Sally Beauty Holdings, Inc.

At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given to you at that time. If you need assistance during the call today, press star and then zero, and an operator will assist you offline. And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Sally B. Holdings First Quarter Earnings Conference Call. Before we begin, I want to point out that we've made a supplemental slide presentation available for today's call that can be viewed from the link provided on our investor site at sallybeadyholdings.com backslash investor relations. In addition, I'd like to remind you that certain comments, including matters such as forecasted financial information, contracts or business, and trade information made during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and similar words or phrases. These statements are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty Holdings filings with the Securities Exchange Commission, including its most recent annual report on Form 10-K. The company does not undertake any obligation to publicly update or revise its forward-looking statements. 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. With me on the call today are Chris Brickman, President and Chief Executive Officer, Aaron Ault, President of Sallie B Supply and Chief Financial Officer, and Heather Platino, Group Vice President of Finance. Chris will start by offering some thoughts on our first quarter and give you an update on our key transformation efforts. Aaron will then discuss our first quarter consolidated and segment financial results, touch on our supply chain modernization efforts, and then discuss our views on our full year financial guidance for fiscal 2020. Now I'd like to turn the call over to Chris.

Thank you, Jeff, and good morning, everyone. During our first quarter, we continued to make significant progress against our transformation plan. We saw Beauty Systems Group and our European operations deliver positive comp growth and improve their gross margins. Beauty Systems Group achieved its highest sales revenue in a quarter ever. More significantly, we took important steps towards our goal of becoming a mobile-first digital retailer. enabled by a differentiated category position, a national store network, and consumer-centric fulfillment options. We did all of this while dealing with a retail calendar with six fewer shopping days, a retail consumer who waited until the last minute to shop around both Thanksgiving and Christmas, and a series of significant technology implementation distractions which impacted our retail top line, same-store sales, and Gross Margins. The good news is that we have a natural hedge between our retail and our professional businesses. We saw strength in Beauty Systems Group that offset the traffic challenges at Sally Beauty. For the quarter, we delivered only modestly negative same-store sales, down only 0.3% at the enterprise level, but with a 1.2% comp at BSG and a positive comp in Europe as well. We largely held our gross margin Despite headwinds, but as expected and predicted during last quarter's earnings call, we did see higher SG&A expenses as we invested in the business and responded to wage inflation. We recognize that short-term challenges have created a gap with respect to earnings expectations. We have been working over the last six weeks to fill the gap. Erin will bridge our results, our responsive actions, and our view of the remainder of the year for you later in the call. While the decline in overall sales and the SG&A increase did result in a decline in operating earnings and operating margin and ultimately a decrease in both GAAP and adjusted diluted EPS, I want to emphasize that these are one quarter's results in the face of a significant transformation that is taking place over multiple quarters. Unlike many retailers, Sally Beauty Holdings is in the advanced stages of a detailed transformation plan and remains both highly profitable and highly liquid. If you take one message away from us today, I want it to be this. Our first priority is to complete the transformation and put in place the right retail and digital capabilities to set the company up for long-term success. We are focused on unlocking the full potential of our highly differentiated business, and we will invest additional resources as appropriate over the year if that is required to deliver our objectives. Let's spend some time talking about the specifics of Q1. As we have discussed in prior earnings calls, in recent quarters we have seen stabilizing traffic trends versus comparable periods in prior years. That changed in Q1. The first quarter's calendar was unique in that Thanksgiving was late, with six fewer traditional holiday shopping days than last year. Retailers generally responded by making Black Friday into Black November, with high discount offers beginning as early as the first week of November this year. We did not play that game and held most of our Black Friday-oriented offers to the weekend before Thanksgiving. Our retail traffic was stable in October, then dropped noticeably in the first three weeks of November as the consumer took their time starting their shopping. Traffic recovered the week of Thanksgiving and Cyber Monday but dropped again until the week of Christmas when it again recovered. While we no doubt felt some pain, the Specialty Retail Traffic Index data shows that other specialty retailer traffic trends suffered at the same times and to similar degrees. The consumer also shifted some of their purchases to digital channels. We were quite pleased with our digital performance over the period. As a reminder, we have a methodical but fast process of moving from being an unsophisticated brick-and-mortar retailer to being a mobile-first digital retailer that leverages its differentiated category position with a national store network and a full set of fulfillment options. In our Sally Beauty business, Our goal, of course, is to grab the consumer's attention with our expertise and to help her unleash her potential by filling her need for hair color, hair care, and related products where she wants it, when she wants it, and at a cost and price that makes sense for both of us. We know we are playing catch-up, so we are moving fast and learning and adapting in real time. The digital path we are on is the right one and does not change as a result of Q1. Five quarters ago, we launched our new CRM platform. Four quarters ago, we launched our new Sally Loyalty Program and tied it into our new POS systems and our digital platforms, and it now has more than 16 million active members. Three quarters ago, we launched and updated sallybeauty.com mobile-first website and also tied it to our loyalty program. Two quarters ago, we launched the new Sally Beauty mobile app, which now has been downloaded over 900,000 times. We further refined the website and began development of our order management system so that we could access all of our inventory and, where appropriate, split shipments. During the most recent quarter, We started to knit all of this together by deploying our new order management system across the Sally Beauty and Beauty Systems Group network to allow us to better access our inventory and split shipments, test delivery capabilities such as same-day delivery for BSG, launched the new ColorView technology in 600 stores and on the Sally app, and expanded our Sally Beauty digital marketplace efforts with eBay, Google, and Amazon. Following the end of Q1, we also executed the consolidation of our digital teams into one team to lead digital efforts for both Sally Beauty and Beauty Systems Group. We have hired two new digital expert leaders, Kevin Metz, VP of e-commerce, and Vinathy Lakshmi, VP of digital product. Together, they bring real life, been there, done that, retail and wholesale digital pedigrees from the likes of Ulta, Walmart, Stuller, and Cachet. Looking ahead, by the end of the current quarter, we expect to launch sallybeauty.ca along with our first iteration of ship-from-store capabilities. An important evolution since we do not have or intend to build a traditional distribution building network for our Sally Canada business. All e-commerce shipments to consumers will come from inventory in Canadian stores. We will test, we will learn, and we will expand. for both ship-from-store and BSG's same-day delivery. We are making significant digital progress. In the most recent quarter, our global digital business grew 27.6%, with the SALI US and Canada business growing the most at 37.8%. As with many of our initiatives, SALI US and Canada is leading the charge, and we are now turning to leverage our learnings and capabilities elsewhere. first with BSG, and then more broadly in Europe as a further part of Project Surge. Our US and Canadian digital retail penetration increased 100 basis points to 3.7% for the quarter, while our overall penetration rate stands at 4.5%, meaning it is still all upside for us as we continue to drive digital capabilities and penetration. We have a massive amount of change underway. Much of it tied to technology, and we are operating on aggressive timelines with significant interdependencies. Anytime you combine transformation and technology, you have to be ready and able to learn and adapt. In the first quarter, we experienced technology integration roadblocks, which together had a significant impact on our first quarter revenue, same-store sales, and gross margins. We are approximately 60% of the way through our X-Store POS implementation across the US and Canada, meaning we have reached critical mass. During the quarter, we discovered design issues within our X-Store system, which resulted in incorrect pricing data flowing to some of our Sally stores, particularly in Canada, on a significant number of items. Technology issues also resulted in some customers receiving elevated promotional discounts, which resulted in a degradation of sales and gross margin. Finally, our new loyalty program is tied into our new X-Store systems, interacts with our promotional cadence and calculation. As a result of the system implementations, we experienced higher redemptions than expected from our early testing on legacy systems. These redemptions also stacked in ways that we were not expecting, having an unplanned and negative impact on revenue, same-store sales, and gross margin in the Sally Beauty business. Aaron will quantify the impact of these challenges in his remarks. The good news is that these integration issues were discovered before we implemented POS chain-wide, and we were able to pause the X-Store rollout quickly at Sally Beauty to mitigate the impact. While there is still work to do, we believe that we have addressed the majority of the underlying issues, making these issues largely a first quarter learning experience that should not impact the rest of our year. That said, we will remain watchful given the ongoing transformation and our continued agenda of significant technology change. We have restarted the POS rollout and expect to complete the point of sale effort across the beauty system group by the end of the second quarter and Sally Beauty by the end of May. As I mentioned earlier, our strategy and our priorities remain unchanged. Play to win with our customers based on our differentiated core, improve our retail fundamentals, whether through people, process, or technology, advance our digital commerce capabilities, and fund our transformation by relentlessly looking for cost savings measures. To close my remarks, I will highlight a few key progress points and plans in the business. for Sally Beauty Segment. During the first quarter, the business executed a soft launch of the single largest brand investment since I have been at the company. Through the relaunch of the Sally Beauty brand with Unleash Your Potential, the effort went live and national on January 6th, and you will find our brand building efforts in digital, TV, radio, and out-of-home channels across the country. Examples of the marketing are available on our website. As part of this effort, the business also launched our Sally Crew Influencer Development Program to further expand our digital reach. We have received more than 1,000 influencer applications for Sally Crew. Newness and innovation continue to be a focus area. We launched Qi Professional Color, Qi Appliances, Maybelline Cosmetics, and Waterless Dry Shampoos during the quarter, and tested a number of pro hair care options such as TG, Big Sexy, American Crew, and It's a Ted that do not have exclusive distribution elsewhere. We will continue these efforts and introduce exciting line extensions from Texture ID, Shea Moisture, Carol's Daughter, Miele, and other brands during the Q2. In addition, Vivid Colors continue to grow and are now 20% of color sales at Salad. We continued to make progress on our stores, having remodeled most of the Charlotte market, launched a Manhattan concept store that will become a dense urban ship-from-store location, and tested store durations in North Texas, all in anticipation of our North Texas remodel cycle and building out a number of new stores in a variety of markets during Q2. Now turning to Europe. At the start of Q1, we launched Project Surge, to turn around our European operations. That effort has five key planks, customer and customer marketing, store operations, country-specific focus, product assortment, and technology integration. While we are still in early days of the effort, we are pleased with the results so far, particularly with respect to the store operations work in the UK. Europe was a positive contributor to our same-store sales for Q1, with improvements driven in the UK and Ireland and parts of continental Europe. We are also excited to announce that we have reached agreement to launch the Redken Color brand in our European stores in late Q3 of this year. Further evidence that our team remains focused on driving this turnaround and we are looking forward to talking about additional wins at the end of next quarter. Now, Beauty Systems Group. As I commented at the start, we are very happy with the progress that BSG made this quarter. The combination of our innovation pipeline and a new emphasis on retail fundamentals within our stores all helped to deliver a positive comp, as well as better execution within the full service channel and led to the highest quarterly revenue ever at BSG. In addition, we recently renewed our exclusive three-year contract with the Cody organization. giving them and us certainty on our relationship going forward. During the quarter, Beauty Systems Group launched Maria Nila's expanded care and styling line, further supporting our emphasis on clean, natural, and vegan products. We also expanded distribution of Olaplex No. 6 and No. 7 critical hair treatment lines and expanded our men's barbering assortment. We will continue this innovation push with the ECU launching later in the year as well, a new natural line from Europe. BSG will also be rolling out its new store concept model to additional territories based on learnings from the successful Las Vegas test in 2019. The rollout will start in the second quarter in Cincinnati, followed by Charlotte and then the rest of Ohio in the back half of the year. We continue to work down our path to launch a new loyalty program at BSG via our partnership with Alliance Data to launch a private label credit card program. Given our ex-store efforts, testing will now begin in select stores during the third quarter with a national rollout to follow in the fourth quarter. Finally, BSG will also look for acquisition opportunities that could expand its distribution rights and add additional brands to its portfolio. Now I will turn it over to Aaron to discuss a couple of topics in more detail.