Q1 2024 Sally Beauty Holdings Inc Earnings Call

Good morning, everyone and welcome to Sally Beauty Holdings conference call to discuss the company's first quarter fiscal 'twenty 'twenty four resolved all participants have been placed into a listen only mode.

After management prepared remarks, there will be a question and answer session. Additional instructions will be given at that time now I would like to turn the call over to Jeff Harkins.

Jeff Harkins: President of Investor Relations and Treasurer for Sally Beauty Holdings.

Jeff Harkins: Thank you.

Jeff Harkins: Everyone and thank you for joining us.

Jeff Harkins: With me on the call today are Denise kilometers, President and Chief Executive Officer, and Marlo Cormier Chief Financial Officer.

Jeff Harkins: Before we begin I would like to remind everyone 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.

Jeff Harkins: Any forward looking statements made on this call represent our views only as of today and we undertake no obligations to update them.

Jeff Harkins: The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and honest website.

Jeff Harkins: Now I'd like to turn the call over to Denise to begin the formal remarks.

Denise Kilometers: Thank you, Jeff and good morning, everyone.

Denise Kilometers: We're pleased with our start to fiscal 2024, Mark Flex financial performance that was in line with our forecast.

Denise Kilometers: First quarter net sales of $931 million declined two 7%, primarily reflecting the lapping of store closures that occurred in December 2022.

Speaker Change: Comparable sales declined <unk>, 8% in the quarter.

Speaker Change: Adjusted gross margin was above 50% and in line with our expectations and adjusted operating margin came in at seven 9%.

Speaker Change: Additionally, we generated solid operating cash flow of more than $50 million.

Speaker Change: Enabling us to return value to shareholders through $20 million of share repurchases.

Speaker Change: In our BSG segment Q1 comparable sales were up 1% as we saw a modest strengthening and so on demand trends coupled with strong momentum from recent product launches and our acquisition of bode well in New York.

Speaker Change: Comparable transactions increased 3%, while average ticket value declined 2%.

In our Sally segment customer shopping behavior remains fairly consistent with recent quarters as they continue buying primarily to me.

Speaker Change: Q1, comparable sales were down 3% with comparable transactions down, 4% and average ticket value up 2%.

Speaker Change: Our teams continue to execute well against our core strategic initiatives are enhancing our customer centricity.

Speaker Change: Growing our high margin owned brand and amplifying innovation.

Speaker Change: Increasing the efficiency of our operations.

Speaker Change: To that end, we continue to assess that product innovation territory expansion and new services will contribute 200 to 300 basis points to our top line performance this year.

Speaker Change: During the first quarter in line with our expectations. These initiatives contributed contributed over 200 basis points to our comparable sales results with product innovation being the predominant driver let.

Speaker Change: Let me share a few highlights.

Speaker Change: Starting with product innovation we.

Speaker Change: We are seeing momentum across both our own and third party brands.

Speaker Change: In Q1, those brand sales penetration for the global Sally Beauty segment was 34%.

Speaker Change: Up 20 basis points over the prior year.

Speaker Change: Additionally, our bond bar and I online continue to perform well.

Speaker Change: With notable strength in bond bar cure and Ireland color.

Speaker Change: Of note.

Speaker Change: Our largest owned brand in the U S and Canada.

Speaker Change: Bond bar has grown to be our fifth largest owned brand in just over a year's time in the market.

Speaker Change: We're also seeing strong performance in the textured hair category, where we have a pipeline of innovation planned for later this year.

Speaker Change: Beginning next month, we'll have several product launches happening throughout 2024.

Speaker Change: Color care styling tools and appliances.

Speaker Change: Both of our proprietary lives and national brands.

Speaker Change: Turning to innovation that BSG standout performers include Omega well its ultimate repair.

Speaker Change: Moroccan oil and color well.

Speaker Change: During the first quarter, we expanded our distribution territory for both Milwaukee and oil and color Wow, and we have additional expansion opportunity across our brand portfolio.

Speaker Change: Additionally, we captured the first full quarter of sales from our global all of New York acquisition.

Speaker Change: The BSG segment also has a robust pipeline of innovation planned for this year, which will be particularly meaningful for our pilots as we part with a partner with them to profitably grow their businesses.

Speaker Change: You can expect to see launches in both new and existing brands across London, Boston and express tolerate.

Speaker Change: As well as conscious beauty and textured hair.

Speaker Change: Our ongoing focus on customer Centricity continues to serve us well in.

Speaker Change: In Q1, we generated 77% of sales from our 16 million of Sally U S and Canada loyalty members.

Speaker Change: Our <unk> rewards credit card purchases represented 8% of sales.

Speaker Change: Our new concept and services are building momentum and we are tracking to our plans for full year fiscal 'twenty four.

Speaker Change: Licensed colors on demand initiative is helping us extend our reach and continues to gain traction.

Speaker Change: In Q1, 36% of our customers, who engage in the service or new to Sally.

Speaker Change: Up from just north of 30% in Q4.

Speaker Change: At quarter end, we had 40 licensed colors on the platform.

Speaker Change: We plan to expand that to approximately 100 this fiscal year as demand for the service growth.

Speaker Change: We're also gaining traction against our marketplace initiatives, which launched with Walmart in Q4 of last year building on the success, we've had with Amazon.

Speaker Change: In the coming quarters, we plan to add door dash and is deferred which will enable us to leverage in store fulfillment.

Speaker Change: Turning now to happy Veeco.

Speaker Change: At fiscal year end, we had 10 pilot stores in operation and we are very pleased with Q1 performance, which included the holiday selling season.

Speaker Change: We expected the stores to be an attractive gift, giving destination and we're gratified to see that take shape with consistent increases in traffic conversion and average transaction value throughout November and December.

Speaker Change: We're.

Speaker Change: To build awareness of heavy duty with grassroots marketing initiatives and remain enthusiastic about the potential to build a sizable historical portfolio over the long term.

Speaker Change: When we look across the business at both our Sally and BSG segment.

At our customers and how they're behaving.

Speaker Change: And at the same time consider the potential of our newer growth strategies.

Speaker Change: We're confident that we're on the right course to reignite sales.

Building on our Q1 results, which were in line with our expectations, we're maintaining our full year fiscal 2020 for guidance.

Speaker Change: Which calls for net sales and comparable sales to be approximately flat.

Speaker Change: This reflects 200 to 300 basis points of anticipated growth from our strategic initiatives, which I mentioned earlier offset by the expectation that macro factors will continue to pressure consumer spending.

Speaker Change: In the second half of the year, we expect to see sequential improvement in comparable sales as we further advance our strategic initiatives.

We are also continuing to prioritize profitability.

Speaker Change: Our fuel for growth initiative is underway and we remain on track to capture previously announced pre tax benefit of $20 million in fiscal 2024.

Speaker Change: I want to highlight that this is a comprehensive program that is fundamentally changing the way we operate.

Speaker Change: Of course, our long term growth algorithm for a low double digit operating margin.

Speaker Change: To that end, we recently partnered with an external resource and have begun to uncover incremental opportunities around merchandising margin non trade spend inventory efficiency supply chain automation and outsourcing that will take effect in fiscal years 2025 and 2026.

Speaker Change: As an outcome as an outgrowth of this initial assessment, we've identified another tranche of potential pre tax benefits totaling approximately $50 million in fiscal 2025 with cumulative run rate benefits in fiscal 2026 expected to approach $120 million.

Speaker Change: We'll have more to share on our roadmap as we continue our analysis in the coming months.

Speaker Change: We're pleased.

Speaker Change: These two have started fiscal 2024 with strong execution and look forward to further advancing our initiatives across customer centricity innovation and efficiency throughout the year.

Speaker Change: We believe these focus areas are important pillars to attract new customers, increasing our share of wallet and strengthening our competitive position.

Our teams are highly engaged our deep understanding of shopping behavior and purchasing patterns, among our retail customers and BSG stylus is enabling us to effectively navigate the dynamic macro environment.

Speaker Change: Our strong market positioning and the traction we're seeing in our initiatives underpin our confidence in the long term growth algorithm. We've previously communicated which calls for low to mid single digit top line growth and low double digit operating margin.

We greatly appreciate your continued support and remain committed to increasing value for all of our stakeholders.

Speaker Change: Now I'll turn the call over to Marshall to discuss the financials.

Marshall: Thank you Denise and good morning, everyone. We're pleased to begin the year with financial results in line with our expectations and continued progress against our strategic initiatives.

Marshall: First quarter consolidated net sales of $931 million declined two 7%.

Marshall: Reflecting the unfavorable impact from our December 2022 store closures and 90 basis points of favorable foreign currency exchange impact.

Marshall: Consolidated comparable sales declined 8%.

Marshall: Global E Commerce sales were $91 million and represented 10% of total net sales.

Marshall: Looking at gross profit, we maintained strong adjusted gross margin, which came in at 52% down.

Marshall: Down 60 basis points versus a year ago.

Marshall: Supply chain efficiencies drove lower distribution and freight costs in the quarter, which were more than offset by sales mix shifts between Sally beauty and BSG as.

Marshall: As well as unfavorable fixed cost absorption related to the timing of inventory receipts.

Marshall: First quarter, adjusted SG&A was up $3 million to $393 million pre.

Marshall: Primarily reflecting increased labor costs and rent expense as.

Marshall: As well as other costs related to our strategic initiatives, partially offset by savings from our distribution center consolidation and store optimization actions last year.

Marshall: For the full year, we expect SG&A dollars to be up modestly versus fiscal 2023.

Marshall: This primarily reflects increased labor costs as well as investments in upper funnel marketing and other expenses related to our strategic growth initiatives.

Marshall: Partially offset by the favorable impact of our fuel for growth initiatives.

Marshall: As a reminder, we expect to realize $20 million of pre tax benefits to gross margin and SG&A during the second half of fiscal 2024.

Marshall: For perspective, approximately 75% of the benefits will be realized in SG&A.

Marshall: As Denise mentioned, we are expanding the scope of our fuel for growth initiatives and now expect to capture incremental cost of goods and SG&A savings in fiscal year 2025 of approximately $50 million.

Marshall: We are in the process of uncovering additional opportunity and building the roadmap for fiscal 2026, which should see us approach $120 million in cumulative benefit.

Marshall: We expect to incur pre tax charges associated with the fuel for growth program in the range of $25 million to $30 million in.

Marshall: In the current fiscal year, including $5 million that was realized in Q1.

Marshall: Turning now to earnings.

Marshall: Adjusted operating margin came in at seven 9%.

Marshall: Adjusted EBITDA margin was 11, 5% and adjusted diluted earnings per share was <unk> 39.

Marshall: Moving to segment results.

Marshall: Sally beauty comparable sales declined 2%, while net sales were down 5% as we lapped our 2022 store closures and our Sally customer remain frugal buying primarily to meet.

Marshall: At constant currency, Sally ecommerce sales were $35 million.

Marshall: And represented 7% of segment net sales for the quarter.

Marshall: For the global Sally Beauty segment color was down 4%.

Marshall: <unk> was flat at Sally U S and Canada color was down 7% and care was down 5%, including the impact of store closures.

Marshall: We believe the category data reflects macro driven pressure on consumer spending and would highlight that market data shows our market share for color and care remained stable over the prior year.

Marshall: Gross margin at Sally was 58, 6% down 30 basis points to last year.

Marshall: Primarily by an unfavorable sales mix shifts between higher margin Sally U S sales and lower margin Sally International sale.

Marshall: As well as unfavorable fixed cost absorption, partially offset by supply chain efficiencies, which drove lower distribution and freight costs.

Marshall: Segment operating margin came in at 14, 8%.

Marshall: Moving to the BSG segment, we saw an improvement in salon demand trends as well as the benefits from expanded distribution and new brand innovation.

Marshall: Comparable sales were up 1%, while net sales were approximately flat on 20 fewer stores.

Marshall: On a constant currency basis, BSG e-commerce sales were $56 million.

Marshall: Representing 14% of segment net sales for the quarter.

Marshall: The color category was up 4%, while care declined 1% at BSG on a total sales basis.

Marshall: Adjusted gross margin at BSG declined 40 basis points year over year and came in at 39, 4%.

Marshall: The decline was driven primarily by unfavorable fixed cost absorption and shrink expense, partially offset by lower distribution and freight costs.

Marshall: Supply chain efficiencies as well as higher product margin.

Marshall: Segment operating margin was 10, 9%.

Marshall: Looking at the balance sheet and cash flow.

Marshall: Ended the first quarter with $121 million of cash and cash equivalents and no outstanding balance under our asset based revolving line of credit.

Marshall: Our net debt leverage ratio stood at two two times.

Marshall: Quarter end inventory was just north of $1 billion, which is in line with our expectations and reflects a healthy overall position, including solid in stock levels.

Marshall: We anticipate that inventory levels will hold relatively steady in the $1 billion range throughout the year.

Marshall: We generated positive cash flow from operations of $51 million.

Marshall: Allowing us to repurchase $20 million of stock under our share repurchase plan.

Marshall: We're pleased with our start to fiscal 2024, and we are maintaining our full year outlook as follows.

We expect net sales and comparable sales to be approximately flat, reflecting 200 to 300 basis points of growth from our strategic initiatives and investments in new services as well as expanded distribution in the BSG segment offset by our expectation that consumer spending will continue to be affected by macro headwinds.

Marshall: We expect gross margin to remain above 50%.

Marshall: Adjusted operating margin is expected to be at least 9%.

Marshall: Operating cash flow is expected to be at least $260 million.

Marshall: And capital expenditures are planned to be approximately $100 million.

Marshall: Our outlook is based on the following assumptions.

Marshall: Comparable sales performance is expected to improve in the second half of the year, reflecting positive drivers in both of our business segments.

Operator: Good morning, everyone, and welcome to Sally Beauty Holdings' conference call to discuss the company's first quarter fiscal 2024 results. All participants have been placed into a listen-only mode.

Marshall: At BSG, the lapping of hair care headwinds from the last several quarters, we will lead to easier compares in the second half of the year. Additionally.

Marshall: Additionally, the second half is also expected to benefit from continued momentum in new brand innovation and expanded distribution opportunities.

Operator: After management's prepared remarks, there will be a question and answer session, and additional instructions will be given at that time. 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.

Marshall: And Sally we expect incremental improvement on the top line to be driven by the ramp of Walmart marketplace as well as the addition of <unk> and door dash the expansion of licensed colors on demand.

Marshall: Benefits in Europe from pricing and new brand launches.

Marshall: Lastly, the $20 million of benefits under our fuel for growth initiatives are expected to be realized in the second half of the year and essentially boost full year operating margin by approximately 50 basis points.

Jeff Harkins: With me on the call today are Denise Polonis, President and Chief Executive Officer, and Marlo Cormier, Chief Financial Officer. Before we begin, I would like to remind everyone 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.

Marshall: Looking at the second quarter, we expect net sales and comps to be flat to down 2%.

Marshall: This includes approximately $10 million of impact from traffic softness in early January coinciding with persistent bad weather across most of the countries.

Marshall: Accordingly during the fourth week of January we saw this pressure moderate and trends returned to a normalized cadence.

Marshall: As a reminder, Q2 is usually our lowest quarter from a total sales dollar perspective.

Jeff Harkins: 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 reconciliation 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 her formal remarks.

Marshall: We expect to see sequential improvement in gross margin rate in Q2, driven in large part by diminishing impact from unfavorable fixed cost absorption related to the projected timing of inventory purchases.

Marshall: Additionally, we anticipate that adjusted operating margin will be approximately 8%.

Lastly, it is reasonable to expect investments and share repurchases in the second quarter that is similar to our last quarter.

Lauren Frasch: Thank you, Jeff, and good morning, everyone. We're pleased with our start to fiscal 2024, marked by financial performance that was in line with our forecast. First quarter net sales of $931 million declined 2.7%, primarily reflecting the lapping of store closures that occurred in December 2022, while comparable sales declined 0.8% in the quarter. An adjusted gross margin was above 50% and in line with our expectations. An adjusted operating margin came in at 7.9%. Additionally, we generated solid operating cash flow of more than $50 million, enabling us to return value to shareholders through $20 million of share repurchases. In our BSG segment, Q1 comparable sales were up 1% as we saw a modest strengthening in salon demand trends, coupled with strong momentum from recent product launches and our acquisition of Volvo in New York. Comparable transactions increased 3% while average ticket values declined 2%.

Speaker Change: We appreciate your time this morning, now I'll ask the operator to open the call for Q&A.

Speaker Change: Thank you and ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your Touchtone phone you will hear and management time that you've been placed in the queue.

Speaker Change: And you may remove yourself from queue at any time by repeating the one zero command if.

Speaker Change: If you're on a speakerphone, please pick up your handset before pressing the number.

Speaker Change: Once again, if you have a question. Please press the London zero at that time.

Speaker Change: One moment please.

Speaker Change: Our first question is from the line of Karen with Meyer.

Karen: Piper Sandler. Please go ahead.

Karen: Hey, good morning team. Thanks for taking the questions first I'd like to better understand how much of the the comp this quarter was driven by.

Karen: Performance in your owned brands versus National brands.

Karen: And then as well how much can you can you kind of break down how much was driven by price versus volume versus mix.

Karen: And then going forward, how should we be thinking about that as well. Thanks.

Lauren Frasch: And our selling segment, Customer Shopping Behavior, remained fairly consistent with recent quarters, as they continued buying primarily to meet Q1 comparable sales were down 2% with comparable transactions down 4% and average ticket value up 2%. Our teams continue to execute well against our core strategic initiatives of enhancing our customer centricity, growing our high-margin owned brands, amplifying innovation, and increasing the efficiency of our operations. To that end, we continue to expect that product innovation, territory expansion, and new services will contribute 200 to 300 basis points to our top-line performance this year. During the first quarter, in line with our expectations, these initiatives contributed over 200 basis points to our comparable sales results, with product innovation being the predominant driver. Let me share a few highlights.

Speaker Change: Good morning, Karin, Let me, let me start there so in total on the comp performance that we deliver to add about 200 basis points of goodness from our strategic initiatives overall.

Karin: Within that innovation was the largest driver and to your question. There was contribution from both growth in our owned brands and growth in our national brands of the National brands growth was pronounced on the BSG side, where of course, the owned brands growth would be pronounced within Sally, but both were a healthy portion of the business.

Karin: As we looked to contribute to that comp base and then when you look at the mix of how that all came together, we really saw two different stories on the BSG side in the Sally side on the BSG side transactions were up we saw a nice customer accounts, particularly as we came to the end of the quarter coming through with stylus saw a modest uptick in <unk>.

Karin: And so that was really true incremental transactions and ticket was slightly down but great news that we saw the traffic of the customers coming into the store and while we're watching it closely we hope that it will persist and we will see that demand trend continue.

Lauren Frasch: Serving with Product Innovation. We are seeing momentum across both our own and third-party brands. In Q1, own brand sales penetration for the global Sally Beattie segment was 34%, up 20 basis points over the prior year. Additionally, our bond bar and ion line continue to perform well, with notable strength in bond bar care and ion color. Of note, ION remains our largest-owned brand in the U.S. and Canada, and Bon Bar has grown to be our fifth-largest-owned brand in just over a year's time in the market.

Karin: On the Sally side of the house.

Transactions were down while ticket was up a bit and that continues to reflect your consumer spending a bit closer to need or buying into their core categories. But we were pleased to see an overall that we continue to see strength in color. We continue to strength see strengths and textured and believe it we're holding share in the space that we're in you know really.

Karin: Facing a bit of consumer pressure on purchasing behavior.

Speaker Change: Very helpful. Thank you and then just on the gross margin line can you kind of walk through the puts and takes a little bit more you gave a little bit of color in the prepared remarks, but wanted to better understand how much of the contraction was driven by shrink versus fixed cost absorption versus.

Lauren Frasch: We're also seeing strong performance in the textured hair category, where we have a pipeline of innovation planned for later this year. Beginning next month, we'll have several product launches happening throughout 2024 across color, care, styling tools, and appliances, encompassing both our proprietary lines and national brands. Turning to innovation at BSG, standout performers include Amika, as well as Ultimate Repair, Moroccan Oil, and Color Wow.

Speaker Change: Any other pressures you may be seeing and then how much benefit where you're getting from the higher product margin. Thank you.

Speaker Change: Yeah. Thank you.

Speaker Change: So on the on the gross margin line, we're still really pleased delivering above the 50% Mark and strong gross margins there.

Speaker Change: Didn't see about 60 basis points of pressure in Q1, there were a handful of puts and takes so on the positive side as we continue to focus on driving supply chain efficiencies. We continue to see goodness coming out there, we've got lower distribution and freight costs.

Lauren Frasch: During the first quarter, we expanded our distribution territory for both Moroccan Oil and ColorWow, and we have additional expansion opportunities across our brand portfolio. Additionally, we captured the first full quarter of sales from our Goldwell of New York Acquisition. The BSG segment also has a robust pipeline of innovation planned for this year, which will be particularly meaningful to our stylists as we partner with them to profitably grow their business. You can expect to see launches across both new and existing brands across blonding, glossing, and express coloring, as well as conscious beauty and textured hair.

Speaker Change: As offsets there were a few but we did have a greater percentage of lower margin BSD sales in the quarter.

Speaker Change: A greater percentage of the BSD sales.

Speaker Change: We did incur some unfavorable fixed cost absorption, that's really due to timing that ebbs and flows throughout the year.

Speaker Change: We expect to see that come back and diminish as we get into Q2, and then lastly, we did have some shrink I would say that's the most minor part of it was a minor headwind.

Speaker Change: That was really in our BSG business.

Lauren Frasch: Our ongoing focus on customer centricity continues to serve us well. In Q1, we generated 77% of sales from our 16 million Sallie U.S. and Canada loyalty members, while our BSG Rewards credit card purchases represented 8% of sales. Our new concepts and services are building momentum, and we are tracking to our plans for full year fiscal 24. Our Licensed Colors on Demand initiative is helping us extend our reach and continues to gain traction.

Speaker Change: Very helpful. Thank you.

Speaker Change: Thank you and our next question is from Oliver Chen T.

Oliver Chen: Colin Please go ahead.

Oliver Chen: Oliver Chen your line is open.

Oliver Chen: Okay.

Well move to actually Halligan from Jefferies. Please go ahead.

Oliver Chen: Hey, good morning. Thanks for taking my question just curious if you could talk about how traffic trended throughout the quarter and then we're also curious if you're seeing any new emerging trends bonding ive been so popular over the last couple of years, if there's anything else in hair care of it.

Lauren Frasch: In Q1, 36% of our customers who engaged in the service were new to Sally. That's up from just north of 30% in Q4. At quarter end, we had 40 licensed colorists on the platform and plan to expand that to approximately 100 this fiscal year as demand for the service grows.

Speaker Change: Emerging all the time level. Thanks.

Speaker Change: Traffic was relatively stable throughout the quarter. If we had to pick anything we saw a little bit softer October and a little bit softer, but a little bit stronger in December with December really supported by the BSG side of the business, but we didn't see any any big changes month over month as we went through the quarter overall.

Lauren Frasch: We're also gaining traction on our Marketplace Initiative, which launched with Walmart in Q4 of last year, building on the success we've had with Amazon. In the coming quarters, we plan to add DoorDash and Instacart, which will enable us to leverage in-store fulfillment. Turning now to Happy Beauty Co. At fiscal year-end, we had 10 pilot stores in operation, and we were very pleased with Key1, which included the holiday selling season. We expected the stores to be an attractive gift-giving destination, and we're gratified to see that take shape, with consistent increases in traffic, conversion, and average transaction value throughout November and December. We are continuing to build awareness of happy beauty with grassroots marketing initiatives and remain enthusiastic about the potential to build a sizable historical portfolio over the long term. When we look across the business, at both our sally and VHG segments, at our customers, and how they're behaving, And at the same time, consider the potential of our newer growth strategy. We're confident that we're on the right course to reignite sales.

Speaker Change: And then in the purpose of trends trends remain very consistent with what we've seen on the hair care front. It really is about about bonding and about things that are efficacy in terms of improving the look and feel of your hair and the health of your hair overall, we see a little bit more interest in scalp care that goes right along with that type of trend and on the call.

Speaker Change: <unk> front.

Speaker Change: When we think about it the things that are that are ticking and continue to seek laughing important you continue to see express.

Speaker Change: Courtney because outlets stylus turn their chairs a bit more often.

Speaker Change: So no major shifts in trend a good healthy healthy continued business across the board there.

Speaker Change: Thanks, so much.

Speaker Change: Thank you. The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Ari Gutman: Hey, good morning, everyone Hi, Denise.

Simeon Ari Gutman: My first question on <unk>.

Simeon Ari Gutman: Consumer spending and the consumer being a little softer there was a time you know a while ago, where this business at least the Sally side benefited from trade down.

Lauren Frasch: Building on our Key1 results, which were in line with our expectations, we're maintaining our full year fiscal 2024 guidance, which calls for net sales and comparable sales to be approximately flat. This reflects 200 to 300 basis points of anticipated growth from our strategic initiative, which I mentioned earlier, offset by the expectation that macro factors will continue to pressure consumer spending. In the second half of the year, we expect to see sequential improvement in comparable sales as we further advance our strategic initiatives. We are also continuing to prioritize profitability. Our Fuel for Growth initiative is underway, and we remain on track to capture previously announced pre-tax benefits of $20 million in fiscal 2024.

Simeon Ari Gutman: While other consumer was under pressure can you talk about are you seeing that because it doesn't seem to be the case on a like on a sequential basis, but do you see customers from different cohorts of people opting not to get service that are coming in and doing it themselves.

Speaker Change: Yes, good morning, Simeon overall, I think what we'd say is we have a very stable business and we have a business thats pretty resistant to some of the consumer demand trends that ebb and flow just because we can offset BSG and and the Sally business to some extent so when we see comps on our on our side.

Speaker Change: Side of the World down, 2%, we think Thats a pretty good performance in a challenged macro environment. When we look within that what we're seeing for customers as we see the particular.

Lauren Frasch: I want to highlight that this is a comprehensive program that is fundamentally changing the way we operate and supports our long-term growth algorithm for a low double-digit operating market. To that end, we recently partnered with an external resource and have begun to uncover incremental opportunities around merchandising margins, non-trade spend, inventory efficiency, supply chain, automation, and outsourcing that will take effect in fiscal years 2025 and 2026. As an outgrowth of this initial assessment, we've identified another tranche of potential pre-tax benefits totaling approximately $50 million in fiscal 2025, with cumulative run rate benefits in fiscal 2026 expected to approach $120 million.

Speaker Change: Trade down or increased frugality, no surprise in the lower income, particularly below the $50 Mark where those folks are fueling outsized pressure you know the build up of all the inflation over time, we're seeing that come through and we're also seeing them with a higher mix to credit card and buy now pay later for what they are buying.

Speaker Change: Exhibiting that stress, but they are still coming in they are still shopping. They are just very frugal about buying to need and buying to need means I buy color because you touch up my roots and I want to keep doing that when I'm, probably not going to do is be buying that styling tool that extra hairbrush, the things that would be more splurge.

Speaker Change: <unk> at this point in time, so we see a little bit of trade down and around but with the value point that we have with many of our own brands as well as our national brands in our stores, we're pretty reasonably priced to begin with in that in that mix of what's coming in so.

Lauren Frasch: We'll have more to share on our road map as we continue our analysis in the coming months. We're pleased to have started fiscal 2024 with strong execution and look forward to further advancing our initiatives across customer centricity, innovation, and efficiency throughout the year. We believe these focus areas are important pillars to attract new customers, increase our share of wallet, and strengthen our competitive position. Our teams are highly engaged.

Speaker Change: Say behavior pretty consistent with what we've what we've seen and if anything just see a little bit more stressed in the way people are purchasing with that mixed towards credit card in and buy now pay later.

Speaker Change: Okay, a follow up on BSG.

Speaker Change: The press release it listed first expanded distribution as the factor for improvement at the end it was improving salon demand trends. So can you can you talk about those two.

Marlo Cormier: Our deep understanding of shopping behavior and purchasing patterns among our retail customers and BSG stylists is enabling us to effectively navigate the dynamic macro environment. Our strong market positioning and the traction we're seeing in our initiative underpin our confidence in the long-term growth algorithm we've previously communicated, which calls for low to mid-single-digit top-line growth and low double-digit operating costs. We greatly appreciate your continued support and remain committed to increasing value for all of our stakeholders. Now, I'll turn the call over to Marlo to discuss the financials. Thank you, Denise. And good morning, everyone.

Speaker Change: Well, what you bought that the does that enter into the comp base or that.

Speaker Change: He's out of it for a while and then just related to it.

Speaker Change: Weather impacted that impact BSG and Sally proportionately in January or was it more Sally.

Speaker Change: So overall, when we think about what drove the BSG business. There were three key factors overall, so innovation expanded distribution and improving salon demand trends I'd say in that order with innovation very broadly a meek well.

Speaker Change: Well as ultimate repair color, while Moroccan oil are places, where we saw our customers lean in.

Marlo Cormier: We're pleased to begin the year with financial results in line with our expectations and continued progress against our strategic initiatives. First quarter consolidated net sales of $931 million declined 2.7%, primarily reflecting the unfavorable impact from our December 2022 store closures and 90 basis points of favorable foreign currency exchange impact. Consolidated comparable sales declined 0.8%. Global e-commerce sales were $91 million and represented 10% of total net sales.

Speaker Change: Into that mix.

Speaker Change: In particular, when we have expanded distribution in a few of those brands with color while in Moroccan oil that certainly helps you to gold while a portion of the business part of that acquisition goes into cough and part of it does not so the new stores that came with the acquisition do not go into cost, but the full service and rest of the business does go into comp.

Speaker Change: So it's a bit split there, but we had expected that to be.

Speaker Change: $10 million to $15 million build for the entire year and we're seeing that perform in line with expectations. So we're really pleased with how that has come to bear.

Marlo Cormier: Looking at growth profits, we maintained strong adjusted growth margins, which came in at 50.2%, down 60 basis points versus a year ago. Supply chain efficiencies drove lower distribution and freight costs in the quarter, which were more than offset by a sales mix shift between Sally Beauty and BSG, as well as unfavorable fixed cost absorption related to the timing of inventory receipts. First Quarter Adjusted SCNA was up $3 million to $393 million, primarily reflecting increased labor costs and rent expenses, as well as other costs related to our strategic initiative, partially offset by savings from our distribution center consolidation and store optimization actions last year. For the full year, we expect SG&A dollars to be up modestly versus fiscal 2023. This primarily reflects increased labor costs, as well as investments in upper funnel marketing and other expenses related to our strategic growth initiatives, partially offset by the favorable impact of our Fuel for Growth initiatives. As a reminder, we expect to realize $20 million of pre-tax benefits to growth margin and SD&A during the second half of fiscal 2024.

Speaker Change: Then finally, the improving salon demand trend, what we're really seeing that in as we saw traffic pickup.

Speaker Change: And come into the stores and shop, the intercepts with customers, just saying I'm, just a little busier and that was great for us to see coming in and feeling out as part of the mix and then if you could remind me what your second part of your question was.

It was the weather, where you talked about some softness.

Speaker Change: Does that affect Sally and BSG.

Speaker Change: Yeah. So the softness that we saw in the early part of January tied to weather and the Great News is really has turned around at the end of January and as we launch into February today, we believe that that will continue.

Speaker Change: It was predominantly Sally but it was across both businesses. So I have two if I have to split it was 60% Sally 30% BSG give or take.

40% BSG, if we if we looked at it that way, but it did affect both businesses.

Speaker Change: Makes sense, okay. Thanks Bill.

Speaker Change: Thank you and the next question is from Olivia Tong. Please I'm sorry from Raymond James. Please go ahead.

Marlo Cormier: For perspective, approximately 75% of the benefits will be realized in SG&A. As Denise mentioned, we are expanding the scope of our Fuel for Growth initiative and now expect to capture incremental cost of goods and SG&A savings in fiscal year 2025 of approximately $50 million. We are in the process of uncovering additional opportunities and building the roadmap for fiscal 2026, which should see us approach $120 million in cumulative benefits. We expect to incur pre-tax charges associated with the Fuel for Growth program in the range of $25 to $30 million in the current fiscal year, including $5 million that was realized in Q1.

Olivia Tong: Great. Thank you.

Olivia Tong: You mentioned, improving salon demand trends PSG could you just expand on what's driving that.

You did leave the full year comp outlook unchanged, but given the PSC was a bit better than expected.

Olivia Tong: Could you just talk about how that influences your full year expectations.

Speaker Change: To start thank you.

Speaker Change: Yeah.

What we talked about and seeing an improving demand trends, we talked about it being modest improvement in demand trends in the way that we understand that is really just watching the purchase behavior of our stylists as they come into our stores as they transact with us online and how they talk about their businesses the way they phrased it was coming into the holiday season, they saw a bit more normal.

Marlo Cormier: Turning now to earnings, adjusted operating margins came in at 7.9%. Adjusted EBITDA margin was 11.5%, and adjusted diluted earnings per share was 39 cents. Moving to segment results.

Speaker Change: C and people wanting to come in ahead of our holiday.

Speaker Change: To refresh their look kind of filling their chair to a to a bit more extensive they had been in the in the earlier period of the year. So you were encouraged that we've seen a little bit about uptick for our stylists and their salon business, but its a really new trend line. So we're not really baking in expectation that that's going to have.

Marlo Cormier: Sally Beauty comparable sales declined 2% while net sales were down 5% as we lapped our 2022 store closures and our Sally customer remained frugal buying primarily on needs. At Constant Currency, Sallie eCommerce sales were $35 million and represented 7% of segment net sales for the quarter. For the global Sally Beauty segment, color was down 4% and care was flat.

Speaker Change: Further grows our continuation as we look to our projections for the remainder of the year, we'll certainly watch it and continue to react as we see that come through.

Speaker Change: Overall in holding our in holding our guidance you know the thing that I would come back to US we really performed in line with our expectations in the first quarter as we look to the second quarter. We did see the unusually persistent weather very early in January to start things off and overall retail traffic was certainly pressured through that point.

Marlo Cormier: At Sally US in Canada, color was down 7% and care was down 5%, including the impact of store closures. We believe the category data reflects macro-driven pressure on consumer spending and would highlight that market data shows our market share for color and care remained stable over the prior year. Gross margin at Sallie was 58.6%, down 30 basis points from last year, driven primarily by an unfavorable sales mix shift between higher margin Sallie U.S. sales and lower margin Sallie international sales, as well as unfavorable fixed cost absorption, partially offset by supply chain efficiencies, which drove lower distribution of freight costs. Segment operating margin came in at 14.8%.

Speaker Change: It lasted long enough, but in our minds, we're not betting that we're going to recoup a bit of the softness that we saw in those in those early couple of weeks, but rather get back on the rest of the trend for the quarter as it really happened at the last week of January and going forward. So our guide for Q2 really reflects the fact that we think that that was.

Speaker Change: Pocket of air and a little bit of loss sales that came from that but the rest of the business underneath that quite healthy so.

Marlo Cormier: Moving to the BSGE segment, we saw an improvement in salon demand trends, as well as the benefits of expanded distribution and new brand innovation. Comparable sales were up 1%, while net sales were approximately flat on 20 fewer stores. On a constant currency basis, BSG e-commerce sales were $56 million, representing 14% of segment net sales for the quarter.

Speaker Change: Downs zero to two on comp sales for the quarter reflects that bit of early January pressure, but we believe that gross margin.

Speaker Change: We will continue to improve from Q1 to Q2 as Marlowe had discussed in an earlier question and then we're really well prepared to ramp into the back half of the year. We also outlined that on the call, but we think about the strength of of BSG that will finally lapping of the hair care headwinds from from one brand from last year. We're also continued to be set up.

Marlo Cormier: The color category was up 4%, while care declined 1% at BSC on a total sales basis. However, adjusted growth margin at BSG declined 40 basis points year over year and came in at 39.4%. The decline was driven primarily by unfavorable fixed cost absorption and shrinkage spending, partially offset by lower distribution and freight costs from supply chain efficiencies, as well as higher product margins. Segment operating margin was 10.9%. Looking at the balance sheet and cash flow, we entered the first quarter with $121 million of cash and cash equivalents and no outstanding balance under our asset-based revolving line of credit.

Speaker Change: This momentum with new brand innovation and expanded distribution and then Sally as we continue to embark in the back half of the year with the growth that we see in marketplaces coming through.

Speaker Change: Our colors on local first on demand and then some improvements in Europe, as well, where we've been working hard on pricing and new brand launches that we think are going to elevate the second half of the year. So all in all the years unfolding generally the way that we expected it to and we do expect the second half of the year to be a bit stronger on the top line than what we'll see for.

Speaker Change: The first half of the year and but pleased with our start.

Marlo Cormier: Our net debt leverage ratio stood at 2.2 times. Quarter-end inventory was just north of a billion dollars, which is in line with our expectations and reflects a healthy overall position, including solid in-stock levels. We anticipate that inventory levels will hold relatively steady in the $1 billion range throughout the year. We generate a positive cash flow from operations of $51 million, allowing us to repurchase $20 million of stock under our share repurchase program. We're pleased with our start to fiscal 2024, and we are maintaining our full-year outlook as follows. We expect net sales and comparable sales to be approximately flat, reflecting 200 to 300 basis points of growth from our strategic initiatives and investments in new services, as well as expanded distribution in the BSD segment, offset by our expectations that consumer spending will continue to be affected by macro headwinds. We expect gross margin to remain above 50%, and the suggested operating margin is expected to be at least 9%. Operating cash flow is expected to be at least $260 million, and capital expenditures are planned to be approximately $100 million.

Speaker Change: Thanks, that's very helpful. So if I could just summarize it sounds like Q1.

Speaker Change: More or less in line, maybe a touch better Q2, obviously impacted by the weather that you don't expect that to get back and then second half more or less no change in expectation relative to your your expectations go onto into.

Speaker Change: Until this quarter.

Speaker Change: Fair enough.

Speaker Change: Got it okay. Thank you and then just my last question is around.

Speaker Change: Our fuel for growth program.

Speaker Change: You talked a little bit about incremental savings can you just talk about where that savings is coming from any new bucket. So just.

Speaker Change: As you as you continue that program and we're just seeing a little bit better success rate with them achieving stable can be existing buckets.

Speaker Change: Yes. Thank you yeah. So you know as we called out last quarter, we were really in our early stages of our fuel for growth work, we had identified $20 million of benefits that we expect to flow through 2020 for most of that is back half loaded.

Speaker Change: We talked about that being weighted.

Speaker Change: 75% SG&A, 25% of cost of goods.

Speaker Change: We did talk about our partnership with an external advisor we've completed that assessment and now we believe we are on a path to identifying another $50 million that we can see flow through fiscal 2025, and then cumulative through the program get to $120 million run rate them as we get into 2026.

Marlo Cormier: Our outlook is based on the following assumptions. Comparable sales performance is expected to improve in the second half of the year, reflecting positive drivers in both of our business segments. At DSG, the lapping of hair care headwinds from the last several quarters will lead to easier comparisons in the second half of the year.

Speaker Change: And where we see that coming from you know in the early stages. It's programs that we were testing and our supply chain like our bi weekly shipping frequency. We are approaching 80% of the fleet for Sally were shy of that on BSG. Our goal is to get to around 85% across both banners were on path for that for this year.

Marlo Cormier: Additionally, the second half is also expected to benefit from continued momentum in new brand innovation and expanded distribution opportunities. At Sally, we expect incremental improvement on the top line to be driven by the growth of Walmart Marketplace, as well as the addition of Instacart and DoorDash, the expansion of license colors on demand, and benefits in Europe from pricing and new brand launches. Lastly, the $20 million of benefits under our Fuel for Growth initiative are expected to be realized in the second half of the year and essentially boost full-year operating margins by approximately 50 basis points. Looking at the second quarter, we expect net sales and comps to be flat to down 2%. This includes approximately $10 million of impact from traffic delays in early January coinciding with persistent bad weather across most of the country.

But as we look forward, we're seeing greater opportunities within our our merchandising.

Speaker Change: And vendor.

Speaker Change: Negotiations and relationships, we have got a goods not for resale opportunities are within our non trade payables.

Speaker Change: We see automation, we see outsourcing so we see a variety of programs, but as we look forward and we start to see where that falls more so in the merchandising and supply chain areas, we'll get more benefits within gross margin. So you'll see that 70 525 start to balance out a bit as we get into the future years, but we're pretty excited about the pro.

Marlo Cormier: And most importantly, during the fourth week of January, we saw this pressure moderate, and trends return to a normalized cadence. As a reminder, Q2 is usually our lowest quarter from a total sales dollar perspective. We expect to see sequential improvement in gross margin rates in Q2, driven in large part by diminishing impacts from unfavorable fixed cost absorption related to the projected timing of inventory purchases. Additionally, we anticipate that adjusted operating margin will be approximately 8%.

Speaker Change: Graham.

Speaker Change: And I think we're off to a great start.

Speaker Change: Great. Thank you best of luck.

Speaker Change: Our next question is from Oliver Chen from Cowen. Please go ahead.

Oliver Chen: Hi, Thank you very much we were curious about the promotional environment that you're seeing in terms of the landscape and how that's playing with how you're thinking about pricing.

Oliver Chen: So as we as we look forward do you expect.

Marlo Cormier: Lastly, it is reasonable to expect investments and share repurchases in the second quarter that are similar to our last quarter. 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 1 and 0 on your touchtone phone. You will hear acknowledgement tones that you have been placed in the queue, and you may remove yourself from the queue at any time by repeating the 1-0 command. If you're on a speakerphone, please pick up your handset before pressing the number.

Oliver Chen: Volatility in traffic just curious about underlying.

Oliver Chen: Trends there and then finally as we model model inventory would love views on.

Oliver Chen: How youre planning inventory relative to sales. Thank you very much.

Speaker Change: Good morning, Oliver So I'll start with the point on promotional landscape. It remains pretty consistent with how we described it last quarter.

Oliver Chen: <unk> remains important for both our Sally customers and our BSG stylists on Vichy stylist point, we actually see a little bit higher promotional activity in play consistent with what we saw last quarter as compared to last year.

Operator: Once again, if you have a question, please press 1 and 0 at that time. And one moment, please. Our first question is from the line of Corinne Wolfmeyer from Piper Sandler. Please go ahead. Hey, good morning team. Thanks for taking the questions. First, I'd like to better understand how much of the comp this quarter was driven by performance in your own brands versus national brands. And then, as well, can you kind of break down how much was driven by price versus volume versus mix? And then, going forward, how should we be thinking about that as well? Thanks. Morning, Corinne.

Oliver Chen: And a lot of that is that we do see a bit of unit demand pull through when that promotional activity happens. So we have that built into our model like I said nothing to particularly outsized in terms of trend, but we do see the stylists to their respond better to promotion.

Oliver Chen: On the Sally side, I would call it a bit steady Eddie you know at the end of the day customers are just being frugal overall with their dollars, so with or without a promotion, we don't see meaningful changes in traffic coming into the store and in turn we are.

Oliver Chen: Moderating that and ensuring that we're at and we're doing the right thing that will drive value for us over all.

Oliver Chen: Importantly in light of the landscape is out there on both sides of the business you can expect that we will remain conservative on pricing.

Lauren Frasch: Let me start there. So, in total, the comp performance that we delivered had about 200 base points of goodness from our strategic initiatives overall. Within that, innovation was the largest driver. And to your question, there was contribution from both growth in our own brands and growth in our national brands. The national brand's growth was pronounced on the BSG side, where, of course, the own brand's growth would be pronounced within Sally. But both were a healthy portion of the business as we looked to contribute to that comp base. And then when you look at the mix of how that all came together, you know, we really saw two different stories on the BSG side and the Sally side.

Oliver Chen: Good news is we're seeing fewer price increases come through for our vendors as commodity costs and other things have moderated, but importantly, we look right now and would not expect to be flowing through any significant increases that will drive AUR in the in the near term in light of the macro environment, so not much different than what.

Oliver Chen: We saw last quarter, but certainly.

Oliver Chen: Three value oriented consumer on both sides of our business today.

Oliver Chen: In terms of volatility in traffic and we definitely see we saw volatility in the quarter, but I would call it moderate volatility up and down I think we've been seeing that now.

Lauren Frasch: On the BSG side, transactions were up. We saw nice customer counts, particularly as we came to the end of the quarter, as Silas saw a modest uptick in demand. So that was really through incremental transactions, and ticket revenue was, you know, slightly down.

Oliver Chen: Since inflation really started to tick up which we're now six quarters into seeing that impact where when people need to come to buy for for need for an event or something like that youre going to see a little bit more strength and then in the down periods, you know a little bit less traffic come through we would expect to see that but it's not wild swings.

Lauren Frasch: But great news that we saw customers coming into the store. And while we're watching that closely, we hope that it will persist and we'll see that demand trend continue. You know, on the Sally side of the house, transactions were down while ticket was up a bit.

Oliver Chen: It's just customers really tailoring their purchase habits.

Oliver Chen: Aligned with knees. So and then your final question was on inventory I'll kick that one over to Marlon I. Thank you.

Lauren Frasch: That continues to reflect, you know, consumers spending a bit closer to need, buying into their core categories. But we are pleased to see, you know, overall that we continue to see strength in color. We continue to see strength in texture and believe that we're holding share in the space that we're in, you know, really facing a bit of consumer pressure on purchasing behavior. Very helpful, thank you.

Marlon: Yeah, well inventory, we expect it to run really in this $1 billion range as you look at the quarterly cadence.

Marlon: So fairly level loaded a little bit of build them as we kind of progress into the year and then drop back down into the $1 billion range. One thing to keep in mind on inventory. We are on a weighted average cost method. So we've got a bit of a lag to those vendor price increases that we had seen previously those are still making.

Marlo Cormier: And then just on the gross margin line, can you kind of walk through the puts and takes a little bit more? You gave a little bit of color in the prepared remarks, but I want to better understand, you know, how much of the contraction was driven by shrink versus fixed cost absorption versus any other pressures you may be seeing? And then, how much benefit were you getting from the higher product margin? Thank you. Yeah, thank you.

Marlon: Making their way through the process, but we continue to maintain improved levels of unit inventory or units are down so where where do you see either level or increases that's all due to the vendor cost increases making their way through the system and we are hitting our unit weeks of supply targets and our in stock levels are at really healthy levels.

Marlo Cormier: So on the gross margin line, you know, we're still really pleased to be delivering above the 50% mark and strong gross margins there. We did see about 60 basis points of pressure in Q1. There were a handful of puts and takes.

Speaker Change: Thank you very much one follow up on one of your competitive advantages as a company is your own brand.

Speaker Change: Portfolio highlights opportunity you see there for sure.

Marlo Cormier: So on the positive side, as we continue to focus on driving supply chain efficiencies, we continue to see goodness coming out there. We've got lower distribution in freight. As offsets, there were a few. We did have a greater percentage of lower-margin VSG sales in the quarter, or a greater percentage of VSG sales. We did incur some unfavorable fixed cost absorption. That's really due to timing.

Speaker Change: Thanks, a lot.

Speaker Change: Yes, you're spot on and we're very excited about the own brand portfolio.

Speaker Change: Of late the biggest change that we have made with the launch of bond bar and the extension of bond bar from care into color.

Speaker Change: Being good customer response, there with a very modern brand.

Speaker Change: Bringing in new customers, when we get that out there and in front of them innovation come forward is going to follow a similar track of being very aligned with maybe a younger consumer trends around desire.

Marlo Cormier: That ebbs and flows throughout the year. We expect to see that come back and diminish as we get into Q2. And then lastly, we did have some shrink. I would say that's the most minor part.

Speaker Change: Desire for more natural products free from products. So we can have good for the environment spaces, where we think we can play there, particularly on the care side and we will talk about that as all things about how you can be more mindful as you shop coming.

Marlo Cormier: It was a minor headwind, and that really helped our VSG sales. Very helpful. Thank you. Thank you. Our next question is from Oliver Chen from TD Collin. Please go ahead. Oliver Chen, your line is open.

Speaker Change: Coming through you'll also see us continue to expand things like ion into sunscreen for your hair and places where people are looking once again for more solution orientation of that Youll see that youll see us push on as well. So I would really focus on the dial up on kind of mindful natural items.

Lauren Frasch: We'll move to Ashley Helgen from Jefferies, please go ahead. Hey, good morning. Thanks for taking our question. I'm just curious if you could talk about how traffic trended throughout the quarter. And then we're also curious if there are any new emerging trends, you know, bonding has been so popular over the last couple years. If there's anything else in hair care that's emerging at a trend level. Thanks. Traffic was relatively stable throughout the quarter.

Speaker Change: Coming through as well as continued expansion of our bond bar business and then your problem solving tied to our island brand.

Speaker Change: Thank you very helpful Best regards.

Speaker Change: Thank you.

Speaker Change: And the last question in queue is from Linda Bolton Weiser from D. A Davidson. Please go ahead.

Lauren Frasch: If we had to pick anything, we saw a little bit softer October and a little bit stronger December, with December really supporting the BSG side of the business. We didn't see any big changes month over month as we went through the quarter overall. For the purpose of trends, trends remain very consistent with what we've seen. On the hair care front, it really is about bonding and about things that are effective in terms of improving the look and feel of your hair and the health of your hair overall.

Speaker Change: Yes, hi, Thank you I was just curious about you've been talking about your experimentation and pilot studies with these other store concepts.

Speaker Change: I was wondering if you could quantify the cost related to those pilot tests in this fiscal year, and then I'm sorry, if I missed it but did you give any more color about your plans to expand the value concept like in FY 'twenty. Five do you think you will open more of those stores. Thank you.

Lauren Frasch: We see a little bit more interest in scalp care that goes right along with that type of trend. On the color front, when we think about it, the things that are ticking, you continue to see glossing important. You continue to see Express important because that lets stylists turn their chairs a bit more often. No major shifts in trend, but good, healthy business across the board. Thanks so much.

Speaker Change: Yeah I appreciate the question when I think about other concept initiatives that we're piloting right now I'd really focus on two key areas. One is the studio by Sally concept and then the other is our value initiative with happy beauty co <unk>.

Speaker Change: So I'll start of it with happy beauty co or maybe I'll back up one step you first asked about financial impact. This year is quite modest financial impact for what we've stood up this year, both in the remodel or relocation cost of opening the studio stores or in the case of happy beauty, It's 10 stores that we put into.

Lauren Frasch: Thank you. The next question is from Simeon Gutman from Morgan Stanley. Please go ahead. Hey, good morning, everyone. Hi Denise. I'm Marlowe.

Speaker Change: Play last year and this year is really about operating them. So no material impact to the bottom line from either initiative. This year, but if I look at the opportunity set happy Veeco, we have 10 stores up and running we have been gaining traction in the first six months since our launch and we're continuing to build awareness and traffic.

Lauren Frasch: My first question on consumer spending is that the consumer being a little softer. There was a time, you know, a while ago, where this business, at least the Sallie side, benefited from trade down, while the consumer was under pressure. Can you talk about, are you seeing that, because it doesn't seem to be the case on a, like, sequential basis, but do you see customers from different cohorts or, you know, people opting not to get service that are coming in and doing it? Yeah, morning, Simeon.

Speaker Change: And with 10 stores, we're really doing that grassroots social media.

Speaker Change: Coming through we were very pleased with what we saw through the holiday season, we thought that the brand was very well positioned for gifting and that and that's what we saw in our teams executed quite well.

Lauren Frasch: Overall, I think what we'd say is we have a very stable business, and we have a business that's pretty resistant to some of the consumer demand trends that ebb and flow just because we can offset BFG and the Sally business to some extent. So when we see comps on our SBI side of the world down 2%, we think that's a pretty good performance in a challenged macro environment. When we look within that, what we're seeing for customers is that we see the particular trade down or increased frugality, no surprise, in the lower incomes, particularly below the $50,000 mark, where those folks are feeling outsized pressure. The buildup of all the inflation over time, we're seeing that come through. And we're also seeing them with a higher mix to credit cards and buy now, pay later for what they are buying, exhibiting that stress.

Speaker Change: Seeing ticket over $25 and <unk> around five December and the holiday shopping weeks, we saw stronger performance supporting that idea that is shifting so we're carrying through those learnings as we consider additional openings more to come on in future calls about about a path there but will remain.

Speaker Change: Excited about the potential and believe that if it.

Speaker Change: If we see some of the metrics continue to perform as they could perform we could be pushing an opportunity for over 500 stores over the long term.

Speaker Change: The real start of that expansion would be going into next year, rather than meaningfully more this year.

And then on the studio side, we have six stores open.

Speaker Change: We're really reading performance, there and understanding what they deliver to us as you'll remember these stores have the opportunity for people to participate in the salon environment with the DIY Salon, but in addition, we made changes to the stores in terms of looking feel both graphics lower gondolas better sight lines.

Lauren Frasch: But they are still coming in, they are still shopping, they are just very frugal about buying what they need. And buying what I need means I buy color because I do touch up my roots, and I want to keep doing that. What I'm probably not going to do is buy that styling tool, that extra hairbrush, the things that would be more splurges at this point in time.

Speaker Change: Much stronger navigation diff.

Lauren Frasch: So we see a little bit of trade down and around. But with the value point that we have with many of our own brands, as well as our national brands and our stores, we're pretty reasonably priced to begin with in that mix of what's coming in. I'd say behavior pretty consistent with what we've seen and, if anything, just be a little bit more stressed in the way people are purchasing with that mix towards credit cards and buying out pay later. Okay, a follow-up on BSG.

Speaker Change: <unk> difference in how we think about education and signage throughout the stores overall, we're seeing very positive reaction to what the store experience is delivering to our customer and how they feel about the brand having gone into those stores. So we think that we're learning a lot there that can just inform overall, how we think about relocations and remodels within Lasalle.

Speaker Change: Ali fleet and the studio is giving us a great opportunity to understand how people use our products are what their pain points are how we can help them and we're continuing to build on those learnings as well we have the potential as we go through the balance of the year.

Lauren Frasch: In the press release, it listed first expanded distribution as a factor for improvement, and at the end, it was improving salon demand trends. So can you talk about those two?

Speaker Change: To get a few dozen more of those out there if we see the potential of being what wed like it to see so on both cases really seeing them come through they are pilots. So they are not meaningful contributors to 2024, but we would look and so they will all be able to be great contributors as we look to the longer term.

Lauren Frasch: Goldwell, what you bought, does that enter into the comp base, or does that stay out of it for a while? And then, just related to it, the weather impact, did that impact BSG and Sally proportionally in January, or was it more Sally? So, overall, when we think about what drove the VSG business, there were three key factors overall. So, innovation, expanded distribution, and improving salon demand trends, I'd say, in that order. With innovation, very broadly, Amica, Welles Ultimate Repair, ColorWow, and Moroccan Oil are places where we saw our customers lean in to that mix, and in particular, when we have expanded distribution for a few of those brands with ColorWow and Moroccan Oil, that certainly helps. The Goldwell portion of the business, part of that acquisition goes into comp, and part of it does not.

Speaker Change: Thank you I appreciate it.

Speaker Change: Yeah.

Speaker Change: Thank you and there are no further questions. Thank you.

Speaker Change: Thank you all for joining us today and thank you to all of our associates around the World. We appreciate what you do every day to serve our customers and to all of our investors and thank you for dialing in this morning and hearing more of our story and we look forward to keeping you posted in the coming quarters.

Speaker Change: Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation M. P. Using AT&T teleconference. You may now disconnect.

Lauren Frasch: So, the new stores that came with the acquisition do not go into comp, but the full service and rest of the business does go into comp. So, it's a bit of a split there, but we had expected that to be a $10 to $15 million build for the entire year, and we're seeing that perform in line with expectations, so we're really pleased with how that has come to bear. And then, finally, the improving salon demand trend. What we're really seeing is that we saw traffic pick up and come into the stores and shops, and the intercepts with customers just saying, I'm just a little busier, and that was great for us to see coming in and feeling that as part of the mix. And then, if you could remind me what the second part of your question was. It was the weather where you talked about some softness. Does that affect Sally and VSG?

Speaker Change: Yeah.

Speaker Change: We're sorry your conferences ending now please hang up.

Lauren Frasch: Yeah, so the softness that we saw in the early part of January tied to weather, great news is that it really has turned around at the end of January and as we launch into February today, we believe that it will continue. It was predominantly Sally, but it was across both businesses. So I have to split it, it was 60% Sally 30% BSG, give or take 40% BSG if we looked at it that way, but it did affect both businesses. That makes sense.

Lauren Frasch: Okay. Thanks. Be well.

Lauren Frasch: Thank you. And the next question is from Olivia Tong. Please. I'm sorry.

Lauren Frasch: From Raymond James. Please go ahead. Great, thank you. You mentioned improving salon demand trends at PSG. Could you just expand on what's driving that? You did leave the full-year comp outlook unchanged, but given that PSG was a bit better than expected, could you just talk about how that influences your full-year expectations to start? Thank you.

Lauren Frasch: You know, what we talked about in seeing improving salon demand trends, you know, we talked about it being a modest improvement in demand trends, and the way that we understand that is really just watching the purchase behavior of our stylists as they come into our stores, as they transact with us online, and how they talk about their businesses. The way they phrased it was coming into the holiday season, they saw a bit more normalcy in people wanting to come in ahead of a holiday, you know, refresh their look, kind of filling their chairs to a bit more extent than they had been in the earlier period of the year. So, we're encouraged that we've seen a little bit of that uptick for our stylists and their salon business, but it's a really new trend line, so we're not really baking in an expectation that that's going to have further growth or continuation as we look to our projections for the remainder of the year.

Lauren Frasch: You know, we'll certainly watch it and continue to react as we see that come through. Overall, in holding our guidance, the thing that I would come back to is we really performed in line with our expectations in the first quarter. As we look to the second quarter, we did see this unusually persistent weather very early in January to start things off, and overall retail traffic was certainly pressured through that point.

Lauren Frasch: It lasted long enough that, in our minds, we're not betting that we're going to recoup a bit of the softness that we saw in those early couple of weeks but rather get back on the rest of the trend for the quarter, as really happened in the last week of January and going forward. So our guide for Q2 really reflects the fact that we think that that was a pocket of air and a little bit of lost sales that came from that, but the rest of the business underneath that was quite healthy. So the down zero to two on comp sales for the quarter reflects that bit of early January pressure. But we believe that gross margin will continue to improve from Q1 to Q2, as Marlo discussed in an earlier question.

Lauren Frasch: And then we're really well prepared to ramp into the back half of the year. We also outlined that on the call, but we think about the strength of BSG that will finally overcome the haircare headwinds from one brand from last year. We're also continuing to be set up for this momentum with new brand innovation and expanded distribution. And then Sally, as we continue to embark on the back half of the year with the growth that we see in marketplaces coming through, our color is virtually first on demand.

Lauren Frasch: And then some improvements in Europe as well, where we've been working hard on pricing and new brand launches that we think are going to improve the second half of the year. So all in all, the year's unfolding generally the way that we expected it to, and we do expect the second half of the year to be a bit stronger on the top line than what we'll see for the first half of the year. I'm just pleased with our start. Thanks. That's very helpful. So if I could just summarize, it sounds like Q1, more or less in line, maybe a touch better. Q2, obviously impacted by the weather. I bet you don't expect that to get back.

Lauren Frasch: And then the second half, more or less, no change in expectations relative to your expectations going into the December quarter. Fair enough. Got it.

Marlo Cormier: Okay. Thank you. And then just my next question is around the Fuel for Growth program. You talked a little bit about incremental savings. Can you just talk about where that savings is coming from, any new buckets, or just as you continue that program, you're just seeing a little bit better success rate with achieving savings in the existing bucket? Yeah, thank you. Yeah, so, as we called out last quarter, we were really in the early stages of our fuel for growth work. We had identified $20 million of benefits that we expect to flow through 2024. You know, most of that is back half loaded.

Marlo Cormier: And we talked about that being weighted 75% SG&A and 25% cost of goods. We also talked about our partnership with an external advisor. We've completed that assessment, and now we believe we're on a path to identifying another $50 million that we can see flow through fiscal 2025 and then cumulatively through the program, get to $120 million run rate as we get into 2026. And where we see that coming from, you know, in the early stages, programs that we were testing in our supply chain, like our biweekly shipping frequency. We are approaching 80% of the fleet for Sally. We're shy of that on VSG; our goal is to get to around 85% across both banners. We're on the path to accomplishing that this year.

Marlo Cormier: But as we look forward, we're seeing greater opportunities within our merchandising and vendor negotiations and relationships. We've got a good spot for resale opportunities within our non-trade payables. We see automation, we see outsourcing. So we see a variety of programs. But as we look forward, and we start to see where that falls, you know, more so in the merchandising and supply chain areas, we'll get more benefits within gross margins. So you'll see that 75 and 25 start to balance out a bit as we get into future years. But We're pretty excited about the program, and we're off to a great start. Great

Marlo Cormier: Thank you. Best of luck. Our next question is from Oliver Chen from TD Cowen. Please go ahead.

Lauren Frasch: Hi, thank you very much. We were curious about the promotional environment that you're seeing in terms of the landscape and how that's interplaying with how you're thinking about pricing. Also, as we look forward, do you expect volatility and traffic? Just curious about underlying trends there? And then finally, as we model inventory, I would love views on how you're planning inventory relative to sales. Thank you very much. Good morning, Oliver.

Lauren Frasch: So, I'll start with the point about the promotional landscape. It remains pretty consistent with how we described it last quarter. Value remains important for both our Sally customers and our BSG stylists.

Lauren Frasch: On the BSG stylist point, we actually see a little bit higher promotional activity in play, consistent with what we saw last quarter as compared to last year. And a lot of that is because we do see a bit of unit demand pull through when that promotional activity happens. So, we have had that built into our model. Like I said, nothing particularly outsized in terms of trend, but we do see the stylists there respond a bit better to promotion. On the Sally side, I would call it a bit steady-eddy.

Lauren Frasch: At the end of the day, customers are just being frugal overall with their dollars. So, with or without a promotion, we don't see meaningful changes in traffic coming into the store, and, in turn, we are moderating that and ensuring that we're doing the right thing that will drive value for us overall. I think importantly, in light of the landscape that's out there on both sides of the business, you can expect that we'll remain conservative on pricing. The good news is that we're seeing fewer price increases come through for our vendors as commodity costs and other things have moderated. But importantly, you know, we look right now and would not expect to be flowing through any significant increases that would drive AUR in the near term in light of the macro environment.

Lauren Frasch: So not much different than what we saw last quarter, but certainly a very value-oriented consumer on both sides of our business today. In terms of volatility and traffic, we definitely saw volatility in the quarter, but I'd call it moderate volatility up and down. I think we've been seeing that now, since inflation really started to tick up, which we're now probably six quarters into seeing that impact where when people need to come to buy for an event or something like that, you're going to see a little bit more strength. And then in the down periods, you know, a little bit less traffic comes through. We'll expect to see that, but you know, it's not wild swings.

Lauren Frasch: It's just, you know, customers really are tailoring their purchase habits to be aligned with needs. So and then your final question was on inventory. I'll kick that one over to Marla.

Marlo Cormier: Yeah, thank you. Yeah, inventory, we expect it to run in the billion dollar range. As you look at the quarterly cadence, you know, fairly level loaded, a little bit of build as we kind of progress into the year and then drop back down into the billion dollar range. One thing to keep in mind about inventory; we are on a weighted average cost method. So we've got a bit of a lag time between those vendor price increases that we had seen previously. Those are still making their way through the process. But we continue to maintain improved levels of unit inventory. However, our units are down.

Marlo Cormier: So where you see their level or increases, that's all due to the vendor cost increases making their way through the system. We are hitting our unit weeks of supply targets, and our in stock levels are at really healthy levels. Thank you very much. One follow up. One of your competitive advantages as a company is your own brand portfolio. What are the highlights of opportunities you see there for innovation and change? Thanks a lot.

Lauren Frasch: Yeah, spot on. We're very excited about the own brand portfolio. You know, of late, the biggest change that we have made was the launch of Bon Bar and the extension of Bon Bar from care into color. We're seeing good customer response there with a very modern brand, you know, bringing in new customers when we get that out there and in front of them. Innovation coming forward is going to follow a similar track of being very aligned with maybe younger consumer trends around desire, desire for more natural products, products free from chemicals.

Lauren Frasch: So kind of good for the environment spaces where we think we can play there, particularly on the care side. And we'll talk about that as all things about how you can be more mindful as you shop. Coming through, you'll also see us continue to expand things like ion into sunscreen for your hair and places where people are looking once again for more solution orientation. You'll see that you'll see it push on as well. So I really focus on the dial up on kind of mindful, natural items coming through as well as continued expansion of our Bon Bar business, and then problem solving tied to our ion. Thank you. Very helpful. Best regards. And the last question in queue is from Linda Bolton Weiser from D.A. Davidson, please go ahead.

Lauren Frasch: Yes, hi, and thank you. I was just curious about your experimentation and pilot studies with these other store concepts, and I was wondering if you could quantify the costs related to those pilot tests this fiscal year. And then, sorry if I missed it, but did you give any more color about your plans to expand the value concept, like in FY25, do you think you will open more of those stores? Thank you. Yeah, I appreciate the question.

Lauren Frasch: You know, when I think about the concept initiatives that we're piloting right now, I really focus on two key areas. One is the Studio by Sally concept, and then the other is our value initiative with Happy Beauty Co. So I'll start a bit with Happy Beauty Co., or maybe I'll back up one step. You first asked about financial impact this year. It's quite a modest financial impact for what we've set up this year, both in the remodel or relocation cost of opening the studio stores, or in the case of Happy Beauty, it's 10 stores that we put into play last year, and this year is really about operating them. So, no material impact to the bottom line from either initiative this year.

Lauren Frasch: But if I look at the opportunity set, you know, Happy Beauty Co., we have 10 stores up and running. We've been gaining traction in the first six months since our launch, and we're continuing to build awareness and traffic, and with 10 stores, we're really seeing that grassroots social media coming through. We were very pleased with what we saw through the holiday season. We thought that the brand was very well positioned for gifting, and that's what we saw, and our teams executed quite well. We're seeing tickets over $25 in UPT around five.

Lauren Frasch: In December and during the holiday shopping weeks, we saw stronger performance than that, supporting that idea that it's a gift. So we're carrying those learnings as we consider additional openings. More to come on future calls about a path there, but we remain excited about the potential and believe that if we see some of the metrics continue to perform as they could perform, we could be pushing an opportunity for over 500 stores over the long term, where the real start of that expansion would be going into next year, rather than meaningfully more this year. And then on the studio side, we have six stores open. We're really reading performance there and understanding what they deliver to us. As you'll remember, these stores have the opportunity for people to participate in the salon environment with a DIY salon. But in addition, we made changes to the stores in terms of look and feel. Both graphics, lower gondolas, better sight lines, much stronger navigation, and changes in how we think about education and signage throughout the stores overall.

Lauren Frasch: We're seeing very positive reactions to what the store experience is delivering to customers and how they feel about the brand having gone into those stores. So we think that we're learning a lot there that can just inform how we think about relocations and remodels within the Sally fleet. And the studio is giving us a great opportunity to understand how people use our products, what their pain points are, and how we can help them. And we're continuing to build on those learnings as well. We have the potential, as we go through the balance of the year, to get a few dozen more of those out there if we see the potential being what we'd like it to see. So in both cases, really seeing them come through. They are pilots, so they are not meaningful contributors in 2024. But we would look and hope that they will all be able to be great contributors in the long term.

Lauren Frasch: Thank you. I appreciate it. Thank you. And there are no further questions. Thank you. Thank you all for joining us today, and thank you to all of our associates around the world. We appreciate what you do every day to serve our customers, and to all of our investors, thank you for dialing in this morning and hearing more of our story, and we look forward to keeping you posted in the coming quarters. Thank you, and, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Teleconference. You may now disconnect. We're sorry, your conference is ending now. Please hang up.