But we’re pleased to hear from our stylists that their chairs are relatively busy and returning to a bit of a normal cadence. If you think about it, the customers for those stylists are middle-to-higher income customers that are kind of back on some of their core routines. When we look at BSG brands, the brands that we’re bringing in and don’t materially change the shelf space of any of our existing brands or existing products. You will trim a few SKUs from the assortment here and there, but no material changes in the reduction of an actual line. But with Moroccan oil and Amika and Color Wow, clearly, those three entries were big ones for us. And then most recently, Briogeo and epres are nice additions, but they are limited SKU counts and can fit into our store assortment nicely.
Unidentified Analyst: Very helpful. Thank you.
Operator: Thank you. And our next question is from Oliver Chen from Cowen. Please go ahead.
Oliver Chen: Hi, thank you very much. Would love your color on the difference in demand in terms of improving salons, but consumer spend at SBS being softer. And then also, how are you managing promotions as consumers remain cautious. What do you think about promotes in the back half? And then also as we think about the softer 2Q margins, at any other underlying driver for lower operating income margin guidance while you’re reiterating the top line would be helpful as well. Thank you.
Denise Paulonis: Great. I’ll cover, Oliver, on both demand and promotions and then pass it to Marlo to talk a little bit more about margins and guidance. When we think about demand, we’re really seeing a bifurcation of two different consumer populations. What we’re seeing with stylists who predominantly serve a middle-to-higher income customer is a return of regular, more normalized services and cadence come through. And we’re seeing that with both strength in color and care coming through our sales portfolio. I think when you contrast that with the lower income consumer, that’s a more typical Sally consumer, is they’re feeling more pressure, right? We see it as people come through and are selective in their baskets fueling the just general price inflation, food inflation, not going down in the way people would have hoped.
And then you Buy Now Pay Later balances, credit card balances starting to make people make a few more choices. The good news is relatively resilient in what we believe is we maintain unit share in color in the category, but the category itself was pressured. So we’re expecting that some of that consumer pressure on the Sally side will persist. But working to navigate through it and still provide good value to our customers, but notably focusing on experiences like Licensed Colorist OnDemand in our marketplaces that provide reason beyond a deal to be shopping with us and having an experience with Sally. And to that end, you asked about promotions. It was a quarter where we saw that take rate on promotions on both the pro and the retail side increase.
So the nature of everyone searching for an extra layer of value certainly came through. As we watch that happened through the quarter, we quickly started to mobilize the analytics on where we could shift to the design of some promotion the absolute depth of promotion, the duration of promotion. And you’ll see some of those changes come through as we work through the second half of the year. We’re really balancing a depth of understanding of how shoppers are putting product in their basket to be able to maintain that share of wallet, while hopefully trimming a bit about AUR pressure that we saw just from that higher promo penetration. That is true on both the BSG and the Sally side in terms of the work we have going on. So we expect to see that trend to moderate a bit as we make these changes, but we’re going to be very live with our choices to maintain that customer loyalty and share of wallet.
And I’ll turn it over to Marlo to comment a bit on margins.
Marlo Cormier: Yes, in terms of our margin update. Really, that was driven predominantly from the adjustments we made to our gross margins. Our gross margins for Q2 came in at 51%, very solid we had the benefits of our supply chain efficiencies. We did have some offset from the lower mix of the higher-margin Sally U.S. business being a lower penetration. But overall, it was a bit lower than our expectations, not significantly, but modestly where we thought based on that performance, that it was prudent to take down our gross margin expectations for the remainder of the year. So we’re guiding to a 50.5% to 51% range, and that’s what translated through to the lowering of the operating margin. That range is still historically high.
It has a very strong margin. We’re very pleased with that margin. But as we learn more about the shift in customer behavior and the adjustments we’re making to our promotional cadence, we just thought it was prudent to make that adjustment.
Oliver Chen: Okay. Very helpful. Just a follow-up. As you think about upper funnel investing in marketing, it sounds like a great idea. What do you think about how this may be different from prior? And then finally, on the comps and as we think about the back half, what are some underlying factors that give you confidence that they’ll turn positive? Thanks so much, Denise and Marlo.
Denise Paulonis: Yes. So how about I take those in reverse order. So I think when we think about the second half of the year, there’s two predominant sets of trends going on. When we look at BSG, we do think the continued momentum in the new brand innovation is real and will continue to benefit. We also see expanded distribution opportunities continuing and that will be there. Underlying that, BSG is also lapping the hair care headwind we had from a big brand in early Q2. So that’s going to lead to some easier compares in the second half of the year, so BSG continuing on a nice solid trajectory. And on the Sally side, as we turn to the second half of the year, we do see marketplaces, Licensed Colorist OnDemand, product innovation, own brands, all combined with CRM and some personalization activities as things that will provide a lift there as well.
So our strategic initiatives continuing to pay off, even though we’ll have that under current of a little bit more macro pressure. I think when we combine all of those with the fuel for growth activity and the savings that we’ll have coming through in the second half of the year, we feel pretty confident about the guidance and the guidance update that we provided today. When we look at marketing, if I go back to your first question, marketing is a very interesting space for us in how we both serve our existing customers and attract new customers. And some of the things we’re trying to do are used [indiscernible] marketing to take people more to something like a Licensed Colorist OnDemand, right? So how can we use social media, how can we use performance marketing to direct people to an experience that will bring a new customer into Sally.
And when we think about that Licensed Colorist OnDemand and the results of having pushed that initiative this past quarter, which we saw 40% of the customers who participated in that were new to Sally. We’ve started to see a little bit of increase in frequency in the month after those customers experienced that. So marketing really tailored to say what’s different about Sally and why Sally can make a difference to you is what we’re focused on as we’re kind of headed towards the back half of the year. We also are pleased we have – we’re about 6 months into having a new performance marketing agency supporting us and see that a lot of the work they’re doing to best target our efforts is going to pay off as well. And I guess the last piece there is, we’re also purposefully doubling down on a bit of a test into 9 of our markets where we think we have a share of wallet opportunity and understanding that if we put a little bit more fuel behind communications and messages in those markets.
What can we do to see that push the needle a little bit more and hopefully convert a few more customers and drive a bit more frequency. So a number of pieces and parts there, but really trying to stay true to what’s unique about Sally and pushing experiences, product offering, expertise in those communications.
Oliver Chen: Thanks very much. Appreciate it.
Operator: Thank you. Our next question is from Olivia Tong from Raymond James. Please go ahead.
Olivia Tong: Thanks. Good morning. A few questions here. First, on Sally – on the Sally Beauty Stores. What did you see as you exited the quarter, maybe talk through some of the initiatives to spur foot traffic? On the BSG side, can you help us understand how much of the territory expansion added to sales and whether there’s any pipeline fill doesn’t repeat. And then just last question is on operating margin, a point of clarification. I understand the margin guide change as a result of the mix shift that impacted Q2 and likely impact the second half, but are you adjusting second half expectations for margins by segment? And if not, can you talk about what’s going to be the offset to keep second half margin targets unchanged if you want to have a little bit more flexibility on adjusted promotion. Thank you so much.
Denise Paulonis: Happy to take those. We’ll try to take them in order. Sally, when we think about driving traffic to the stores and driving transactions overall, I think we’re thinking about it very holistically in a very omni-channel. So as we look to the second half of the year and we look to the end of our second quarter, marketplaces ramped up for us. So, we were able to add in DoorDash to our mix, along with Walmart and Amazon and saw nice early results there. Instacart is getting turned on in the beginning of Q3. That’s nice traffic. It’s traffic that actually goes through our stores. As you know, as those will get shopped in the stores, particularly for the DoorDash and Instacart piece and delivered to the customer.
When we look beyond that, things that are generating those experiences and those reasons to shop with us were performing well at the end of the quarter. So, as I mentioned earlier, Licensed Colorist OnDemand, our own brands and bondbar that are driving new customers into our store and building that loyalty piece as well. And then our CRM activities as we continue to get more targeted and more personalized for the reason for somebody to come back and shop with Sally. So, looking at it a very omnichannel way. And then when a customer gets into the store, that store associate being knowledgeable, having the information that they need to really drive conversion. And we have seen a modest uptick in conversion as we have come through the quarter as well.
So, trying to capitalize on all fronts there in the – as we also look to say a customer is shopping with a bit of frugality. And so pleased with what we are working on and the traction that we are starting to get and think that, that will bear more fruit as we come into the second half of the year. On the BSG front, in terms of what’s contributing to the upside, it’s a broad-based set of things, right, that span from innovation gains, new innovation gains, distribution gains, and we have also talked a little bit about the stylist demand. We haven’t broken out those individual component pieces beyond talking about the Goldwell New York acquisition that we are kick-starting Q4, so it still has another couple of quarters to run there. I believe that, that was – it’s $10 million to $15 million in top line sales that will be on an annualized basis.
All the other pieces we really believe are in the run rate and that is these items start to lap. We do have continued innovation in the pipeline behind them. So Amika and Moroccan oil and Color Wow, great strength today, and we think there is more to come. But adding in things like Briogeo and epres, we just want to continue that flywheel of innovation coming into the BSG ecosystem. And Marlo, do you want to talk a little bit about the margin guide?
Marlo Cormier: Yes, the margin guide in terms of – I think your question was directed at the segment. So, a key component is the mix shift that we saw in Q2, and we expect that to continue again with the solid momentum around BSG and a little bit of softness in Sally, mainly from that AUR pressure. And then the gross margin guide, as we mentioned, again, being a little more prudent there as we continue to work through our adjustments to our promotional offerings as we try to continue to drive traffic and gain share of wallet.
Operator: And our next question is from Ashley Helgans from Jefferies. Please go ahead.
Ashley Helgans: Hi. Thanks for taking our question. To start, maybe you can just give us a little bit more color on kind of the specifics around the innovation that you saw this quarter that really helped drive the strength at BSG. And then any innovation that you are seeing within Sally would be helpful. And then I know you kind of mentioned like promotions and people shifting towards buying more on promotion. But anything you can tell about just the promotional rate this quarter versus last year would be great.
Denise Paulonis: So, let me take those in reverse order. So, promotional rate this year versus last year, no meaningful difference in the offers that we had out there on the Sally side, BSG probably had a slight bit more promotion, but we have been seeing that with our vendors leaning in over the last few quarters. But in the Sally World, offers were out there, they were just being more consistently – more consistently pursued by our customer base. And in BSG, the most notable was our customers leaning in against the customer appreciation sale, which is a once a quarter event that we do. But to put it in proportion, this quarter versus the quarter a year ago, the same two-day customer appreciation sale, our sales were up 17%.
So, really leaning in and looking for that value is what came through, but the offers themselves very, very similar year-over-year. On the innovation front, as I have said, we are extremely excited about the innovation cycle we are in and what we can bring in. And when you think about the drivers of the innovation on the BSG side, certainly continue to have some strength from core brands like Wella that we are bringing out new innovation. But a lot of the strength came from Moroccan oil, Color Wow, Amika. In some cases, that was expanding territory rights in some of those brands. And in other cases, it was expanding to our entire store fleet and then cycling behind that a new level of innovation with the launch of Briogeo as well as epres. All of these are hair care products that are on the styling side, on the core care side, they just offer new and different alternatives for our stylists as they think about serving their customers and their clients.
Some of which are bonding, some of which are other functional solutions, but all of which are really resonating through our customer base. On the Sally side, we continue to look favorably to opportunities around kind of our mindful brands. So, things that are more conscious beauty choices are inspired by nature products performed well. We continue to see bondbar perform well and grow from our own brands perspective. And then we see interest remains in vivid color, it was about 22% of our penetration in the quarter. So, that has also leveled off in those low-20s, but there is still a nice pipeline there. The innovation to come in Sally is exciting around some things that we are doing on skin care, continue leaning into textured care that will all come as we are entering the second half of the year.
So, great pipeline on both sides of the business that we actually think are fantastic offerings for our customers.
Ashley Helgans: Great. Thanks for all the color.
Operator: The next question is from the line of Jenna Giannelli from Morgan Stanley. Please go ahead.
Unidentified Analyst: Hi. This is Sarah on for Jenna. Can you update us on your capital allocation priorities if your leverage target of 1.5x to 2x still holds and how you are balancing that with repurchases? Thanks.
