Q4 2024 Sally Beauty Holdings Inc Earnings Call and Business Update
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Speaker Change: And good morning, everyone and welcome to Sally Beauty Holdings conference call to discuss the company's fourth quarter and full year fiscal 2024 results.
Speaker Change: All participants have been placed in listen only mode. After management's 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, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings.
Jeff Harkins: Thank you good morning, everyone and thank you for joining us.
Jeff Harkins: With me on the call today are Denise Paolo Nunez, President and Chief Executive Officer.
Speaker Change: Marlo Cormier Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Actual results may differ materially from those indicated by these forward looking statements.
Speaker Change: 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.
Speaker Change: Any forward looking statements made on this call represent our views only as of today and we undertake no obligations to update them.
Speaker Change: The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.
Speaker Change: Now I'd like to turn the call over to Denise to begin the formal remarks.
Denise: Thank you, Jeff and good morning, everyone.
Speaker Change: Please conclude our fiscal year with strong results.
And our fourth quarter, which met our expectations.
Speaker Change: And exceeded our expectations on the bottom line.
Speaker Change: The results reflect.
Speaker Change: In a quarter that's positive.
Speaker Change: In our BSG segment.
Speaker Change: Second consecutive quarter.
Speaker Change: Sally beauty.
Speaker Change: This is a testament to our team.
Speaker Change: Navigating.
Speaker Change: With agility.
Our strategic pillars.
Speaker Change: As we anticipated our business strengthened in the second half of the year.
Speaker Change: Initiatives continue to mature and gain traction.
Speaker Change: More than 250 basis points to our comparable sales in the fourth quarter.
Speaker Change: So the 250 basis point contribution in the third quarter.
Speaker Change: In addition to this.
Speaker Change: Q4 represented another quarter of strong growth.
Speaker Change: Effective cost control and improved profitability with adjusted operating margin expansion of 80 basis points over the prior year to nine 4%.
Speaker Change: It's clear that our actions around performance marketing.
Speaker Change: Digital marketplaces expanded distribution and new services are driving operating and financial improvements across the business.
Speaker Change: Touching on the financial highlights of the fiscal year we.
Speaker Change: We delivered consolidated net sales of $3 7 billion.
Speaker Change: Strong gross margin of 51%.
Speaker Change: And adjusted operating income of $315 million.
Enabling us to generate $247 million of cash flow from operations.
Speaker Change: We significantly strengthened our balance sheet with the refinance.
Of our senior notes and the.
Speaker Change: Repayment of our outstanding ABL balance.
Speaker Change: While also returning value to shareholders through $60 million of share repurchases throughout the year.
Speaker Change: There are also a number of operating successes to highlight.
Speaker Change: We built new and lasting relationships with customers through effective engagement education and marketing initiatives.
In fiscal year, 'twenty 'twenty four values in Canada generated 78% of sales.
16 million royalties.
Speaker Change: We delivered a product innovation in both segments across third party.
Speaker Change: Driving growth and customer engagement.
Speaker Change: We successfully expanded our marketplace initiatives that is fueling digital sales growth and attracting new customers to the Sally brand.
Speaker Change: Our partnerships with high visibility platforms, including Amazon.
Dash in CCAR and Walmart.
Speaker Change: And lastly in the fourth quarter. These she completed the strategic acquisition of exclusive beauty supplies of Florida.
Speaker Change: Our highly regarded professional beauty distributor.
The acquisition adds three store locations and seven direct sales consultant to our existing presence in this important market.
Speaker Change: While also bringing several key brands such as Moroccan oil all of what Russ and.
Speaker Change: 275 locations throughout Florida.
Speaker Change: It is evident that our commitment to our core pillars is working enabling us to enter fiscal 2025 with strong operating and financial momentum.
Speaker Change: The business has returned to positive topline performance.
Speaker Change: And we're continuing to drive increased efficiency through our fuel for growth program, which is helping us improve profitability.
Speaker Change: By the end of fiscal 2025, we expect to capture she more to gross margin and SG&A benefits of approximately $70 million.
Speaker Change: Building on 28 million.
Speaker Change: In fiscal 2024.
Speaker Change: And positioning us to generate up to $120 million of cumulative run rate benefits by the end of fiscal 2026.
Speaker Change: With a strike that foundation in place the businesses on the path to our long term low double digit operating margin target.
Speaker Change: As we enter a new fiscal year, our priorities are clear will.
Speaker Change: We will be focusing on several initiatives under our strategic pillars of enhancing our customer centricity.
Speaker Change: Our high margin owned brand and amplifying innovation.
Speaker Change: And increasing the efficiency of our operations.
Speaker Change: What are the initiatives, we are particularly excited about is a Sally beauty brand refresh.
Speaker Change: And to move us from a trusted beauty supplier to a more dynamic of beauty powerhouse.
Speaker Change: It's clear to us with significant opportunity to leverage our rich heritage brand equity and loyal customer base to evolve Sally beauty into a go to destination for brand and product discovery.
Speaker Change: Our work will include an updated brand expression that is modern sophisticated and scalable that will begin rolling out across all our brands media touch points in store marketing and digital asset in the second half of fiscal 2025.
Speaker Change: At the same time, we'll be piloting our store refresh that incorporates key takeaways from our studio by Sally initiatives.
Speaker Change: It was our first foray into changing the perception of our stores.
Speaker Change: We've made the decision not to move forward with the services component of studios, but rather take the highest and best learning to re imagine our Sally stores.
Speaker Change: Creating a new shopping experience that inspires our customers to find joy and their beauty journey from discovery to result.
Speaker Change: We'll be starting with the Orlando market for your customers is significantly enhanced shopping experience.
Speaker Change: That reflects our newly modernized branding expanded assortments, new floor plans and fixtures and moments for discovery.
Speaker Change: We will evaluate the results of Orlando initiative with a view towards potentially refreshing up to two thirds of our Sally fleet in the U S.
With this commitment to refreshing the Sally brand and experience we are continuing to build for the long term, making strategic investments that build on our core strength.
Speaker Change: Deepen our connection to our customers and extend our reach to new consumers.
Speaker Change: Another important initiative that continues to gain momentum is license colors on demand, which provides our customers with high touch service and professional consultation ensuring they're set up for success throughout their hair colored journey.
Speaker Change: We're incredibly pleased with how this offer is scaling.
Speaker Change: With over 60 licensed colors on the platform will.
Speaker Change: We will providing inspiration to our DIY customers and attracting new customers to the Sally brand well.
Speaker Change: While driving higher average ticket value.
Speaker Change: Larger basket Ricky.
Speaker Change: Recurring color purchases and more frequent visits.
In Q4, the percentage of customers new to the brands eclipsed 45%.
Speaker Change: The average order was 33% higher than non L. C O D customers and the number of consultations continue to build rapidly.
Speaker Change: More than 4000 per week up 20% from Q3.
Speaker Change: Looking at our marketplace initiatives, we're incredibly pleased with the level of success. We've had in fiscal 2024 and look forward to accelerating growth in 2025 and beyond.
Speaker Change: We are currently partnered with Amazon door Dash is Descartes and Walmart.
Speaker Change: This strategy is bringing new customers decided to Sally while the ability to utilize in store fulfillment is driving more profitable sales growth.
Turning now to productivity Asian, which has proven to be a significant driver of growth and provides a meaningful competitive advantage to both Sally and BSG.
Speaker Change: In fiscal 2024.
Speaker Change: We delivered a consistent pipeline of innovation across our own and third party brands and we have plans to further accelerate this in the new fiscal year.
Speaker Change: At ESG were expanding our presence with major brands or.
Speaker Change: For example, Omega, which was already fully rolled out to all positive Ross stores, just recently expanded to all of our full service direct sales consultants in October.
Speaker Change: Additionally, Moroccan oil recently expanded into California, and Nevada, and Colorado is now available in all of our stores in New York, New Jersey, and Pennsylvania, as well as to our full service teams in North and South Carolina.
So that would ETE will also see innovation across color bonding nails and appliances.
Speaker Change: Some of the key highlights include an expanded partnership with fast beauty coming into Q2.
Speaker Change: And a new ion eight one air Styler that launched November one.
Speaker Change: Well, thank you happy beauty co.
Speaker Change: We are continuing to build this concept and we will have our next tranche of 10 pilot stores opened before Black Friday.
Speaker Change: Strategically located in strip centers and mall locations. This next group of stores in the Dallas and Phoenix market is expected to provide an expanded datasets and key learnings related to location format and demographics that will integrate into future planning.
Speaker Change: As we approach the holidays, we are prepared for a strong gifting season supported by creative marketing and traffic driving strategies, including social media grassroots initiatives and in store events.
Speaker Change: From a high level perspective, we feel good about the results of the pilot program in its first year and will continue to take a test and learn approach as we consider a more broad base long term rollout.
Speaker Change: We're pleased to be entering fiscal 'twenty 25, with a position of strength.
Speaker Change: He has regained momentum driving customer reactivation and new customer acquisition as performance marketing education product innovation and virtual services are scaling well.
Speaker Change: While also providing customers with an enhanced level of convenience through our marketplace offering.
Speaker Change: At BSG, we've a strong foundation from which to continue growing fueled by a robust pipeline of product innovation expanded distribution and healthy underlying purchasing pattern among our professional stylist community.
Speaker Change: We have confidence that our industry leadership position talented teams and strong cash flow will continue to rise with the flexibility to define our future and return value to shareholders over the long term.
Speaker Change: We are grateful for the hard work of our associates throughout the organization to bring an enthusiastic customer centric mindset to work every day.
Speaker Change: And we appreciate the support of our shareholders and look forward to updating you on our continued progress in fiscal 2025.
Speaker Change: Now I'll turn the call over tomorrow to discuss the financials.
Speaker Change: Denise and good morning, everyone. We're pleased to be wrapping up a strong second half of the year with continuing momentum across our key financial metrics. Our Q4 results marked our second consecutive quarter of positive topline performance in both business segments.
Speaker Change: Additionally, we delivered healthy gross margins well above our 50% target range.
Speaker Change: Adjusted operating margin ahead of our guidance and strong operating cash flow allowed us to reduce our debt levels and return value to shareholders.
Speaker Change: Fourth quarter consolidated net sales of $935 million increased one 5%, while consolidated comparable sales grew 2%, reflecting an improvement in new and reactivated customer trends at Sally beauty as key strategic initiatives continued to mature.
Speaker Change: And continued momentum at BSG, driven by expanded brand in territory distributions.
Speaker Change: Global E Commerce sales were $91 million and represented 10% of total net sales.
Speaker Change: Fourth quarter gross margin expanded 60 basis points to 51, 2%, reflecting lower distribution and freight costs from supply chain efficiency.
Speaker Change: Adjusted SG&A expenses in the quarter totaled $391 million.
Speaker Change: Down slightly from the third quarter and up 1% versus a year ago, which was in line with our expectations.
The modest increase from the prior year, primarily reflects higher labor and other compensation related expenses as well as planned increases in advertising spend.
Speaker Change: Partially offset by $5 $5 million in savings from our fuel for growth program.
Speaker Change: On a full year basis, we achieved $28 million of pre tax benefits to gross margin and SG&A in fiscal 2024, and expect to capture accumulative $70 million of savings in fiscal 2025.
Speaker Change: Additionally, we expect to incur approximately $10 million in charges related to our fuel for growth initiatives in fiscal 2025, which are expected to be excluded from adjusted earnings.
Speaker Change: As Denise mentioned, we remain on track to achieve up to $120 million of commute cumulative run rate benefits by the end of fiscal 2026 from our fuel for growth program.
Speaker Change: The strength of our sales and margin performance in the quarter, coupled with savings from our fuel for growth program enabled us to deliver an adjusted operating margin of nine 4% and adjusted EBITDA margin of 12, 6%.
Speaker Change: And adjusted diluted earnings per share of <unk> 50.
Speaker Change: All increases over the prior year.
Speaker Change: Moving to segment results.
Sales growth at Sally beauty accelerated from Q3 with comparable sales up two 6% and net sales growth of one 8% versus a year ago.
Speaker Change: Comparable transactions were down 6% and average ticket was up two 2% driven by growth in average unit retail.
Constant currency Sally ecommerce sales were $38 million and represented 7% of segment net sales for the quarter.
Speaker Change: We are pleased to see ongoing traction from our marketing tactics marketplace expansion and digital enhancements.
Speaker Change: For the global Sally Beauty segment color and care, both increased by 2% and sales were up 9% compared to the prior year.
That's all U S and Canada color increased 3% care was up 2% and sales were up 12%.
Speaker Change: Gross margin in our Sally segment increased 120 basis points to 64%.
Speaker Change: The year over year improvement reflects higher product margins and lower distribution and freight costs, resulting from supply chain efficiencies.
Speaker Change: So I guess segment operating margin was strong coming in at 17, 4% up 240 basis points to last year.
Speaker Change: Looking at the BSG segment, we delivered a fourth consecutive quarter of sales growth, reflecting expanded distribution product innovation and healthy underlying stylus demand trend.
Speaker Change: Comparable sales increased one 3%, while net sales were up 1%.
Speaker Change: Comparable transactions were up four 6% and average ticket was down to two 6% driven by a decrease in units per transaction.
Speaker Change: On a constant currency basis, BSG e-commerce sales were $53 million, representing 13% of segment net sales for the quarter.
Speaker Change: From a category perspective color was up 4% and care was flat.
Speaker Change: Gross margin at BSG was 39% down 30 basis points versus last year.
Speaker Change: Reflecting lower product margin related to brand mix, partially offset by lower distribution and freight costs, resulting from supply chain efficiency.
Speaker Change: Segment operating margin was 11% down 50 basis points to the prior year.
Speaker Change: Turning to the balance sheet and cash flow.
Speaker Change: We ended the year with $108 million of cash and cash equivalents and no outstanding borrowings borrowings under our asset based revolving line of credit.
As announced in today's earnings release during the fourth quarter, we utilized our strong cash flow to repay the $45 million ABL balance, bringing our net debt leverage ratio down to two two times.
Speaker Change: As we previously noted we believe our leverage ratio in the range of one and a half to two times is appropriate for our business.
Speaker Change: Year end inventory levels were slightly over $1 billion.
Speaker Change: Of 6% to last year, which is in line with our expectations and reflects a healthy overall position.
Speaker Change: The business generated strong cash flow from operations of $111 million in Q4 and $247 million for the full year.
Speaker Change: Capital expenditures totaled $37 million in the fourth quarter and $101 million for the full year.
Speaker Change: Throughout the year, we deployed capital toward our core growth initiatives strategic acquisitions and debt reduction, while also returning value to shareholders through $60 million of share repurchases.
Speaker Change: Now I'll turn to a brief update on our subsequent events that occurred in our first quarter in.
Speaker Change: In October we completed the sale of our home office in Denton, Texas, and we have plans to move into a new building next summer.
Speaker Change: The new building will contain more of the modern amenities that are customary in today's corporate headquarters, which allows for more flexibility and collaboration as well as central location in DFW for our employees and recruiting efforts.
Speaker Change: The sale of the building included net proceeds of $43 million and will include a net gain of approximately $25 million in our first quarter reported GAAP earnings.
Speaker Change: The net gain of $25 million will be excluded from our adjusted earnings.
Speaker Change: Before going into our outlook for fiscal 2025, I would like to reiterate our capital allocation priorities and provide some insights into how we intend to utilize our balance sheet.
Speaker Change: The business continues to be a strong cash flow generator in fiscal 2025, we expect the combination of operating cash flow and net proceeds from the sale of our building to provide us with $300 million to $325 million.
Our cash to deploy towards capital expenditures, including investing for growth returning value to shareholders and strengthening our balance sheet.
Speaker Change: Let me Dimensionalize that for you.
Speaker Change: Full year capital expenditures are planned to be approximately $120 million.
Speaker Change: This includes our historical annual spend of about $90 million and approximately $30 million to support the build out of our corporate office move.
Speaker Change: In the first half, we anticipate having approximately $60 million in cash to deploy after we invest in capital expenditures and our new building location.
Speaker Change: We anticipate that share repurchases will comprise about one third of this cash deployment with the remaining two thirds going towards debt reduction.
Speaker Change: In the second half of the year, we will evaluate the progress of our hockey beauty co concept as well as our Sally brand refresh initiatives and provide an update on the use of cash between our strategic investments as well as returning value to shareholders and any further debt reduction.
Turning now to our full year outlook for fiscal 2025, we are introducing the following guidance.
Speaker Change: Consolidated net sales and comparable sales in the range of flat to up 2% and adjusted operating margin in the range of eight 5% to 9%.
Speaker Change: As we consider the shape of fiscal 2025, we expect our strong top line momentum to continue in the first half.
Speaker Change: I would buy more difficult comparisons in the second half of the year.
Speaker Change: Looking further down the P&L benefits from our fuel for growth program are expected to drive modest gross margin expansion and enable us to hold SG&A as a percentage of sales relatively flat to the prior year.
Speaker Change: Our guidance for the first quarter of fiscal 2025 includes net sales and comparable sales in the range of flat to up 2% and adjusted operating margin of 8% to eight 4%, reflecting an improvement of 10 to 50 basis points versus the first quarter of fiscal 2024.
Speaker Change: We are pleased to be entering fiscal 2025 with strong momentum and believe we are well positioned to maintain our industry leadership as we continue to advance our initiatives.
Speaker Change: We appreciate your time this morning, now I'll ask the operator to open the call for Q&A.
Speaker Change: And ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your telephone keypad.
Let's try your question at any time by repeating them, London Zero command.
Excuse me speaker phone, please pick up the handset before pressing the numbers.
Speaker Change: Once again, if you have a question. Please press one of them zero at this time.
A moment please for our first question.
Speaker Change: Yeah.
Speaker Change: And our first question today.
Comes from the line of Oliver Chen with Cowen. Please go ahead.
Oliver Chen: Hi, Denise and Marla the brand refresh sound really encouraging why why is now the right time and what are your thoughts on how that will manifest in comps and traffic and the timing of how we should think about that as you phase it in.
Oliver Chen: I'm also a cross the comp metrics as we think about the forecast.
Oliver Chen: Either in both divisions do you expect AUR to continue to be positive and would love commentary on color nail and hair as we think about that.
Oliver Chen: The forecast that the divisions as well going forward I'm really nice momentum.
Speaker Change: All of those categories. Thank you.
Speaker Change: Good morning, Oliver I. Appreciate the question. This is Denise let me start with brand refresh on the Sally side. We are excited about the potential that we have here and you specifically asked about the timing and why now is right I think you've been on the journey with us, but we made the strategic decision to close a set of stores a few years ago.
Speaker Change: To really reposition us into all the markets that we needed to be in and wanted to be and we returned to positive growth coming to the end of our fiscal 'twenty four as we've just discussed and we've been doing a lot of test and learn whether that was through our studio by Sally initiative or other small pilots. So we feel like we're well armed with the information now on what can move the needle.
Speaker Change: And engage our existing customers as well as new customers. So what we're really working on is changing the way customers can experience the store as well as how they talk we talk about the brand externally. This store will be about new floor plans and fixtures more opportunity for discovery really moving away from a supply house to immediate.
Speaker Change: We're going to have the opportunity to test some new assortment, which we're excited about when we think about what we're testing in Orlando right now on the storefront. We're testing a range of options at different levels of investments that average investment is about 150000, a store, but testing a range around that we will see how that works through.
Speaker Change: We'll see how those different tests come out, but we're optimistic that we'll be able to expand on what we're doing as we look into fiscal 'twenty six on that front and importantly, we're going to complement that with marketing really coming online in a different way in the second half of fiscal 'twenty five so really bringing that modern persona that we want to.
Speaker Change: Hi to Sally the experiences that you can get a community events and how thats going to come to life. So a good progress that we're excited about there.
Speaker Change: And when we look to the comp forecast, we see continued strength across all the three categories that you mentioned on color care and nails and when we're when we're looking at both businesses on the Sally side really nice momentum with nails with some new assortment of the breadth of that assortment and brings in a customer and we do see some customers come shop first.
Speaker Change: US for nails, which is quite encouraging.
Speaker Change: Friends that were seeing them color is our bread and butter and with care, we have some new products coming in and some new assortment changes there that we are moving along with and I'd be remiss not to mention that bond bar has actually become our fifth largest owned brand over the course of the year. So a nice piece to build on there and when we look to the process.
Speaker Change: Of the business and BSG color and care both remain good sources of strength color continues to outperform.
Speaker Change: And we're really happy to see other results there with the brands that we have in our cadre and with care with all the expansion into the new brands that we've had whether that's Amiga color, while Moroccan oil we're seeing good traction with our customers. We're seeing transactions increase which is really encouraging we saw a little bit of softness in <unk>.
Speaker Change: Here in the fourth quarter as we came out of that there were really two drivers for that one and we did see a little bit more slow down an old flex, but we also intentionally pushed the timing of some of our holiday packs to go to market shifting that from the end of September into early October so planned timing change there for some <unk>.
Speaker Change: Sell through as we look to holiday. So all in all really pleased where we're headed and we do expect AUR will remain modestly positive as we go through the year as well.
Speaker Change: Okay. One follow up you've competed really strongly in a promotional environment in the middle and lower.
That's why it continues to have pressure endure volatile it in confidence.
Speaker Change: Consumer confidence what are your thoughts on the promo environment and Marla. The compares get tougher as you mentioned in the back half.
Speaker Change: Does that imply that comparable.
Speaker Change: Likely be negative on the back half I know you went that a lot of that conservatism in the guidance as well generally thank you.
Speaker Change: Sure so on the <unk>.
Speaker Change: <unk> front, we're really seeing a consistency over the last couple of quarters value continues to be important on both sides of the house in the quarter Sally was actually down a bit in terms of promotional frequency compared to the prior year and wishes reflect some of the strategic choices, we've made on how to navigate promotional penetration.
Speaker Change: The issue was pretty consistent we're looking we're looking for that to continue into the new year. I think we feel like we have the right levers to be able to pivot as we need to not materially change our promotional cadence that still give customers that value that they want.
Speaker Change: And thanks for the question on the quarterly cadence of the topline comp.
Speaker Change: From a topline perspective, we don't see necessarily going negative, but certainly lower than the front half where those compares get a bit harder.
Speaker Change: But we do see the momentum coming out of 2024 into 2025 continuing strong.
Speaker Change: Stronger first half than we see back half, but that's only from a compare point of view from a dollars point of view, we still see the volumes are very strong.
Speaker Change: Thank you best regards.
Speaker Change: Yeah.
Speaker Change: And our next question comes from the line of Korean Hoffmeyer with Piper Sandler. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: Ran.
Just one on a transaction versus ticket at the beginning on under the quarter.
Speaker Change: And how that has trended for me I see it and then for the hobby beauty stores, what you're seeing in terms of transaction versus ticket times there.
Speaker Change: Sure and happy to talk about that so on the ESG front transactions were quite strong in the quarter. We definitely saw a frequency increase in terms of stylus coming to shop.
Speaker Change: Up low single digits, which we felt really good about that we saw a little lighter UPC, but not unexpected given that we saw the frequency builds so net net I'm coming out to be that that positive one comp, which we felt nice nice about and complements the rest of the year that we have there.
Speaker Change: I'm happy to be front, we continue to see great strength in our average unit retails, which is a testament to the <unk> of what people are putting in their basket and seeing.
Speaker Change: And shopping across the stores they come into the store, we continue to see transaction trends improve and we are excited as we launch. Our next 10 stores that will be opened before black Friday to continue to test into locations, where we believe that transaction strengths can come through which includes some strip mall locations, but also includes testing in traditional <unk>.
Speaker Change: All environments that have built in traffic with them, so I'm seeing nice progress, but we'd like to see more there and thats what were working through in the next phase of the test.
Speaker Change: And our next question comes from the line of Olivia Tong with Raymond James. Please go ahead.
Olivia Tong: Great. Thanks, good morning.
Speaker Change: I was wondering if you could talk about the building blocks to margin improvement and whether you think the 50 basis point expansion that you're seeing this this year.
Speaker Change: A perfect 25, excuse me is the right way to think about long term.
Speaker Change: Sure. So that's probably one for both marleau and I you know I think the starting point of that is really the sales growth in the sales growth trajectory, we're definitely on that path to delivering low single digit topline growth, we exited that in the third quarter and the fourth quarter of this past year and with that continuity that we get there we certainly.
You can get some leverage on what's behind that is behind all the things that we've talked about with Sally around product innovation marketplaces licensed colors on demand personalization and what we hope will be building into with the brand refresh in the marketing side of that that will come in the second half of the year and then BSG, we continue to show stress.
Speaker Change: As a leader in this distribution space the brands that we're bringing in the distribution expansion and the M&A that we have in front of us get us into that low single digit range, which is as I said as the foundation to getting us to margin improvement Martin would you want to talk a little bit about fuel for growth. So in addition to the low single digit range.
Speaker Change: We're working over the long term the contributes to SG&A leverage in the near term. We're working towards is our fuel for growth program, which in 2025, we have slated to deliver over $40 million on our way to a cumulative run rate of $70 million over the program life.
Speaker Change: In 2025, it'll come mainly on 60% of that will come through gross margin and 40% in SG&A. So as we look to the near term, we see leverage building through operating or gross margin expansion.
Speaker Change: With sales or selling SG&A expenses.
Basically at the same percentage last year over the long term, we see further leverage in SG&A.
Speaker Change: So as we look into our fuel for growth program, we're expecting about $120 million of run rate by 2026, so that will create leverage flow through gross margin expansion as well as SG&A leverage over time.
Speaker Change: And I think when we wrap all that up you know the trends that we're on right now we look at our long range horizon, which is about a three year planning cycle to be.
Speaker Change: Within our algorithm of low double digit operating margin as we get to the end of that cycle.
Speaker Change: Thank you that's very helpful.
And then just to follow up of course, given the challenging macro but we're seeing are you seeing any benefit from consumers, who haven't historically shopped the store coming in to find value, whether it's DIY color or any other.
Speaker Change: And it seems like that and then.
Speaker Change: But digital E Commerce side could you talk a little bit more about some of the initiatives that you have.
Speaker Change: A lot of our score well on E Commerce, So just wondering what what.
Speaker Change: Additions you're planning for fiscal 'twenty. Thanks, So much yes, sure I'm happy to do that you know when we think about our customer base on the Sally side the trajectory changes that we've seen in the last two quarters can vote come from both new and reactivated customers.
Speaker Change: Certainly some of those new customers are coming and getting introduced to us through license colorist on demand, which is our online platform to be able to give education and coaching to customers about coloring their hair in the journey. They can be on and we do think some of those are first time colors of their hair, so to the point of bringing in that new customer we're seeing.
Speaker Change: Some nice traction there and then reactivated customers I think the messaging about the assortment that we have at that customer service of what we can deliver to customers newness in things like nails, it's nice to see the reengagement of customers happening there as well. So we always have that great loyal base, but those other two populations are.
Speaker Change: Fitting for us to see and we think that that's going to continue and we have the momentum with our initiatives to make that happen.
Speaker Change: On the digital E Com front, certainly didnt mean to not do justice there compared to what we're doing in the stores and we should have a lot going on and so when you think about could different component parts of that over the last couple of months the biggest launches and the expansion of our marketplace program into door at Ash and instant card, which uses our source.
Speaker Change: Stores as the point of distribution, but we do think also reaches some new customers, who might not be thinking Sally first or might not have a salary in their backyard, but need or want that product in a in a timely fashion. So we've seen nice growth there and in fact for the full fiscal year. This past year, we saw about $13 million in total growth coming from marketplaces.
Speaker Change: <unk>, which feels like a good number to us.
Speaker Change: We're also growing going and focusing on growing against our own platforms as well our app is getting some really nice engagement, we complement that with our SMS and CRM activities, becoming more personalized and the journey. We're on to continue to deliver on that personalized communication is there and then we're going to.
Speaker Change: Working on the digital side with our owned platforms as well to roll out that brand refresh and kind of updated Sally persona still Sally to the core, but maybe a little bit more modern a little bit.
Speaker Change: More sophisticated view of how customers will see us enact with US online. So when we combine personalization in CRM with continued expansion of market places and the <unk>.
Speaker Change: Improvements against our own sites, it's certainly an important area of growth for us.
Speaker Change: Yeah.
Speaker Change: And our next question comes from the line of window Bolton Weiser from D. A Davidson. Please go ahead.
Speaker Change: Yes, hi.
Speaker Change: So it sounds like.
Speaker Change: From your tone that you are really you made these changes in the business and you're finding success in many areas that you're.
Speaker Change: And you're talking about the consecutive quarters of positive comp growth. So I'm wondering if that's like like your goal I mean, I don't mean to put you on the spot but are you kind of saying that new wanted have like more consistency, where you actually produce a positive comp.
Speaker Change: Overall.
Speaker Change: Every quarter I mean is that kind of like a goal of yours. Thanks.
Speaker Change: I think our we I just go back to our guidance and how we think about our guidance our guidance really is low single digit comp comp growth expanding our margin underneath that so just delivering operating growth you know a little bit faster than that sales growth and getting back to a double digit operating margin.
Speaker Change: We are building towards and expect that we will drive comp growth in both of our segments contributing to the entire portfolio and see us on a good path to do that as we've talked about all of our initiatives. So absolutely the path or on have a lot of conviction about how we're managing through that and the plans we have in place.
Speaker Change: And can I can I just follow up to about.
Speaker Change: On the selling side I know long term strategy doesn't involve increasing the percentage from owned or private label brands.
But you didn't really mention that on the call in terms of any percentages. How do you marry that idea of having your own private label brands with trying to modernize.
Speaker Change: The concept a little bit and have a more test and learn kind of thing it seems to me that that might mean, having a.
Speaker Change: Reorientation towards more popular outside non owned brands can you can you talk about that.
Speaker Change: We think the marriage of owned brands and National brands and up and coming brands is a great one and when we think about the the business that we're building in Sally it's about giving people brands. They recognize is also about giving them great high quality brands at good price points that are things, we can generate in our own brands business.
<unk> business in penetration grew modestly in fiscal 'twenty four in line with our expectations and we felt great that is an example of bond.
Modernizing with owned brands like Bond Bar is a great example of how we're actually utilizing owned brands as part of that modernization bond.
Bond bar grew to be our number five owned brand in the store in only 18 to 24 months. Since we originally launched that very first SKU and so a nice trajectory there, but you know deep partnerships with other brands out in the industry, we talked about launching more products with source beauty.
Speaker Change: Have a great partnership with soap box to name just a few as well as some of our largest partnerships with folks like Wella and all of those really build a robust engine behind what we can offer our customers and we think marrying the both together is a great outcome for our specialty beauty play.
Great and then my final my final question, if I could fit it in.
John.
John: The drug store closures that we're seeing in that channel and I know that in some ways do you view yourself as competing with drug stores at least on the DIY color area.
John: Are the drug store closures benefiting your business in any way.
Yeah, we don't really look at the data specifically in that way I think we look at saying here's the customer base, we serve 78% of our sales come from 16 million customers that we know and are part of our loyalty program. The more that we can continue to build that customer base and as I mentioned, we're seeing new and reactivated.
John: <unk> are trending well in our portfolio, we'll take advantage of all of those opportunities where they exist, but we are really running our own play to be winning in these categories a little more so than trying to think about.
John: Specific closures that we might go target to pick up any volume, but you feel great about the customer trends that we're seeing.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: And our next question comes from the line of Ashley Hogan with Jefferies. Please go ahead.
Speaker Change: Hi, This is sidney on for Ashley. Thank you for taking our question you mentioned studio by Sally and forming this new brand refresh I was just wondering if you can give a bit more color on what some of those key takeaways or findings have been that you'll be carrying over.
Speaker Change: Absolutely studio by Sallie It was a wonderful test for us to understand how a customer can engage differently with both the thought of DIY kind of hands on education as well as some changes in the store format Youre starting with the store format piece you know some of the things that we were doing in studio we lowered the height.
Speaker Change: The gondolas and fixture so you could see across the entire end of the store and we actually reduced our SKU count and put more education navigation and information in the store as customers were shopping to understand brands to understand how to get great results, we increased a bit the impulse fixture space in the <unk>.
Speaker Change: Stores, and we oriented nail and a little bit better way for the customer to really fully experience the category.
Speaker Change: All of those are things that we're carrying through into into the new experience that we're looking at and excited about that.
Speaker Change: What we learned from the service side of the studio store has really come to life in licensed color of sand demand. So our ability to offer that consultation about how to get the right result, we have our store associate in our beauty advisor, who can do some of that in store real time, but taking the opportunity to actually have a colorist.
Speaker Change: Licensed colorist on staff, who we can engage customers can engage with online really grew out a lot of the services component of studio evolved as well.
Speaker Change: So fantastic learnings out of that that we are carrying forward.
Thank you that's really helpful.
Speaker Change: And our next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.
Speaker Change: Hi, This is zach on for Simeon Thanks for taking your questions.
Speaker Change: Oh Geez. If this was asked already but with respect to pricing can you give us a little color on what's happening at retail.
Yeah overall for US, we're seeing modest increases in AUR on both sides of our business and at this point, we do some tactical pricing activity, but we are not we're.
Speaker Change: We're not seeing a significant price increases from our vendors and things like that so pricing overall can stay at a moderate pace and given that we are growing AUR in that environment, we're doing a great job containing promotions and making sure that the promotions were offering a really value added to both our retail customer and our stylists commute.
Speaker Change: So good healthy place to be I expect that that will continue in fiscal 'twenty five as we continue to grow the business.
Speaker Change: That's helpful. Thank you and then just as a quick follow up can you also talk about what's happening with product costs and some puts and takes there as well.
Speaker Change: The protocols are really are quite in control I think that was we've seen inflation broadly start to moderate and that's happening with our product costs coming through as well, we do not see product cost decreases coming through in any meaningful way, we watch commodities and worked against that and so we're in a we're in a pretty good environment and.
Speaker Change: I know, there's one question out there that what could happen with tariffs I think what I'd point out is less than 10% of our product comes from China. So our exposure is pretty limited and we think it's within the same set of.
Speaker Change: As actions that were taken a few years ago to manage is that comes through which we can look at our vendor choices. We can look at some sites, where we source from could take some modest pricing if it came to bear, but I think the most important part there is really limited exposure for us.
Speaker Change: Got it thank you.
Speaker Change: And once again, if there are any additional questions at this time please press one.
Speaker Change: Hollywood Zero on your Touchtone phone.
Speaker Change: And at this time it does appear there are no further questions from the whole lot.
Well to wrap up today I. Thank you to all of our associates across the globe. Thank you to our shareholders. The fourth quarter for us really capped a successful year, we delivered financial results within our expectations and strengthen the balance sheet returned value to shareholders and meaningfully advanced our strategic initiatives and we think we have great momentum.
Speaker Change: Entering fiscal 'twenty five as you continue on this track. So once again, thank you to everyone and we'll talk to you next quarter.
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