Q2 2023 Sally Beauty Holdings Inc Earnings Call
We offset by lower units per transaction.
The color and care categories remained strong at Sally up, 6% and 2% respectively. On a total sales basis, which includes the impact of store closures.
Color continues to see strong momentum with great coverage up 14%.
Turning now to BSG color was up 4% on a total sales basis, and nails skincare and cosmetics performed well in the quarter.
Care was down 2%, reflecting solid continuing to buy closer to need and the lapping of some new product launches last year.
Of note in both segments, we've made great progress on inventory.
Our in stock levels are the best we have seen since 2019 with lower total weeks on hand enabled by our investments in planning and allocation and supply chain technologies.
Taking a bit broader look at the Sally consumer we saw customer purchasing behavior hold steady in January and February as compared to Q1 with some softening in transactions and ticket at the end of March that continued in April .
We're closely monitoring this trend and focused on actions around newness and value that inspire our customers to shop.
Additionally, cost control remains a priority.
Halfway through the year, we're particularly pleased to be on track with our fiscal 2023 priorities and delivering financial results consistent with the goals. We laid out last November when we shared our vision for the Sally beauty holdings of the future.
We believe the execution of our three strategic initiatives is unlocking our future growth potential as we enhanced customer centricity.
Fuel innovation and.
And increase operating efficiency.
Today I'll provide a few highlights on each one.
Let's start with customer Centricity.
In Q2, we had 17 million active loyalty members at Sally U S and Canada, comprising 78% of sales.
And our rewards credit card at BSG represented 9% of sales for the quarter.
We pride ourselves on serving as a trusted resource for our DIY customers and professional silos and they continue to reward us with high NPS scores and high engagement with our brands in store on our website and across multiple social media outlets.
At BSG, we're seeing strong stylus engagement with our Salon HQ platform, which has now surpassed 1000, new digital storefront and the first territory we're piloting.
During these initial months, we're working closely with our stylists to ensure they have the resources they need to utilize this as a powerful selling tool to grow their businesses.
We're excited about the potential for this platform, which advances our goal to build a services ecosystem that empowers our stylist community to operate more value added and profitable businesses.
Turning now to our Sally business.
Virtual color expert program continues to perform well with great customer response and feedback.
When customers utilize this service, we see average ticket trend higher by about 40% driven by color and color accessories.
Additionally, NPS scores are 16 points higher than our already strong baseline.
Virtual color experts is currently in 75 stores as we look to scale. The initiative, we remain on track to rollout this to our e-commerce platform in the second half of the year.
Moving onto our new studio by Sally concept.
We are on track with the initial store rollout and opened our first pilot location in Dallas at the end of fiscal Q2.
The store looks fantastic and we're thrilled to be bringing this experiential retail concept to market.
With studio by Sally, we're essentially updating and modernizing our proven salary formula, making it more interactive and engaging for our customers.
We are ideally positioned to do this by leveraging our DIY authority and utilizing our core competencies across color and care education and digital.
Customer response in the initial weeks has been positive and we have five additional locations slated to open this fiscal year.
Moving on to our second strategic initiative.
Owned brand penetration and product innovation.
At BSG after a few years during which vendors were focused on overcoming pandemic related supply chain issues.
We're starting to see the innovation pipelines pickup and the pro channel.
We are bringing newness to our stylists in color and care, including new bonding products from two of our Mark key vendor partners, including Wella Ultimate repair and Paul Mitchell Bond Rx.
Both of which recently launched.
Additionally, we expanded our distribution with color while to approximately half of our stores.
And partnering with danger Jones for the exclusive U S launch of their new vivid color line in all BSG location.
Danger Jones is a highly creative and edgy direct to consumer brand recently brought to market by the makers of pulp riot, which has an incredibly strong following.
This is a more intense color line is considered highly artistic and has the potential to bring in new customer to ESG.
This is a great example of our authority in color and ability to stay at the forefront of the category.
Lastly, psus biggest launch in fiscal 'twenty three will be in the third quarter, when we introduce a meager.
<unk> clean vegan hair care brand, which will be carried in the majority of our U S stores.
At Sally we're continuing to bring newness to our customers focusing on both vendor innovation and owned brands.
In the second half of the year, we're excited about several new brand launches from our vendor partners across key categories like hair color hair care and texture here.
On the owned brand side, we completed the full launch of our new Bond bar line in the second quarter, which is performing well and bringing in new customers, who have not shopped at Sally previously.
Owned brand sales penetration for the Sally segment was 34% of sales in the second quarter up compared to the prior year.
Turning now to our third strategic initiative.
<unk> efficiencies and optimizing our capabilities.
Our store optimization program is enabling us to improve productivity and profitability, while delivering a convenient omni channel experience to our customers.
In the initial months following our recent store closures sales transfer has been strong and was a contributor to our 9% comp sales growth at Sally this quarter.
From a supply chain perspective, we've continued to increase efficiency as macro driven disruptions have begun to recede.
As a result, I am pleased to note. There we are approaching the second half of fiscal 2023 with healthy inventory and as I mentioned earlier strong in stock levels.
Yes.
Lastly, our fuel for growth initiative is ongoing and remains an important component of how we think about the future and deliver on our profitability targets.
As an example, we are currently testing a new shipment frequency to our stores that we believe will reduce our transportation cost and drive better labor productivity in both our stores and Dcs, while maintaining healthy in stock levels.
In the current environment, we remain focused on driving forward, our long term growth agenda, while managing expenses.
We're staying close to our customers, providing them with engaging experiences and leveraging our authority in color and care to bring newness and services and assortment to both our DIY customers and professional stylist community.
We're confident that our competitive advantages and strategies will drive sustainable growth and value for our shareholders in the coming years.
Now I'll turn the call over tomorrow to discuss the financials.
Thank you Denise and good morning, everyone.
Our second quarter results reflect another solid quarter of progress and execution across our three strategic initiatives.
Second quarter net sales increased 1% to $919 million on 378 fewer stores and 80 basis points of unfavorable foreign currency impact.
Comparable sales grew a healthy five 7% with solid delivering nine 1% growth in BSD returning to positive comps.
Digital performance remained strong with global E Commerce sales up 9% on a constant currency basis to $87 million and representing 10% of total net sales.
We maintained strong adjusted gross margins, which came in at 57%.
Increased product margin and Sally beauty, driven by pricing leverage and higher owned brand penetration was more than offset by lower margin at BSG due to channel mix shifts between stores and our expanded <unk> business as well as a shift in some distribution center costs from SG&A expense into gross margin.
Turning now to operating expenses adjusted.
Adjusted SG&A totaled $390 million.
That's up $12 million versus a year ago in line with our expectations and reflect higher labor accrued bonus and advertising costs.
Perfect offset by savings from our previously announced distribution center and distribution center consolidation and store optimization plan.
It's early days, but we're pleased to see our wage investments begin to bear fruit in the form of improved retention and stronger conversion in store.
Additionally, we are on track to achieve expected expense savings of approximately $50 million. This year from our distribution center consolidation and store optimization plan.
Which will serve as a partial offset to macro driven wage pressure.
We expect you expect to capture the majority of those savings across the second quarter through the fourth quarter at approximately $15 million each quarter with a small portion that occurred in the first quarter.
Looking forward to the third quarter, we expect SG&A on a dollar basis to be up low single digits to the prior year, driven primarily by increased labor costs and higher accrued bonus expense.
Ongoing cost controls combined with our strong gross margin performance drove solid bottom line performance.
Adjusted operating margin came in at eight 3%.
Rested EBITA margin was 11, 5% and adjusted diluted earnings per share was <unk> 41.
Looking at segment results Sally Beauty's strong nine 1% comparable sales increase reflects strong sales recapture from recently closed stores contributing just under half of the increase.
As well as the comparison to a challenging second quarter last year, which included the impact from omicron supply chain challenges and the onset of inflationary pressures, particularly at Sally U S and Canada.
Segment net sales increased 1%, despite 356 fewer stores in operation versus a year ago, and 90 basis points of unfavorable foreign currency impact.
Our constant currency Sally e-commerce sales increased 7% to $34 million representing.
Representing six 4% of segment net sales for the quarter.
Notably, we're seeing that our current a buy now pay later payment option is driving higher average order value and bringing a new and younger customer to Sally.
For the global Sally segment color was up 6% driven by great coverage.
<unk> increased 2%.
As Sally U S and Canada color increased by 8%, while <unk> was down 1%, including the impact of store closures.
Gross margin at Sally expanded 100 basis points to 59, 8%.
There are two key drivers here first product margins remained strong driven primarily by pricing leverage and higher owned brand penetration.
There was a favorable true up of the noncash inventory write down we took in the fourth quarter of last year related to the distribution center consolidation and store optimization plan.
Strong sales and gross margin performance drove 200 basis points of segment operating margin expansion, which came in at 17, 4%.
Turning to the BSG segment, we saw second quarter trends that were consistent with our first quarter comparable sales growth of one 3% compares to a disruptive quarter last year that was impacted by supply chain challenges and omicron.
Net sales increased 1% on 22 fewer stores in operation versus a year ago, and 50 basis points of unfavorable foreign currency impact.
On a constant currency basis, PST ecommerce sales increased 11% to $53 million.
13, 7% of segment net sales for the quarter.
The color category remained strong and was up 4% while care declined 2% at BSG on a total sales basis.
As our stylist continue to purchase closer to need and we lap some new product launches from last year.
The nail category was particularly strong up 17%, reflecting strong response to our resets in the latter part of last year.
Gross margin at BSG decreased 160 basis points to 38, 9%.
Primarily driven by lower product margin due to the sales channel mix shifts between stores and our expanded regional partnerships as well as a shift in some distribution center costs from SG&A into gross margin.
Segment operating margin came in at nine 6%.
Moving to the balance sheet and cash flow.
We ended the quarter was $62 million of cash and cash equivalents and $34 million outstanding under our asset based revolving line of credit.
Our net debt leverage ratio stood at two two times.
During the quarter, we were able to further strengthen our balance sheet by taking advantage of a narrow opening in the market to refinance our $406 million term loan.
Notably the loan has an extended maturity date and is covenant lite substantially mirroring the covenants under our 500%, 8% senior notes due 2025.
Under the new agreement, which matures in February 2030 the.
The term loan has an aggregate principal amount of $400 million.
And bears interest at a floating rate equal to one month term, so far plus a spread of 250 basis points.
The term loan was priced with an original issued discount of <unk> 99 in the quarter.
And includes mandatory quarterly amortization payment of a quarter percent of the original loan amount.
Subsequent to the end of our second quarter, we entered into a three year interest rate swap agreement on April 28, which swaps a notional amount of $200 million of the new term loan from a floating term interest rate to a fixed rate of three 7% and 5%.
Yeah.
Looking at inventory, we are particularly pleased with the substantial progress we've made across composition and in stock levels.
The combination of our improved capabilities and receding supply chain disruptions have enabled us to return to a healthy overall position.
Quarter end inventories came in slightly above 1 billion versus $963 million a year ago at.
That's up 6% and primarily reflects higher vendor pricing improved in stock levels as well as the timing of receipts.
We expect our inventory to finish the year just below a $1 billion.
Second quarter cash flow from operations was $25 million and capital expenditures totaled $17 million.
For the full year, we continue to expect to return to free cash flow generation in the range of 175 million to $200 million.
Providing us with the financial flexibility to invest in our strategic initiatives to drive long term growth.
Turning now to guidance.
I'll start with some comments on cadence.
Given the challenging macro conditions, we're lapping in the second quarter.
We expected this would be our highest comp performance of the year.
Looking at the second half of fiscal 2023, we expect third quarter comparable sales to be in the low single digits and remain on track to achieve our full year guidance as follows.
Comparable sales are expected to increase by low single digits compared to the prior year.
Driven by growth in key categories sales transfer from store closures related to our store optimization efforts.
Our expanded retail distribution and new strategic initiatives.
Net sales are expected to decline by low single digits compared to the prior year, reflecting the unfavorable impact of store closures from the Companys store optimization efforts net of expected sales recapture rates and the anticipated unfavorable impact from foreign exchange headwinds.
At the end of fiscal 2023 store count is expected to be down 6% to 7% compared to the end of fiscal 2022 due to our store optimization plan and a small number of new store openings.
Gross margin is expected to remain above 50%.
And adjusted operating margin is expected to be in the range of eight five to nine 5%.
This reflects increased investments in store labor, partially offset by unexpected benefit to operating earnings of approximately $10 million related to our distribution center consolidation and store optimization plan.
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'd like to ask a question. Please press. One then zero on your Touchtone phone Youll hear an acknowledgment that you been placed in the queue and you're carrying over from Q at any time by repeating the one zero come out.
If you're on a speaker phone please pick up your handset before pressing the numbers once again for a question. Please press one zero at this time one moment. Please for our first question.
That will come from the line of Oliver Chen with TD Cowen.
Hi, good morning.
Ali comp was really impressive it looks like recapture is really working what are you seeing with recapture and what should we think about happening ahead with recapture.
Also as everybody thinks about consumers and inflation.
What are your thoughts in terms of how that's playing out in your and your solid performance and also is it in.
You're playing with traffic traffic can sometimes be fairly volatile. Thank you.
Good morning, Oliver Thanks for the questions I'll start off and in Marlow will jump in as needed here overall of the Sally comp we were really pleased with what we delivered in the quarter and sales recapture is going in line with plan, which was about a 40% target that we communicated so.
Okay. Thanks inventory, if we've made progress I know you've really put some prudent efforts. There looking ahead what are the the major catalyst or initiatives, we should focus on for.
For inventory and how does that manifest thing you know by by Sally relative to B S. G. In terms of the the progress you're making thanks a lot.
Improved state.
Where we want to be with our inventory position at just over $1 billion as we progress through the year that we see that coming down just a bit but as we finish we're expecting.
Hey, good morning, all congrats on the quarter and thanks for taking my question.
First like to touch on it just the the.
The guidance I mean, obviously you put up a good quarter now than you did talk about maybe some softness in March and maybe the early parts of April and is that really the reasoning for not raising guidance and leave it unchanged and can you just kind of expand on those trends viewer seen here in the early parts of April . Thank you.
Good morning, <unk>. Thanks for the question.
I'll reiterate that the cadence in the quarters of the year of playing out largely as we expected coming into the year. So the shape of the curve from Q1 Q2 with comp sales in line with what we had anticipated with Q2 lapping add some challenging times last year and the back half as we as we said low single digit comps really.
Sally side that we did see a really consistent January and February , but with a slight bit of pressure against both traffic and.
Yeah in reverse order I'll start a little bit with BSG side in the stylist and the consumer for that stylists in general what we're hearing from stylists as a continuation of the trends before that they will have some clients who might not get as many add on services or might stretch their time between color treatments.
In an effort to save a little bit of money here and there we continue to see that when you think about the products that we sell three to our stylists a very large proportion of that actually goes down the drain in the forlorn. It is used.
By the pros and then a small amount of the businesses in retail direct to consumer.
I think our Silas are very focused on retailing that product is it's a good AD on profitability and in a way for them to know their clients will keep that great look that they have leaving at the forlorn when they use those products.
Came into the year expecting that our readers business would double throughout the year, we remain largely on track for that so that would have been consistent in our second quarter as well.
We'll go next to line Ashley Helgen with Jeffries.
Hey, Thanks for taking my question, Firstly any thoughts around the current promotional environment and then any trends by product category color hair care that you.
You see emerging thanks.
Sure promotional environment remains very consistent with what we have seen for the last few quarters.
Overall, our promotion investment is directionally in line with what we had seen it earlier in the year as well.
Seeing good vendor support our vendors would like to see units continue to move in as we have good offerings, where that elasticity is there and available are vendors are really supporting us in those efforts and so we.
We appreciate that and continue to watch the broader dynamic as well and in terms of category trends I think a lot of continuation from what we've seen before on the BSG side lots of focus on.
We are also very excited on the BSG side about danger Jones.
Vivid color line, that's getting great response, very trendy and in terms of even the packaging of what's come out and we're excited to see where that goes and then for us distribution around color, while an Amiga really round out the portfolio for what our consumers are looking for so in general we're still seeing a lot of focus unexpressed color.
<unk>.
But more broadly very excited that the newness is coming through the BSG channel and from our vendor partners really steps up this quarter as they've now fully lap supply chain and other pandemic related challenges.
And on this alley side, great interest in our own brands great interest in here repair product, they're a great coverage remains extremely strong up 14% in the quarter that doesn't mean that is we're challenged just meant they held a little more study well very coverage really grew and then we're seeing some fun.
Add ons, you think about the Taylor Swift and the trends behind that people are getting into things like hair tenfold, not a huge business, but things that reflect kind of the current environment of what's trendy out there in the marketplace.
Alright, thanks, so much for the color.
Great. Thank the morning.
I wanted to ask you about the.
Delta between your comp performance, and Sps and BSG, because it sounds like the magnitude of store closures.
<unk>, sorry, but can you talk about what else drove that differentiation between performance and Sps versus DSD. Thank you.
Yeah. So yeah, I think the key call out there in terms of.
The magnitude of the current being strong, 9% and then B a C returning to destroy them or to the positive come at the low single digits.
As you mentioned over half about half the Sps level of that comp is being driven by store optimization and then underneath that we've got strong performance, especially in our color categories Zoey sighed.
<unk> sighed and thinking about it in terms of year over year performance.
We've got a really.
Big embarrassing that we're trying to laughs from omicron last year that was a big drag as well as just the inflationary pressures that we're starting to appear in some supply chain challenges that was almost zoey sighed and we had that as well on the <unk> side, but not to the same degree that we have seen on the the Sally said.
Got it and then.
Non loyalty numbers average basket frequency to purchase.
Right.
And I will talk a little bit about this at our conference but.
To non members are they knew people or can you talk about what efforts are being made what efforts are being made to convert more of them into royalty numbers. Thanks. So much.
Let me, let me try it without one I will start in reverse order when we think about loyalty and non loyalty are non loyalty members are likely folks who they could be new they might be shopping for the first time or so and don't yet see the <unk>.
Benefit of signing up for the loyalty program.
They could also be members, who just choose to want to remain not identified that come through and the transactions the differential between non loyalty and loyalty, we do definitely see with our royalty members.
And the group that we're really focused on within our loyalty program, while while we love them all the top tier of our customers within our loyalty platform.
Really are heavy shoppers. They typically have a color oriented basket. They will come in two or three times more frequently than the average customer and we really see that reflected in both basket size as well as in total spend per year with that frequency being up so we continue to do.
And then things, we keep doing to enhance the customer experience and give them more ways to pay we recently launched corner on R. E Commerce site and the buy now pay later opportunity is bringing in new customers to us and it's actually increasing basket as well. So it was a great a great potential for people to participate.
We'll go next to the line of swimming and got men with Morgan Stanley .
Great. Thanks, This is Michael <unk> for for swimming.
DCU store closures sounds like Labour level of staffing advertising is all kind of normalized and we're getting there.
Can you just talk about the the.
That is driven by the wage inflation in the the bonus accrual thinking about it in terms of kind of run rate and how we look at it going forward from two two now there is a bit more of a step up from wages, just given the timing of merits, but at that point.
Anything further Mr comments.
Thank you and I appreciate everyone. Joining us. This morning, we continue to be very excited about the past that Sally beauty holdings is on and look forward to providing additional updates in the future and as a final note is always thank you to all of our associates across the world for all you do every day to help serve our customers.
Thank you and as a reminder, today's conference was recorded for replay. Please refer to the company's press release for that replay information that does conclude our conference for today. Thank you for your participation in freezing AT&T given conferencing you may now disconnect.