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.

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.

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%…

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…

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

Hey, good morning, team. Thanks for taking the questions. First I'd like to better understand how much of the comp this quarter was driven by performance in your 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.

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.

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.

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.

Very helpful. Thank you.

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.

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.

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.

Thanks so much.

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

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?

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.

Okay. A follow-up on BSG. The press release, it listed first expanded distribution as a factor for improvement. At the end, it was improving salon demand trends. So can you talk about those two? Goldwell, what you bought, does that enter into the comp base or that stays out of it for a while? And then just related to it, the weather impact, did that impact BSG and Sally proportionally in January, or was it more Sally?

So, overall, when we think about what drove the BSG business, there were three key factors overall. So innovation, expanded distribution, and improving salon demand trends, I'd say, in that order. With innovation very broadly, Amika, Wella's Ultimate Repair, Color Wow, Moroccannoil are places where we saw our customers lean in into that mix. And in particular, when we have expanded distribution in a few of those brands with Color Wow and Moroccannoil, that certainly helped. The Goldwell portion of the business part of that acquisition goes into comp, and part of it does not. So the new stores that came with the acquisition do not go into comp, but the full service and rest of the business does go into comp. So it's a big split there. But we had expected that to be a $10 million to $15 million build for the entire year, and we're seeing that perform in line with expectations. So we're really pleased with how that has come to bear and then finally, the improving salon demand trend, what we're really seeing that in, as we saw traffic pick up and come into the stores and shop the intercepts with customers, just saying, I'm just a little busier. And that was great for us to see coming in and feeling that as part of the mix. And then if you could remind me what your second part of your question was?

It was weather, where you talked about some softness. Does that affect Sally and BSG?

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

Makes sense. Okay, thanks. Be well.

Thank you. And the next question is from Olivia Tong please, sorry from Raymond James. Please go ahead.

Great. Thank you. You mentioned improving salon demand trends at BSG. Could you just expand on what's driving that? You did leave the full-year comp outlook unchanged. But given that BSG was a bit better than expected, could you just talk about how that influences your full-year expectations to start? Thank you.

Yes. When we talked about and seeing improving salon demand trends, we talked about it being modest improvement in demand trends and the way that we understand that is really just watching the purchase behavior of our stylists as they come into our stores, as they transact with us online and how they talk about their businesses. The way they phrased it was coming into the holiday season. They saw a bit more normalcy in people wanting to come in ahead of the holiday, refresh their look, kind of filling their chair to a bit more extent than they had been in the earlier period of the year. So we're encouraged that we've seen a little bit of that uptick for our stylists in their salon business. But it's a really new trend line. So we're not really baking an expectation that, that's going to have further growth or continuation as we look to our projections for the remainder of the year and we'll certainly watch it and continue to react as we see that come through. Overall, in holding our guidance, the thing that I would come back to is we really performed in line with our expectations in the first quarter. As we look to the second quarter, we did see this unusually persistent weather very early in January to start things off. And overall retail traffic was certainly pressured through that point. It lasted long enough that in our minds, we're not betting that we're going to recoup a bit of the softness that we saw in those early couple of weeks, but rather get back on the rest of the trend for the quarter, as really happened at the last week of January and going forward. So our guide for Q2 really reflects the fact that…

Thanks. That's very helpful. So if I could just summarize, it sounds like Q1, more or less in line, maybe a touch better. Q2 obviously impacted by the weather that you don't expect that to get back in the second half, more or less no change in expectation relative to your expectations going into December quarter?

Fair enough.

Got it. Okay. Thank you. And then just my next question is around the fuel for growth program. You talked a little bit about incremental savings. Can you just talk about where that savings is coming from? Any new buckets or just as you continue that program, you're just seeing a little bit better success rate with achieving savings in the existing buckets?

Yes. Thank you. Yes, so as we called out last quarter, we were really in our early stages of our fuel for growth work. We had identified $20 million of benefits that we expect to flow through 2024. Most of that is back-half loaded. And we talked about that being weighted 75% SG&A, 25% cost of goods. We did talk about our partnership with an external adviser. We have completed that assessment, and now we believe we're on a path to identifying another $50 million that we can see flow through fiscal 2025 and then cumulative through the program, get to $120 million run rate as we get into 2026. And where we see that coming from in the early stages, it's programs that we were testing in our supply chain, like our biweekly shipping frequency, we are approaching 80% of the fleet. For Sally, we're shy of that. On BSG, our goal is to get to around 85% across both banners. We're on path for that for this year. But as we look forward, we're seeing greater opportunities within our merchandising and vendor negotiations and relationships. We've got goods not for resale opportunities within our non-trade payables. We see automation, we see outsourcing. So we see a variety of programs. But as we look forward and we start to see where that falls, more so in the merchandising and supply chain areas, we'll get more benefits within gross margin. So you'll see that 75-25 start to balance out a bit as we get into future years. But we're pretty excited about the program, and I think we're off to a great start.

Great. Thank you. Best of luck.

Our next question is from Oliver Chen from TD Cowen. Please go ahead.

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

Good morning, Oliver. So I'll start with the point on promotional landscape. It remains pretty consistent with how we described it last quarter. Value remains important for both our Sally customers and our BSG stylists. On the BSG stylist point, we actually see a little bit higher promotional activity in play, consistent with what we saw last quarter as compared to last year. And a lot of that is that we do see a bit of unit demand pull-through when that promotional activity happens. So we have had that built into our model, like I said, nothing particularly outsized in terms of trend, but we do see the stylists there respond a bit better to promotion. On the Sally side, I would call it a bit steady-Eddie. At the end of the day, customers are just being frugal overall with their dollars. So with or without a promotion, we don't see meaningful changes in traffic coming into the store. And in turn, we are moderating that and ensuring that we're doing the right thing that will drive value for us overall. I think importantly, in light of the landscape out there on both sides of the business, you can expect that we'll remain conservative on pricing. The good news is, we're seeing fewer price increases come through for our vendors as commodity costs and other things have moderated. But importantly, we look right now and would not expect to be flowing through any significant increases that would drive AUR in the near term in light of the macro environment. So not much different than what we saw last quarter, but certainly a very value-oriented consumer on both sides of our business today. In terms of volatility and traffic, we definitely see -- we saw volatility in the quarter, but I'd call it moderate volatility up and down. I think we've been seeing that now since inflation really started to pick up, which we're now probably six quarters into seeing that impact, where when people need to come to buy for need, for an event, for something like that, you're going to see a little bit more strength. And then in the down periods, a little bit less traffic come through. We'll expect to see that, but it's not wild swings. It's just customers really tailoring their purchase habits as aligned with needs. So and then your final question was on inventory, I'll kick that one over to Marlo.

Thank you. Yes, inventory, we expect it to run really in the $1 billion range. As you look at the quarterly cadence, fairly level loaded, a little bit of build as we kind of progress into the year and then drop back down into the $1 billion range. One thing to keep in mind on inventory, we are on a weighted average cost method. So we've got a bit of a lag to those vendor price increases that we had seen previously. Those are still making their way through the process. But we continue to maintain improved levels of unit inventory. Our units are down. So where you see their level or increases, that's all due to the vendor cost increases, making their way through the system. We are hitting our unit weeks of supply targets and our in-stock levels are at really healthy levels.

Thank you very much. One follow-up. One of your competitive advantages of the company is your own brand portfolio. What are highlights of opportunities you see there for innovation and change? Thanks a lot.

Yes, spot on. We're very excited about the own-brand portfolio. Of late, the biggest change that we have made was the launch of bondbar and the extension of bondbar from care into color. We're seeing good customer response there with a very modern brand bringing in new customers when we get that out there in front of them. Innovation come forward is going to follow a similar track of being very aligned with maybe younger consumer trends around desire for more natural products free from products. So it can be good for the environment spaces, where we think we can play there, particularly on the care side. And we'll talk about that as all things about how you can be more mindful as you shop coming through. You'll also see us continue to expand things like Ion into sunscreen for your hair and places, where people are looking once again for more solutions orientation that you'll see us push on as well. So I'd really focus on the dial-up on kind of mindful natural items coming through, as well as continued expansion of our bondbar business and then problem-solving tied to our Ion brand.

Thank you. Very helpful. Best regards.

Thank you. And the last question in queue is from Linda Bolton-Weiser from DA Davidson. Please go ahead.

Yes, hi. Thank you. I was just curious about you've been talking about your experimentation in pilot studies with these other store concepts. And I was wondering if you could quantify the costs related to those pilot tests in this fiscal year. And then sorry if I missed it, but did you give any more color about your plans to expand the value concept, like in FY '25, do you think you will open more of those stores? Thank you.

Yes. I appreciate the question. When I think about the concept initiatives that we're piloting right now, I'd really focus on two key areas. One is the Studio by Sally concept and then the other is our value initiative with Happy Beauty Co. So I'll start a bit with Happy Beauty Co or maybe I'll back up one step. You first asked about financial impact this year. It's quite modest financial impact for what we've stood up this year, both in the remodel or relocation cost of opening the studio stores or in the case of Happy Beauty, it's 10 stores that we put into play last year and this year is really about operating them. So no material impact to the bottom line from either initiative this year. But if I look at the opportunity set, Happy Beauty Co, we have 10 stores up and running. We've been gaining traction in the first six months since our launch, and we're continuing to build awareness and traffic. And with 10 stores, we're really doing that grassroots social media coming through. We were very pleased with what we saw through the holiday season. We thought that the brand was very well positioned for gifting, and that's what we saw, and our teams executed quite well. We're seeing ticket over $25 and UPT around 5. December and the holiday shopping weeks, we saw stronger performance than that, supporting that idea that it's gifting. So we're carrying through those learnings as we consider additional openings. More to come on future calls about a path there, but we remain excited about the potential and believe that if we see some of the metrics continue to perform as they could perform, we could be pushing an opportunity for over 500 stores over the long-term, where…

Thank you. I appreciate it.

Thank you. And there are no further question. Thank you.

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

Thank you, and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using a AT&T teleconference. You may now disconnect.