Sally Beauty Holdings reported Q2 fiscal 2024 net sales of $908 million, a 1% decrease year-over-year, with comparable sales down 1.5%.
Adjusted gross margin was 51%, affected by higher promotional penetration and an unfavorable sales mix shift.
The company maintained solid cost control, with adjusted SG&A expenses up 1% versus last year.
Operational cash flow was $37 million for the quarter, supporting continued share repurchase activity.
Segment Analysis
Beauty Systems Group (BSG) Q2 comparable sales increased by 2%, showing improvement in salon demand trends and benefiting from product innovation.
Sally segment faced softer sales performance, with Q2 comparable sales down 4%, attributed to cautious consumer behavior and the impact of weather in January.
Market and Consumer Trends
Customers across both segments increased promotional purchases in response to the inflationary environment, affecting average unit retail.
Product innovation and territory expansion contributed over 250 basis points to comparable sales results, with strategic initiatives on track for the full year.
Strategic Initiatives and Innovations
New brand additions at BSG include Briogeo and epres, enhancing the product offering.
In Q2, owned brand sales penetration for the Global Sally Beauty segment was 34%, up 60 basis points from the previous year.
The company launched new marketing campaigns and continued to innovate in product offerings, including plans for skin care and men’s grooming in the second half of the year.
Omnichannel and Customer Engagement
Licensed Colorist OnDemand service is showing positive momentum with significant new customer engagement.
Sally Beauty is expanding its marketplace presence with Amazon, Walmart, and new partnerships with DoorDash and Instacart.
Future Growth and Optimization
Happy Beauty Co. pilot stores are performing well, leading to plans for additional pilot stores before Thanksgiving.
The company is on track to capture $20 million of pretax benefits in fiscal 2024 from its Fuel for Growth initiatives, with additional savings expected in fiscal 2025 and 2026.
Financial Guidance Adjustments
Full year operating margin outlook was revised due to Q2 results, with net sales and comparable sales expected to be approximately flat.
Full year gross margin rate is now expected to be between 50.5% and 51%, with adjusted operating margin around 8.5%.
Operating cash flow outlook adjusted to approximately $240 million, with planned capital expenditures of about $100 million.
Q3 Expectations
Net sales and comparable sales for Q3 are projected to range from down 1% to up 1%.
Q3 gross margin rate expected to slightly decrease from Q2, with adjusted SG&A dollars approximately flat versus the second quarter.
Anticipated Q3 adjusted operating margin is between 8% and 8.5%, with share repurchases expected to be around $10 million.
Question and Answer
Stylist Sentiment and Brand Expansion
Question
Can you discuss stylist sentiment and whether stylists are still shopping closer to their needs or holding more inventory, as well as how you are managing shelf space for new BSG brands?
Answer
Stylist sentiment has improved in Q2, with stylists still buying closer to need but showing better response to discounting opportunities, indicating a search for value.
New BSG brands like Moroccan Oil, Amika, Color Wow, Briogeo, and Epres are being added without materially changing shelf space for existing brands, with some minor SKU trimming.
Consumer Demand and Margins
Question
Can you explain the difference in demand between improving salons and softer consumer spend at Sally Beauty Stores, how you are managing promotions in the current cautious consumer environment, and the drivers for lower operating income margin guidance while reiterating the top line?
Answer
Demand is bifurcated, with stylists serving middle-to-higher income customers experiencing a return to regular services, while the lower-income consumer segment is feeling pressure from price inflation and credit card balances, leading to more selective purchasing.
Promotions are being managed by adjusting the design, depth, and duration of promotions to balance share of wallet and average unit retail (AUR) pressure, with expectations for the trend to moderate in the second half of the year.
Lower operating income margin guidance is primarily driven by adjustments to gross margin expectations due to shifts in customer behavior and promotional cadence, with a range of 50.5% to 51% still historically high and reflecting continued strong margins.
Marketing Strategy and Comp Confidence
Question
How will upper funnel marketing investments be different from prior approaches, and what are the underlying factors giving you confidence in positive comps for the back half of the year?
Answer
Marketing will focus on highlighting what makes Sally Beauty unique and driving experiences like Licensed Colorist OnDemand to attract new customers while retaining existing ones.
Positive comps in the second half of the year are expected due to continued momentum in new brand innovation and expanded distribution for BSG, as well as the impact of marketplaces, Licensed Colorist OnDemand, product innovation, own brands, CRM, and personalization for Sally.
Sally Beauty Store Initiatives and BSG Territory Expansion
Question
What were the initiatives to drive foot traffic and spur transactions at Sally Beauty Stores, how much did territory expansion contribute to BSG sales, and are you adjusting second-half margin expectations by segment or what offsets are in place to maintain margin targets with flexibility on promotions?
Answer
Sally Beauty Store initiatives include a holistic omni-channel approach, such as expanding marketplaces with DoorDash, Walmart, and Amazon, as well as launching Instacart, and focusing on experiences like Licensed Colorist OnDemand, own brands, and CRM activities to drive traffic and build loyalty.
BSG sales growth is attributed to a combination of innovation gains, distribution gains, and stylist demand, with no specific breakdown provided beyond the $10 million to $15 million contribution from the Goldwell New York acquisition.
The margin guide is influenced by the mix shift favoring BSG and AUR pressure at Sally, as well as adjustments to gross margin expectations due to promotional offerings, with a balanced approach to maintain margin targets while having flexibility on promotions.
BSG and Sally Innovation and Promotional Rate
Question
Can you provide more details on the specific BSG and Sally innovations that drove strength, as well as any insights into the promotional rate this quarter compared to last year?
Answer
There was no significant difference in promotional offers between this year and last year, with BSG potentially having slightly more promotions due to vendor support.
Notable BSG innovations include expansions of territory rights and full store fleet access for brands like Moroccan Oil, Color Wow, and Amika, as well as the launch of Briogeo and Epres, offering new alternatives for stylists and clients.
Sally innovations focus on mindful brands, bondbar, and vivid color, with upcoming launches in skin care and textured care.
Capital Allocation and Higher Ticket Item Trends
Question
Can you provide an update on capital allocation priorities, including leverage targets and share repurchases, and discuss the extent to which weakness in higher ticket items continues to impact sales and when this trend might start to improve?
Answer
The leverage target range of 1.5 to 2x remains appropriate, and the company will continue to work towards that range while balancing debt paydown and share repurchases.
The impact of weaker sales in higher ticket items is reflected in the Q3 sales guidance of down 1% to plus 1%, but the company expects a sequential improvement and a return to flat performance by the end of the year.
Industry Trends and Customer Behavior
Question
Can you provide insights into the broader industry trends and the potential reasons behind the recent slowdown, such as reaching a peak in innovation and consumption or macroeconomic factors, and discuss whether there have been any recent shifts in consumer behavior that could be impacting the business?
Answer
The industry is experiencing a bifurcation in customer behavior, with healthy demand and a robust innovation cycle for stylists serving middle-to-upper income clients, while lower-income consumers are exhibiting more frugality in their purchasing decisions due to price inflation and credit pressures.
The recent slowdown is attributed to the challenges faced by the lower-income customer segment, rather than an innovation cycle reaching its peak.
Recent Business Trends and Outlook
Question
Have there been any recent shifts in trends or consumer behavior that could be impacting the business, and is there any indication of a potential pivot or change in the current trajectory?
Answer
The company has observed a dynamic customer base with fluctuations in spending patterns, but the overall trend is towards a sequential improvement, with continued solid performance in BSG and some softness in Sally expected to persist.
