Sally Beauty Holdings, Inc. (NYSE:SBH) Q1 2024 Earnings Call Transcript

Sally Beauty Holdings, Inc. (NYSE:SBH) Q1 2024 Earnings Call Transcript February 1, 2024

Sally Beauty Holdings, Inc. beats earnings expectations. Reported EPS is $0.39, expectations were $0.36. Sally Beauty Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. 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, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings.

Jeff Harkins: Thank you. Good morning everyone, and thank you for joining us. With me on the call today are Denise Paulonis, 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. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them.

The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. Now, I’d like to turn the call over to Denise to begin the formal remarks.

Denise Paulonis: 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. Adjusted gross margin was above 50% and in line with our expectations and 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 Goldwell New York.

Comparable transactions increased 3%, while average ticket value declined 2%. In our service segment customer shopping behavior remains 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 of 2%. Our teams continue to execute well against our core strategic initiatives of enhancing our customer-centricity growing our high-margin owned brands and amplify 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. Starting 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 Beauty segment was 34% up 20 basis-points over the prior year. Additionally, our bondbar and Ion continue to perform well with notable strengths in bondbar care and Ion color. Of note, Ion remains our largest owned brand in the US and Canada and bondbar has grown to be our fifth largest owned brand in just over a year’s time in the market. We’re also seeing strong performance in the textured hair category. 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, downfall and appliances, encompassing both our proprietary line and national brands.

Turning to innovation at BSG standout performers include Amika, Wella’s Ultimate Repair, Moroccannoil, and Color Wow. During the first-quarter, we expanded our distribution territories for both Moroccannoil and Color Wow 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 for our stylist as we partner with them to profitably grow their businesses. You can expect to see launches in both new and existing brands across blonding, glossing and express coloring, as well as conscious beauty and textured hair. Our ongoing focus on customer-centricity continues to serve us well.

In Q1, we generated 77% of sales from our 16 million Sally 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. 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. We’re also gaining traction against our marketplace initiative, which launched with Walmart in Q4 of last year, building on the success we have 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 Q1 performance, which included the holiday selling season. We expected the stores to be an attractive gift-giving destination and were 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 store portfolio over the long-term. When we look across the business at both our Sally and BSG segments, at our customers and how they’re behaving, and at the same time, consider the potential of our newer growth strategies, 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 2024 guidance, which called for net sales and comparable sales to be approximately flat. This reflects 200 basis points 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. 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.

I want to highlight 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 margin. 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. 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. We’ll have more to share on our roadmap 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, 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 stylists is enabling us to effectively navigate the dynamic macro environment. 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. Now I’ll turn the call over to Marlo to discuss the financials.

Marlo Cormier: 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. 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 ecommerce, sales were $91 million and represented 10% of total net sales. Looking at gross profit, we maintained strong adjusted gross margin, which came in at 50.2%. Down 60 basis-points versus a year-ago. The price inefficiencies drove lower distribution and freight costs in the quarter, which were more than offset by 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 SG&A was up $3 million to $393 million, primarily reflecting increased labor costs and rent expense. 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. 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 gross margin and SG&A during the second-half of fiscal 2024.

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 initiatives. 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 opportunity 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 million to $30 million, in the current fiscal year, including $5 million that was realized in Q1. Turning now to earnings. Adjusted operating margin came in at 7.9%. Adjusted EBITDA margin was 11.5% and adjusted diluted earnings per share was $0.39.

Moving to segment results. Sally Beauty comparable sales declined 2%, while net sales were down 5% as we left our 2022 store closures and our Sally customer remained frugal buying primarily to need. At constant-currency, Sally e-commerce 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. At Sally U.S. and 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 will highlight the market data shows our market-share for color and care remained stable over the prior year. Gross margin at Sally was 58.6%, down 30 basis-points to last year, driven primarily by an unfavorable sales mix-shift between higher-margin Sally US sales and lower-margin Sally International sales.

As well as unfavorable fixed-cost absorption, partially offset by supply-chain efficiencies, which drove lower distribution and freight costs. Segment operating margin came in at 14.8%. 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. 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. The color category was up 4%, while care declined 1% at BSG on a total sales basis. Adjusted gross 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 shrink expense, 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 ended the first quarter with $121 million of cash and cash equivalents and no outstanding balance under our asset-based revolving line of credit. Our net debt leverage ratio stood at 2.2 times. 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. We anticipate that inventory levels will hold relatively steady in the $1 billion range throughout the year. We generated positive cash flow from operations of $51 million, allowing us to repurchase $20 million of stock under our share repurchase plan. 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 basis points 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. We expect gross margin to remain above 50%, adjusted 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. 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 BSG, the lapping of hair care headwinds from the last several quarters will lead to easier compares in the second half of the year. 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 ramp of Walmart marketplace, as well as the addition of Instacart and DoorDash. The expansion of licensed colorists 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 boosts full-year operating margin 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 softness in early January, coinciding with persistent bad weather across most of the country. Importantly, during the fourth week of January, we saw this pressure moderate and trends returned 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 rate 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%. Lastly, it is reasonable to expect investments in share repurchases in the second quarter that is similar to our last quarter.

We appreciate your time this morning. Now, I’ll ask the operator to open the call for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from the line of Korinne Wolfmeyer from Piper Sandler. Please go-ahead.

Korinne Wolfmeyer: 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 owned brands versus national brands. And then as well, how much can you — can you kind of break-down how much was driven by price versus volume versus mix. And then going-forward, how should we think about that as well. Thanks.

Denise Paulonis: Good morning, Korinne. Let me start there. So in total, the comp performance that we delivered had about 200 basis-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 brands growth was pronounced on the BSG side, where, of course, the own brands 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, we really saw two different stories on the BSG side and the Sally side. On the BSG side, transactions were up.

We saw nice customer counts, particularly as we came to the end of the quarter coming through as stylists saw a modest uptick in demand. So that was really through 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 that closely, we hope that it will persist and we’ll see that demand trend continue. On the Sally side of the house, transactions were down, while ticket was up a bit. That continues to reflect consumers spending a bit closer to need, buying into their core categories. But we were pleased to see overall that we continue to see strengths in color, we continue to see strengths in texture, and believe that we’re holding share in the space that we’re in.

Really facing a bit of consumer pressure on purchasing behavior.

Korinne Wolfmeyer: 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 want to better understand 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.

Marlo Cormier: Yes, thank you. So on the gross margin line, we’re still really pleased, 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. 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. As offsets, there were a few. We did have a greater percentage of lower margin BSG sales in the quarter or a greater percentage, yes, of the BSG sales. We did incur some unfavorable fixed cost absorption, that’s really due to timing. 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. It was a minor headwind and that was really in our BSG business.

Korinne Wolfmeyer: Very helpful. Thank you.

Operator: Thank you. Our next question is from Oliver Chen from TD Cowen. Please go-ahead. Oliver Chen, your line is open. We’ll move to Ashley Helgans from Jefferies. Please go ahead.

Ashley Helgans: 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 you’re seeing any new emerging trends bonding has been so popular for the last couple of years. If there’s anything else in hair-care that emerging on the trend level. Thanks.

Denise Paulonis: 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 December, with December really supported by the BSG side of the business. But we didn’t see any big changes month-over-month as we went through the quarter overall. 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 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 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 is what stylists turn their chairs a bit more often. So no major shifts in trend, but good healthy continued business across the board there.

Ashley Helgans: Thanks so much.

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

Simeon Gutman: Hey, good morning, everyone. Hi, Denise. Hi, Marlo. My first question on consumer spending, the consumer being a little softer. There was a time a while ago where this business, at least the Sally 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 on a sequential basis, but do you see customers from different cohorts or people opting not to get service that are coming in and doing it themselves?

Denise Paulonis: Yes. Good morning, Simeon. 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 BSG 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 we see the particular trade down or increased frugality. No surprise in the lower income, particularly below the $50,000 mark, where those folks are feeling outsized pressure. 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, 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 I do touch up my roots and I want to keep doing that. What I’m probably not going to do is be buying that styling tool, that extra hair brush, the things that would be more splurges 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 and our stores, we’re pretty reasonably priced to begin with in that mix of what’s coming in. So I’d say, behavior is pretty consistent with what we’ve seen. And if anything, just see a little bit more stress in the way people are purchasing with that mix towards credit card and buy now, pay later.