growth in the BSG segment with net sales up 1%.
<unk> sales, increasing one 5%.
While we continue to be impacted by supply chain disruptions, we did see some improvement in Q4 and expect the situation to normalize as we move through fiscal 2023.
We estimate that the sales loss from raw material shortages with approximately $5 million.
Or 120 basis points of impact on net sales growth.
Additionally, at constant currency segment E Commerce sales increased 37% to $57 million.
13, 9% of segment net sales for the quarter.
The current category was down 5% in the quarter, driven mainly by stylus, reducing their back stock inventory and some of their customers are stretching time between coloring services and by raw material shortages.
Hair care increased 9% versus a year ago due to our expanded regional partnerships and better in stock levels of key brands.
Adjusted gross margin at BSG decreased 180 basis points to 38, 9%, primarily driven by lower product margin from a sales mix shifts between stores and full service and higher distribution and freight costs.
Segment operating margin came in at 8%.
Moving to the balance sheet and cash flow.
We ended the year with $71 million of cash and cash equivalents.
$69 million outstanding under our asset based revolving line of credit.
Our net debt leverage ratio stood at two two times.
We brought down inventories to $936 million at year end after peaking just north of $1 billion in Q3.
Excluding the Q4 noncash write down of $19 million of goods related to the distribution center consolidation and acceleration of our store optimization program yearend inventory would have been about $955 million.
Our supply chain disruptions began to ease we're pleased to return to more normalized levels entering the new fiscal year.
We generated free cash flow of $75 million in the fourth quarter and $57 million for the full year.
We anticipate that our working capital requirements will revert to historical patterns as we progress through fiscal 2023, and expect to return to free cash flow generation in the range of $175 million to $200 million.
But the majority of that coming in the back half of the fiscal year.
From a capital allocation perspective, we will continue to prioritize investment for growth and returning value to shareholders.
Turning now to guidance.
It is clear that the external environment will remain challenging for the foreseeable future most notably inflationary pressure is affecting consumer spending and also driving increased labor costs.
We remain encouraged by our new strategic initiatives and the growth drivers we have just discussed.
And they are reflected in our fiscal 2023 outlets.
For the full year, we expect the following.
Global sales notwithstanding a notable change in consumer behavior are expected to increase by low single digits compared to the prior year driven.
Driven by growth in key categories sales transfer from store closures, our expanded retail distribution and new strategic initiatives.
Net sales are expected to decline by low single digits compared to the prior year.
This reflects approximately 150 to 200 basis points of net.
Favorable impact of store closures and expected sales recapture rates from our optimization efforts as.
As well as approximately 150 basis points and anticipated impact from FX headwinds.
At the end of fiscal 2023 store count is expected to be down in the range of 6% to 7% compared to the end of fiscal 2022 due to our store optimization plan net of a small number of new store openings.
Gross margin is expected to remain above 50%.
And adjusted operating margin is expected to be 9% at the midpoint of our guidance range.
This is inclusive of our investment in store labor as we lean into elevating the expertise of our associates to drive our growth in the coming years.
In addition, we expect to partially offset this labor investment by the $10 million benefit to operating earnings from our distribution center consolidation and store optimization plan.
While the uncertain macro backdrop is impacting our outlook for fiscal 2023.
Our teams are energized by the opportunities ahead and the growth plans for these outlined in her remarks, we are focusing on our new strategic initiatives and laying the groundwork to drive solid top line growth build scale and further optimize our operating model to return to double digit operating margins in fiscal 2024 and beyond.
We appreciate your time this morning, now I'll ask the operator to open the call for Q&A.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the command of one zero. Once again, if you have any questions or comments. Please press one zero.
And our first question comes from the line of Rupert <unk> Parker Oppenheimer. Please go ahead.
Good morning, and thanks for taking my question. So I just wanted to go back to your longer term sales target for low to mid single digit growth. Just curious you know what are the key drivers to get there and your confidence in being able to get to that level just given some of the challenges in recent years, how store closures impact impact that longer term sales growth and if there's any timing in terms of one when do you think youll be able to start.
Delivering those targets.
Sure. Thanks for the question of cash all starts Denise and or Luke and jump in and as we need to hear.
In the in the very near term, we really space out how we think about these growth initiatives and let me walk you a little bit through year by year, what we see coming online which influences the numbers.
We're looking to 2023 and our priority is to get that low single comp, let's say single digit comp number for a key sources of growth there will be leaning in on owned brands, that's ion that strawberry leverage thus phone bar.
Rebuilding our nail category, we have a new nail wall set in both Sally and BSG stores and seeing good responses there.
Nearly doubling the region's business that we have which really leverages. The E. Commerce platform. We built and then when we think about the store optimization DC consolidation pieces. They are a great help to operating performance for about $10 million. This year, but we did talk about the fact that that store optimization.
We're expecting about a 40% recapture rate and so with that recapture rate there will be some pressure on the topline that comes through but of course that recapture delivered comp sales.
As we work through 2024 into 2025, we see the new initiatives start to come online. So later in 'twenty three are stylus platform a full on each Q, we expect to be ramping up is only in a in a tester market right now and we really want to work out all the kinks to be sure. It suggest right before we fully roll that.
And then our virtual color expert experience will rollout online later in the year as well and we think that that will start to give that.
Benefit and scale as we come through and then when we get into 2024 further into 2024 is one of those things really start to ramp up so further own brand growth new innovation from our vendor partners continued tailwind from the virtual teller expert in the ecommerce piece and then when we talked about and of course the solid platform.
Then when we talk about studio by Sally it's a bit longer term. So we're going to pilot in fiscal 'twenty three with a small number of stores, we're going to look to those results and with positive results, we'd add some stores in 'twenty four but we really believe it's going to be beyond 24, where we can get to you perhaps up to 100 locations in the U S. So when we think.
About the sales cadence.
This year run to run positive comp sales as we turn into next year. After we eliminate the drag of it comes from the store consolidation work right now net sales will turn positive and as we work our way through 'twenty four and 'twenty five that's when we're really targeting that low to mid single digit comp trajectory total sales trajectory.
Great Great. Thank you and then maybe just one follow up question maybe for Marlow, you know as we look at this year. Your guidance anything you can share just from a quarterly cadence perspective.
Yeah. So from a quarterly cadence perspective, you know a lot of it's about what happened. This past year in 2022 as you recall, we started Q1 very strong plus six com.
And then as we were.
Going into the holiday season, we were up against a Covid Spike and then as we came out of that.
When we saw the pivot to the.
<unk> the intent inflationary pressure that really started to change customer behavior and that pretty much held on throughout the rest of the year. So when you're looking at it from a year over year basis.
Also taking into consideration what's happening this year with the store closures, which is happening mainly in December for the bulk of the closures.
The Q1 comp and net sales will be challenged and then we'll start to see improvement as we go through the rest of the year.
Great. Thank you I'll, possibly I guess, one more one more I'm sorry, you're on that if you're looking at net sales also keep in mind FX. We had some some FX movements towards the end of this year that we won't lap until we get to Q4 this year.
Great. Thank you.
Our next question comes from the line of Oliver Chen Cowen. Please go ahead.
I think you are regarding the store closure program, what's assumed for transfers and any color on how we should think about the margin impact there.
So on the BSG Division would love further details on the gross margin and some headwinds there and what's you're assuming.
Going forward that would be helpful as well.
And then finally, the holiday period as all with somewhat promotional so what are you seeing in the environment and how you're prepared to compete in the topic of inflation. This is very pervasive across the consumer thanks, a lot the Nathan Marlow.
Oliver there's a lot there for us.
And let's let's work through store closures and promotion and then we might need you to clarify the BSG question I'm not sure exactly what you were after there but on the store closure front. It's about 350 stores. It is primarily a U S Sally stores.
The vast majority of those will close in December of this year and the work that we've done in the pilot that we had been running over the course of the last year delivered a good.
Sales recapture rates actually above the industry average and for the stores that we're going to we're going.
Going to be closing, we're assuming about a 40% sales recapture rate I think the important point to note in the stores that we're closing as the stores. We're closing are all EBITDA four wall EBITDA positive and so the benefit of the closure really comes from the ability.
To transfer those sales and then get some efficiencies within the labor and rent types of lines coming through.
So net net about 40% sales recapture is what we're looking for and that will really start to play into as we get from December into January because of the timing of the closures.
On the promotional front I think I think you're very right customers and stylists are most looking for deals and when we think about what they're doing out there they are being pretty selective there looking around being choice for women and the decisions that they're making.
That said, we've really been focusing on is what most resonates with our stylists.
And what we've done is more about changing our tactics versus investing more so what we've been doing more is going to types of promotions like bundle offers that there is a discount involved but it actually ends up driving more unit sales and we actually believe is getting us more share of wallet.
People are buying that quantity is less that they might buy somewhere else coming through.
Absolute level of promotional investment has remained relatively steady.
I would also say we've seen very good support from a number of our vendor partners, where they are leaning in to help fund.
Some some more.
More enticing promotions for their specific product as they want to do that through the year, but I would argue it's not been overly elevated its more of a mix of the tactics that we're using from what they might have been before that might've been very single unit focus.
And then the third question on BSG, I think you're referring to the BSG gross margins.
Being down so.
Just to talk us through a bit what we're seeing there is really a mix shift when you look at an individualized basis or SKU level. The merchandising margins are strong.
But what we're seeing is a mix away from stores and into full service and lot of Thats being driven through the expansion of our <unk> business.
Of course, we've got the higher distribution and freight costs.
But when we look forward you know as a consolidated business you know it was going to be puts and takes in it.
We see for the combined business continued strong and healthy margins above 50% going forward.
Thank you very helpful. The regional partnership sounds encouraging.
Could give us on why is that.
The right partner that would be helpful. And lastly on digital sometimes store closures can have unintended consequences given that they can be great recruitment.
<unk> for customer acquisition online as well like have you thought through that.
Thinking you have around that I'm sure you tested it thanks a lot.
Sure. So on the <unk> front I think the real benefit of in the <unk> businesses. When we think about how many people there are out there who use regis franchise salons as their main destination 5000, plus salons out there in the marketplace. It's a huge reach and theyre not the only chain that is out there and so when we.
Look at the penetration we've got you've got people early in their careers as stylists you've got customers.
Through all walks of life, who we can introduce a product that can stay with them for the long term so whether those stylists stay with regus or they choose to go out on their own are joined another salon.
They will have been nicely ingrained with all the types of products that we can offer them and we'll be building that relationship with them. So beyond the day to day sales today, the longer term view of us becoming a.
A more important part of our stylists decision, making is really a strong point that we're going after and it really fits nicely into the idea of the stylist ecosystem that we want to build on to help them grow their businesses and help them be more profitable. So all in all a good business to be getting into it does primarily it comes at a slightly lower margin because it's more.
Managed like our full service business and it is our store business, but when you think about the longevity of those stylists, it's really something that we think will serve us well longer term.
And the store closures that we've spent a lot of time thinking about this I think it's actually been a number of investors and analysts that have actually asked us why we weren't moving faster and I think when we reflect on it we really wanted to take the full year to start to understand how those customers will behave and how they would transfer their sales would we have in each.
Range and trajectory of new customers coming into the business all in all at the 100 stores that we did the test on it we felt very good about across all of those metrics in piece that we're most focused on is this is clearly a larger tranche of stores to go close is that early communication to our customers about where they are.
Next closest Sally store might be about how they can shop online how they can still get them.
Both bovis and two hour delivery potential it would just be out of the different store and reinforcing to them by no means are we going away. We just wanted to transfer them too.
A different location or a slightly different experience.
And I think the piece that when we think about how deep the penetration is in things like two hour delivery into our business model. In fact, that's really no change in behavior for the end customer in that portion of the business. So.
This is definitely a larger tranche right. We go into it understanding we might see a few surprises are a few puts and takes that will be anticipated and really realized and how we're thinking about the numbers, but believe that the benefit we get over.
Over the longer term.
We are set up and have a good chance here of seeing the results that we.
Believing that we will see.
Thank you best regards.
Our next question comes from the line of Ashley Helgen Jefferies. Please go ahead.
Hi, Thanks for taking our questions I know you touched on it briefly but any more details you can provide us on the trends in the Salon channel.
And then as consumer spend has.
Now starting to soften we're curious if you're seeing a pick up in <unk>.
Things like DIY hair color.
And then last just any color you can give us on the recapture rate. Thanks, so much.
Sure. So let's start with Salon channels, and then work our way through the inflow on channels, we put in our prepared remarks, some commentary about just what we're seeing in general in the business. We think the Salon had a had a pretty good good back to school and through the fall season of the business has softened a little bit following that.
More in line with what it had been a mid summer, but in general our stylists are still talking about having having good business, but seeing other customers stretch a little bit more between services and certainly the idea of stocking up on inventory everyone's being very cash conscious about where else they need to use our cash.
And their own personal lives so those trends haven't haven't really changed.
When we look back to what they are trying to figure out they are trying to figure out how to be even more efficient with their businesses to be able to make more money and turn their chairs more quickly. So we have seen an uptick in interest and engagement around express color.
And what that can do for their business in terms of being able to serve their clients a little bit more expediently and we've also seen them shopping and looking for awareness promotions makes sense to them leaning in a little bit more in terms of units that they might have bought versus historical where.
Maybe they weren't as focused on watching for those opportunities. So net net as we said we haven't dramatically increased our promotional intensity and where we are offering promotions our vendors have been a great support in building both of our businesses together and doing that so we're anticipating as we go through the coming year that that same level.
All of that a slight bit of sluggishness is going to be what continues to persist in the salons and we'll be watching quite closely for any trends and changes that might come about there.
On the DIY front and about customers' coloring and I think the most notable trends that we saw over the past quarter as we saw a 9% increase in our <unk>.
Great coverage products and great coverage sales, we saw about a 1% increase and you did it.
So to me as I look at that you know were really are seeing a customer who is saying I mean I do my own here, a little bit more unwilling to be buying in knowing that that's going to be the path that we.
We felt very encouraged about that great coverage number while visits still hung in you know as we've seen them at about 27% penetration.
So I think that.
I would say interesting trend shift towards the great coverage, but perhaps not unexpected when you think about what's happening in the macro environment.
And then I think your third question was on recapture rate.
And I'll, let Mario talk a little bit about the details of what was built up into there and what we believe go forward. So marlow, yes from a recapture rate you know as you know we've spent a lot of time studying this built a very sophisticated model that proved out with results even better than what we had going in assumptions.
So the one thing to keep in mind is we have we have data on 75% of our Sally customers. Our Sally sales are coming from customers. We now have 100% on BSG. So we can track them very closely and really get some robust insights as to what's happening there and then you combine that with our theater capabilities to be able to pursue.
One is messaging talk to them market for them to make sure that I understand where they can go when we close a store. So we feel pretty good about well first of all the 40% that we're quoting now is all coming out of our tested pilot and from a go forward basis in terms of being able to continue to deliver that and I feel pretty good about our capabilities to do that.
And I would just add one point I think one of the most interesting observations through the pilot period was we originally had a model that assumed a customer would only potentially think about one additional store or maybe two additional stores that might be in their sphere of where they would go instead of their current store, we actually thought to be a much wider radius that you even.
Most of our stores that we closed those sales would transfer to four or five different stores and so back to that idea of the ability of that recapture to be fairly sticky and that was actually a very good indicator for us.
Wonderful. Thank you so much for all the color.
And once again, ladies and gentlemen, if you'd like to ask a question or make a comment. Please first one then zero. Our next question comes from the line of Olivia Tong Raymond James. Please go ahead.
Great. Thanks, good morning.
Can you talk a little bit about the margin targets.
Your expectation for fiscal 'twenty three for eight five to nine and a half.
Versus a long term target for low double digits can you talk about how much of a business.
Huntington of some of the macro pressures that are out there.
As opposed to the desire to obviously increase investment in some of the strategic initiatives and then just the timing that you expect sort of a.
Glide path to get to that low double digit target overtime. Thank you.
Yes, so how about I'll, let Marty let's start with the kind of the current state and where we are and then we will follow up with the long term trajectory.
And we're looking forward to 2023, and we really see that as a transitory here.
The reality is we've been operating.
Over the past few years in a very challenging consumer environment.
But through that all we've been pleased to be able to deliver the healthy gross margins.
Upwards in more than 50% really where we're seeing the pressures on expenses.
We are planning for 2023 them higher.
<unk> expenses, and mainly driven through the wage pressures that we've seen.
And disappoint out there it's a it's a conscious investment in wages, we are not talking about adding head count, but really just looking at the labor market, especially for the retail Mark worker.
Been challenging over the past couple of years, and really where we see our differentiator in our associates the expertise of our associates in our stores to be able to.
Really.
I hope our customers understand and give confidence to.
To take take the leap into the do it yourself color. So we think it's an important element of our growth driver going forward and we believe it's a very important investment for us to me. So when we're looking at next year, it's really about investing.
Investing in our associates as well as refilling, our values, we need to refill our our bonus pool. So.
But beyond optimization efforts and we are continuing to look for more efficiencies.
Denise touch a little bit more on the longer term, but certainly are keeping an eye on cost control.
And then when I think about the longer term what we're focused on this year as Mario said was.
Making sure that we're set up for our initiatives to be as productive as they can and reinvesting wages into the organization, but as.
As we turn into 2024 and the opportunity with the owned brands. It is quite significant and it will be important contributor to gross margin expansion in 2024 and beyond we talked about on the call moving from 33% owned brand penetration in the <unk> in the Sally business.
Sources close to 50% over the next four to five years that comes with anywhere from 1000 to 500 basis points of margin difference versus branded product. So that really will pick up more in 2024 as we continue our work in that space and when we think about the fuel for growth initiative that I commented on it.
The end of the call and one of our third pillars about becoming more efficient in what we do now. This is this is not about slashing short term costs. This was about actually thinking very differently about the way, we work and continuing to look at network optimization continuing to look at sourcing looking at opportunities around outsourcing looking at the structure of <unk>.
Things like our loyalty programs and we think that that's also going to start to play out towards the end of 2024 and into 2025 with some improvements on the margin front as well and then you know.
Think under undercurrent all of that that I know you guys know very well, but as we move past the net sales decline of this year that is happening with the store closures are impacting us.
And into 2024 start to see net sales turned positive and continue on that trajectory and we'll get some natural SG&A leverage that will come through in the P&L as well. So a combination of cost savings longer term bigger picture cost savings efficiency initiatives owned brands and then sales trajectory returning.
Positive really add us up to that low double digit operating margin, but we are we are pushing towards.
That's super helpful.
Maybe if I could follow up just you know it.
Terms of the health of the hair care category that feel like this.
There's a fair bit of interest and quite a bit of activity in the category to the extent that the number of new entry. It's can be used as a guide and obviously you have your own <unk>.
<unk> launch.
At home color bonding your own brand. So can you talk a little bit about the balance between driving growth.
For external brands versus your own brands and perhaps.
What drives customers and thinking.
Thinking about the profit profile, obviously relative to <unk>.
Between your brands and external just a little bit of color there would be super helpful. Thank you.
Absolutely I mean first and foremost we greatly value our vendor partners, whether those be entrepreneurs that we bring through the first time through some of our support programs for our newer innovators are whether that's with our some of our long standing vendor partners. So our objective is to keep a very healthy mix between owned brand and vendor products.
And in our Sally businesses go forward. So when we think about that the owned brands and what we're able to do is framed a bring to bear products that are a great price point great efficacy.
That resonate with our customers coming into the stores, we see that we feel that we want to grow that a lot of new innovation a lot of very maybe perhaps more technical products things tied to.
Textured hair and other elements our vendor partners continue to bring great innovation, there do a great job communicating with consumers and we want to support them as well. So we actually think that both should be able to grow and be a good balanced go forward.
And then on our BSG business, we have great vendor relationships a lot of exclusive relationships and the focus of our BSG business is continuing to support our vendor partners.
And I just want to be crystal clear about that front. When we think about anything that is owned brand within BSG. You are only talking about bowls and brushes. The very basics, we are not talking about color and care in that space that is a great partnership that we have with our external vendors.
Thanks, So much I'll pass it on.
And at this time there are no other questions in queue.
Great well. Thank you all for joining US today, we are very excited about pursuing our new strategic initiatives to drive growth into the business. Our team members our associates out in the field, our most valued asset and more excited about bringing these strategic initiatives to them and growing our businesses.
Together, so I wish all of you a happy holiday season, and we will talk again in January .
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