Sally Beauty Holdings, Inc. Price & Performance (SBH)

We offer professional stylists most with over 20 different color brands, including over 3,000 shades of As a wholesaler, our customers are required to set up sole accounts with us This means we know 100% of our Over 70% of our salon professionals purchase color from BSG and average over $1,000 in annual spend on 11 trips per year. Similar to Sally, color drives the majority of our new customer growth. This position of strength has and will continue to endure as we built a substantial competitive moat through our commitment to customer service, education, advice and inspiration, delivered through a modern omni channel go to market model buoyed by an unparalleled store network. At Sally, this is supported by our associates that are Sally and Care ex whose primary mission is to support our customers achieving their desired salon quality look. At BSG, our store in full service team partner with our brands at trade shows and local education events helping stylists with the latest innovation and styling techniques Of note, many of our associates at both Sallie and Sally are trained cosmetologists. This unparalleled customer reach and commitment to education and service creates a symbiotic relationship between SBH and the most influential brands in the hair category.

For BSG, approximately 40% of our sales come from brands under exclusive or limited distribution agreements. These agreements give us exclusive distribution rights in certain territories and include many of the largest brands in the industry. Including Wella, [indiscernible] Paul Mitchell and Goldwell. We also remain at the forefront of innovation. With distribution partnerships with Amica, [indiscernible] Moroccon Oil, Danger Jones, and as we just announced, [indiscernible] At Sally, Sally are proud Soapbox and KISS to bring new product discovery to our customers complemented by recognized professional products from our long term partners such as Wellus, Royal and Walt. Further, at Sally, our own brands drive trips and loyalty. With high quality, well priced on trend, only available at Sally Brands. This includes brands such as Ion, which is a $280,000,000 brand for Sally Sally, as well as other notable brands like Bon Bar, Inspired by Nature, and Strawberry Leopard to name a few. Our owned brands run about 10 percentage points to 15 percentage points higher in gross margin our third party brands. Lastly, from a financial perspective, our business has a strong balance sheet and consistently generates healthy gross margins over 50% and strong free cash flow. We believe all these factors service key differentiators and position us to capture an increasing share of the overall beauty market as we advance our strategic pillars to further evolve SPH into a modern beauty leader.

Given the traction we are seeing thus far, we have conviction that the business is squarely on a path to deliver our long term algorithm of low single digit sales growth mid to high single digit operating profit and our return to a low double digit operating margin. We appreciate the support of our shareholders. Remain committed to building long term value for all of our stakeholders. Now I'll turn the call over to Marla. To discuss the financials. Thank you, Denise. And good morning, everyone. We are pleased to be reporting a third consecutive quarter of positive top line performance in both business segments. Despite a $6,000,000 headwind to sales coming from foreign currency translations, We also delivered healthy gross margins operating margin expansion, and strong free cash flow that allowed us to reduce our debt levels and return value to shareholders in the quarter. Q1 consolidated net sales of $938,000,000 represented an increase of 0.7% and included 60 basis points of unfavorable foreign currency impact. Consolidated comparable sales grew 1.6% reflecting continued momentum across both our Sally Beauty and BSC segments. Global e commerce sales $99,000,000 That's up 9% to last year and represented 11% of total net sales.

Quarter gross margin expanded 60 basis points to 50.8%, primarily reflecting reduced shrink and lower distribution and freight costs from our continued supply chain efficiencies. Adjusted SG and A in the quarter totaled $398,000,000 up $5,000,000 versus a year ago, which is in line with our expectations. [indiscernible] The modest increase from the prior year primarily reflects higher labor costs as well as planned increases in advertising spend partially offset by $6,000,000 in savings from our Fuel for Growth program. In Q1, we captured approximately $11,000,000 of pre tax benefits to gross margin and SG and A putting us on track to capture $40,000,000 to $45,000,000 of savings full year fiscal twenty twenty five. Cumulative savings of approximately $70,000,000 after achieving $28,000,000 of benefit in fiscal twenty twenty four. '24. The strength of our sales and margin performance in the quarter coupled with savings from our fuel for growth program, enabled us to deliver improved profitability versus a year ago. Adjusted operating margin of 8.4% fifty basis points adjusted EBITDA margin of 11.7% was up 20 basis points and adjusted diluted EPS of $0.43 was up 10% versus the year ago. Moving to segment results. Sally Beauty delivered another quarter of top line growth in the quarter.

Despite a 90 basis point foreign currency headwind, Q1 net sales increased 0.4% to $525,000,000 Comparable sales were up 1.7% driven by strong growth in hair color, in our digital marketplaces. Comparable transactions were flat, and average ticket was up 1% driven by average unit retail. At constant currency, Sally e commerce sales were $41,000,000 and represented 8% of segment net sales for the quarter, that's up 18% last year, primarily driven the strength of our digital marketplace strategy. For the Global Sally Beauty segment, Color grew 4%, while Care was down 3%. Compared to the prior year. At South U. S. And Canada, Color grew 5% and Nail increased 2%. While Care was down 1%. Importantly, we are pleased with the continued strength of our active known customers as SEL U. S. And Canada. In fiscal Q1, we generated 79% of our sales at Sallie U. S. And Canada from this group, which is up 200 basis points from a year ago. Driven partly by a modest increase in purchasing frequency frequency. Gross margin in our Sally segment increased 100 basis points to 59.6% The year over year improvement reflects higher product margins, resulting from the combination of our enhanced promotional strategies benefits from the fuel for growth initiatives.

And lower shrink expense. Segment operating margin was strong coming in at 15.2%. Up 40 basis points last year. Looking at the BSD segment, we delivered a fifth consecutive quarter of sales growth driven by expanded distribution and product innovation. Comparable sales increased 1.4% while net sales were $412,000,000 an increase of 1.1%. Including 20 basis points of unfavorable foreign exchange impact. Comparable transactions increased 3% and average ticket was flat. On a constant currency basis, BSG e commerce sales dollars representing 14% of segment net sales for the quarter. From a category perspective, color grew 3%, and care increased 1%. Gross margin at BSG increased 30 basis points to 39.7% primarily reflecting lower distribution and freight costs from supply chain efficiencies and lower shrink expense. Partially offset by lower product margin related to brand mix. Cigna operating margin was strong for BSD at 12.2% up 130 basis to the prior year. Turning to the balance sheet and cash flow. We ended the quarter in strong financial condition. With $106,000,000 of cash and cash equivalents and no outstanding borrowings under our asset based revolving line of credit. Inventory levels remain healthy at slightly over $1,000,000,000 essentially The business continued to generate solid cash flow enabling us to invest for growth pay down debt and return value to shareholders during the quarter.

Q1 cash flow from operations was $34,000,000 operating free cash flow totaled $57,000,000 As a reminder, that includes $44,000,000 of proceeds from the planned sale of our corporate office. Which we discussed on our year end earnings call. Capital expenditures totaled $20,000,000 in the quarter, After utilizing excess cash to pay $41,000,000 of term loan B debt our net debt leverage ratio now stands at 1.9x which is now inside of our target range of 1.5 times to two times. We also deployed cash to repurchase $10,000,000 of stock under our existing share repurchase program. These actions are aligned with the capital allocation priorities we previously outlined for fiscal Investing for growth, strengthening our balance sheet, and returning value to shareholders. And demonstrate our ongoing commitment to create long term value for all our stakeholders. Turning now to guidance. We are reiterating our full year outlook for both comparable sales and adjusted We are also updating our consolidated net sales guidance for the full year due to the unfavorable impact from foreign currency exchange rates Our fiscal twenty twenty five guidance as follows. Comparable sales are expected to be in the range of flat up 2%. Consolidated net sales are now expected to be approximately 100 basis points lower than comparable sales due to the expected unfavorable impact from foreign currency exchange rates.

And adjusted operating margin is expected to be in the range of 8.5 to 9%. We're also introducing guidance for the second quarter of fiscal twenty twenty five as follows: Comparable sales are expected to be approximately flat to the prior year reflecting the factors Denise outlined. Consolidated net sales are expected to be approximately 100 basis lower than comparable sales due to the expected unfavorable impact from foreign currency exchange rates and adjusted operating margin percent to 8.3% reflecting an improvement of 40 to 70 basis points versus the second quarter of fiscal twenty twenty four. In closing, we are pleased with our first quarter results and the progress we are making on our strategic initiatives which gives us confidence in the remainder of the year and our long term trajectory. We appreciate your time this morning. Now I'll ask the operator open the call for Q and A. Your first question comes from the line of Oliver Chen from TD Thanks a lot. Hi, Denise and Marlow. Great quarter. Regarding your second quarter guidance, what's happening by banner in terms of the dynamics of Sally relative to BSG? Sally then as we look towards the back half, what should we think about in terms of the comp trajectory implied by your guidance?

Would also love your take of about what the forecast embeds for traffic relative to ticket Oliver and thank you for the congrats. We are excited about our first quarter. When I think about your question overall, I'll step back and start a bit with we remain very focused deliver on our full year comp sales plan, which is to be up 0% to 2% in comp Sally. And our first quarter was squarely in line with delivering on that. As we look to Q2 and the guidance that there is for Q2, coming into the quarter, what we knew is There are Embedded in Q2 are two known headwinds for BSG from last year. So one is lapping the load in of both Amica and Briaggio for our McCall franchise businesses.

As well as an unfavorable calendar in terms of ship days and numbers of Mondays of operation, which are big days for BST those were kind of known pullbacks from what we would have seen in Q1. And then the guidance also reflects the macro environment in January and what's emerged in the quarter. Has been a little bit choppier and noisier than we had hoped for. But in all honesty, anticipated some in how we thought about our full year. And so within that, what are we really seeing? Right? The noisiness that started in the New Year, whether that was the flu, weather, new administration, wildfires, it distracted our consumer a bit and maybe created a little it's kind of manifested in two different ways.

At BSG, our stylists have actually just seen disruptive in their appointment books from illness [indiscernible] that be the customers or themselves, kind of taking time away from their chairs. And so they are buying closer to need that's more focused on color. That they need for their services. And color has remained quite strong. And on the Sally side, once again color remaining strong, but a little bit more uneven traffic trends where we have a choiceful consumer for some of our other categories. Underlying it all, still feel good about the trajectory of the business, but just realistic about the weathering of of what's come through in January. And being prudent as we think about the rest of the quarter, When we think to the back half of the year, very excited about the trends in the business and what we have to deliver. After three straight positive comp quarters in both businesses the things that we're doing against our strategy are delivering, we think they'll continue that way. Couple of highlights, BSG, the launch of K18 across all stores in e commerce comes online April 1, which is beginning of our third quarter. Continue with expanded territory distribution with Moroccan oil.

And we're seeing great innovation in the tools segment whether that's with the universal NeuroDryer and other brand innovation. So lots to look forward to on the BSG side. And similarly on Sally Sally, digital expansion with marketplaces and the performance marketing that's behind that is performing well as you heard about in the first quarter. We continue to have more innovation coming there as well, not just in color and care, but also in nails. And then we're working our CRM customer file quite hard. The personalization efforts that we have ramping in terms of driving trips and frequency really are helping our growth and we can expect that to continue as long as as well as the performance within our app.

So all of those real signs of strength. When we think the mix overall and you talked about kind of traffic versus ticket. We think traffic will continue to be relatively flat. But we're seeing nice increases in frequency with some of our most frequent shoppers and our most loyal shoppers that we anticipate will continue as we go through the year.

Your next question comes from the line of Corinne Wolfmeyer from Piper Sandler.

Hey, good morning. Thanks for taking the question. Maybe to build off of that prior question, just any color on kind of where you feel like you're sitting within your full year guidance range after the Q1 and then the expectations for a softer Q2 you did reiterate that full year range. Just trying to figure out where we might stake out and how much upside downside there is there? And then any color on kind of the operating margin cadence for the remainder of the year? You gave some Q2 color, but as we think about Q3 and Q4, any puts and takes that could alter that expansion cadence for the back half Thank you.

Good morning, Corinne. I'll start on the point on comp and the range for the full year. I think the important part is we're four months into our fiscal year. And Q3 and Q4 are our largest two quarters of the year. So we've got a lot of the year to go. As we look at things today, we're squarely within the guidance range that we provided. I think there's Nice potential for upside with the things that I just mentioned in the prior question on both the Sallie and BSG side.

Around innovation, performance marketing, things to come to pass. But I think as we said when we guided for the full year, we were all also prudent that we haven't had a year yet that has not had sense of newness or uncertainty around the consumer behaviors. Feel good about where we are, feel like we're squarely in that guidance range. Marla, do you want to talk about operating margins? Yes. The operating margin cadence in terms of how we're looking at the back half It's really a continuation of what we've seen in Q1 and you'll see in Q2 as well with our fuel [indiscernible] really bringing benefits on a quarterly basis we're looking at about $40,000,000 of benefit That was split between gross margin and SG and A. It's a fairly regular cadence as you go throughout the And so you'll see some gross margin mentioned on the gross margin line as well as SG and A will contain those costs You saw its leverage are relatively flat in terms of dollars. As we go through the rest year as well. The combination of the growth in the sales line as well as the feel for growth benefits we'll see some operating margin Your next question comes from the line of Susan Anderson from Canaccord Genuity.

Hi, good morning. Sally Legg on for for Susan. Can you just talk about the promotional environment? What are you seeing year over year and maybe even comparing it to pre pandemic levels? And then just a follow-up on that Are you able to talk a little more in detail about the puts and takes on gross margins in the quarter? I know you mentioned lower shrink. Are you expecting that to lap the rest of the year.

Yes.

Good morning, Alex.

On the promotional levels that we saw in Q1, What I'd start with saying is that value continues be very important on both the Sally and the BSG side of [indiscernible] In terms of our promotional intensity, promotional levels were relatively flat and pretty consistent in both segments compared to last year. Customers do continue to buy on those promotions. So we see nice uptake with that promotional activity. Given the way that we assort and we plan, we think we were at the right level of promotional activity in the quarter. Feel good about how we're working through that. And I think to that end, when we think about managing our promotions, we're really focused on delivering the value message to customers so that they know that that value is out there but then doing it very strategically so that we're driving volume. So all of our promotions are really driven through the filter of both creating that excitement for the customer, but achieving good unit volume when do it.

On the cadence for the gross margins, again, we're very pleased with the expansion that we had in Q1, a 60 basis Again, we expect that expansion to continue, but moderate somewhat in the back half of the year. There are puts and takes in terms of our inventory levels and purchase is that will cause some fluctuation as you go. But in terms of the shrink improvement, that started in the middle part of last year with some actions that we put in place. So very pleased with that. That will continue, but it will start to moderate as we get to the back half of the year. Underlying too is our promotional change. We made that about Q3 of last year as well.

In terms of changing our strategic promo there that was adding to our gross margin. And have continued that will too moderate as we lap. But for the most part, our filter growth initiatives will continue, like I said, the pace at consistent paces throughout the quarter and continue to add to that gross margin expansion. Your next question comes from the line of Azalee Helgans from Jefferies. Hey, thanks for taking our question and congrats on the nice quarter. So maybe to start, if you could just kind of share what innovation you're seeing in the market right now and maybe how that to last year? And then if you could talk maybe about how traffic was pacing throughout the quarter and maybe how demand evolved? Thanks. Sure. So on the innovation front, I think that the great news is within the hair space and nail space overall, Innovation has stayed very robust coming out of COVID where there had been a bit of a pocket or a lull in some of that innovation. On the pro side, we continue to see in the care world things such as K-eighteen that that have a lot of efficacy and really help our stylists become more efficient in the services they provide.

I think that's only going to continue. We've also seen great innovation around tools and simplifying the way it's stylist can use a dryer or an iron and again make their lives a little bit easier and we're seeing nice uptake from as they're trading up to [indiscernible] Easier to use tools in the space as well.

And on the retail side, the same trends persist [indiscernible] I would also add that in the nail world, we continue to see strength around press on, and once again people doing manicures at home with a lot better tools and capabilities that you would normally find in a salon now becoming an at home trend. So we're excited all fronts about the innovation profile that we have coming through right now. You also had mentioned about traffic that we were seeing Q1, what we saw Q1 was quite benign. We saw great can natural period of time of that shortening of the holiday selling season, which just really compressed purchases a bit So we saw transactions flat to up in both of our businesses, which was was great to see. And as we come into the [indiscernible] remarks earlier in my prepared remarks, We saw a little bit more noise come into the consumer pattern [indiscernible] And we see that spike around flu season. We [indiscernible] When we have some different weather patterns or some big news cycles that come through. Underlying it, demand is healthy. We're particularly seeing that in the strength of our color business that's a very sticky customer base and a very loyal customer base terms of what they come in.

If anything, what we've seen is those customers who might not be color customers and shop across other categories is where we see a little bit more hesitant or a little less traffic coming into the stores. But overall, pleased with pleased with the direction of the business.

Great.

Thanks.

Your next question comes from the line of Simeon Gutman from Morgan Stanley.

Please go ahead. Hey, good morning, everyone, and nice job in the quarter. So my question is the margins of the business have been great. You've gotten good gross margin expansion and you've really kept SG and A growth at a minimum as you reinvigorate the top line It looks like some of these things could be peaking. You mentioned gross margin could taper a little bit in the back half. I don't know, does fuel for growth allow you to keep SG and A low single digit band I guess the question is, do you see the top line inflecting further by the back half of the year as some of these margin levers taper to be able to keep this kind of mid single digit rate of EBIT growth, which is impressive. That's the big big question. How does this all play out? Do you have more initiatives that can help gross margin keep going, so you don't have to be as reliant on the sales accelerating? Just trying to get a sense of how you're thinking about it.

Yes. So Simeon and Denise, let me start and I'll have Marlo talk a little bit more about some of the efficiency work as well. Overall, we believe that we are on a pace to get that single digit operating margin growth as as we proceed through the full year. And we feel great about the fuel for growth and other initiatives that Marlow can talk about a bit more, But our top line really is built to continue to weather the ups and downs of what might come with the strategic initiatives drive growth. But I think that the great news is, as the flexibility that we have built in with the strength of the margins, the strength of the portfolio and innovation, depending with some moderation of what sales could be, still feel great about the bottom line.

Yes, I would just reiterate our Feel for Growth program. We've We've already delivered over $20,000,000 $28,000,000 in 2024. We've got another $40,000,000 to $45,000,000 on target for this year in 2025 and we're well on the path to 120,000,000 by 2026. I'd say the good thing about that program is not only do we have a path to the dollars, we actually are building a muscle.

Within our own organization In terms of new ways of working, new ways the pipeline of opportunity with our filter growth. So while we've defined this program as a three year program, this is an ongoing program for us. We're looking to see results for this for the long term. But clearly, believe that we're going to deliver or actually are on the path to deliver numbers that we put in. And so from a margin expansion, I see this not only going in '25, but beyond '26 And your final question today comes from the line of Olivia Tong from Raymond James. Please go ahead.

Great. Thank you. You called out external distractions and macros is driving the expectation for Q2 deceleration. Obviously, that makes sense. Have you started to see any improvement now that we're further away from some of the shocks in January? And then of course, there's customer SKUs a bit more towards value. So given the increased macro pressures, I'd love to hear a little bit more about what what are going to what's going to offset that that allows for that second half improvement or if it's just moving further away from some of those shocks in January? And then switching topics, on the topic of tariffs, which I don't think we talked about so far today. I know I don't think you directly source for from any of the main regions of China, Canada and Mexico, but if you could talk about your conversations with some of your vendors and their exposure and how you think that could potentially play out? Thank you. Good morning. Let me just start a little bit with the quarter. I think everything that we've seen around the macro items is is reflected in the guidance that we have. I will tell you you January showed a brunt of the weather and flu season is peaking now.

So we'll just watch those trends as we work our way through the rest of the quarter. But feel good about where we are and as I said, feel good about our ability to pivot and navigate as we need to with tactics that we can exercise throughout the back half of the and we have a proven track record.

So when we think about that equation of value becoming more important, to customers or could become more important to customers, we've been able to think about differently about our promotional tactics importantly, focus on what's new and different for us to keep getting customers in our door, which is really around innovation It's our service levels our capabilities around license colors on demand to create experiences that we don't otherwise have. And within the Sally Sally, itself, continuing to push kind of our new brand image as we're going to roll out some of our marketing campaigns. All our fuel underneath what is the that we're excited about. So, we'll continue to navigate the year, but feel it's all within our control to deliver as we work through. Marla, do you want to talk a bit about tariffs? Yes. From a tariff point of view, we've been through this before. So similar to the last round of tariffs, I think it is important as you called out to understand that our exposure is not overly significant relative to some of our peers. We do receive about 10% of our product or less than 10% of our product from Asia and China really nothing material Mexico or Canada We would We would employ similar playbooks that we did in the previous go around which included a combination of switching vendors, increasing volumes at other sites and of course some price increases.

But we're monitoring it as a very uncertain environment At this keeping a very close eye on it. I'll now turn the call back over to Jeff Harkins.

Hello, everyone. It's Denise. I just want to close today by saying thank you so much to our associates around the world. I know how hard all of you are work to serve our customers bring them the innovation and coaching and advice that they need to deliver on their beauty aspirations. So thank you again for all the work that you do. And to our shareholders, thank you again for your support and we look forward to updating you again next quarter.

Ladies and gentlemen, that does conclude your conference for today.