Sally Beauty Holdings, Inc.

Thank you for standing by and welcome to the Sally Beauty Holdings second quarter fiscal year 2020 conference call. 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 Second Quarter Earnings Conference call. Before we begin, I point out that we have made a supplemental presentation available for today's call that can be viewed from the link provided on our investor site at sallybdholdings.com forward slash investor relations. In addition, given the timing of COVID-19, We will be providing limited supplemental disclosure for some operating and financial metrics for the month of April, which is outside of our second quarter financial results. I'd like to remind you that certain comments, including matters such as forecasted financial information, contracts for business, and trend information, made during this call may contain forward-looking statements within the meaning of Section 27A of 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 can cause actual results to differ materially from expectations. Those factors are described in Solidity Holdings' filings with the Securities and 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 Salary Duty Supply and Chief Financial Officer, and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer. Chris will start by offering thoughts on our progress against our transformation initiatives and on how our second quarter played out and he will in particular focus on the dramatic growth of our e-commerce business as well as our already in progress store network restart. Aaron will then discuss our second quarter consolidated and segmented financial results, touch on our liquidity, and then discuss how we were thinking about the rest of fiscal year 2020. Finally, Chris, Aaron, Marlo, and I will be available for your questions. Now I'd like to turn the call over to Chris.

Thank you, Jeff, and good morning, everyone. What an incredible couple of months it has been. In early March, our team was reflecting on the significant progress We had made on our transformation agenda. We had launched the national brand campaign for Sally with good success. We had hired and were onboarding new leaders for our digital product and e-commerce businesses. We had fixed the technology issues that we experienced in the first quarter. We had just launched sallybeauty.ca and a test of new ship-from-store capabilities in Sally Canada. We had just launched same-day delivery for Beauty Systems Group in one territory. And our sales metrics were flashing green, with same-store sales in the quarter prior to March 12th of positive 4.7%. And global, Sally, same-store sales up 4.8%, Beauty Systems Group up 4.5%, and Europe also showing positive progress. Then we recognized the massive change that was coming, and we executed a fast pivot to the future. Because of that pivot, we are a different company today than we were just 60 days ago. That change will continue, and we are going to spend the rest of this call highlighting for you what has changed in our situation, how we have responded, and why I am so excited about our future. First, let me set the stage with some observations about our business and our categories in times of financial turmoil. During Ernie's calls over the last couple of years, we have gone out of our way to point out that history has shown that our business has been particularly stable in times of financial distress. We saw it in 2008, and we are seeing it again today. When it comes right down to it, Our customers want to feel good about themselves, and they're willing to sacrifice other things before they sacrifice their investment in themselves and how they look. Of course, this may mean that some consumers will be value conscious, and some business may shift to Sally Beauty from BSG. However, keep in mind that Sally is the higher profit margin business for us. So we are comfortable with the natural hedge that may result from a consumer channel shift from professional service to DIY. That being said, the BSG segment was basically flat over the 2007 to 2009 time period, and that should serve as further evidence of the resiliency of our business. Of course, COVID-19 is not your typical financial disruption. In some respects, it has created a growth opportunity for both our retail and our wholesale businesses. Just as we have been selling gloves to salons, doctors' offices, police departments, and even the postal service during the shutdown, we also expect personal protective equipment will be a must-have for salons, individual stylists, consumers, and other industries going forward. and we are investing in inventory accordingly. We expect this to be a growth opportunity for both Sally Beauty and Beauty Systems Group. Let me give you some competitive context. During early March, what was remarkable to us was how our business was responding differently from specialty retail and differently from apparel specialty retail in particular. Our traffic was relatively flat. while other specialty retailers were experiencing traffic declines of 30, 40, even 50% in the weeks leading up to the COVID-19 shutdown orders. While other specialty retailers were considering closing their stores for safety reasons and because no one was shopping, we had steady traffic and good conversion. It was only as we approached the last 10 days of March When news reports grew increasingly grim, we started to see greater impact to our sales and shortly thereafter local authorities asked retailers to close operations. I want to repeat this point. We did not close our stores because of low traffic, like many other retailers. As the COVID situation developed, we closed our stores due to our overall concern for the safety of our employees and customers and in compliance with the mandates On March 24th, we closed all customer-facing operations and stores across the United States and Canada. All stores in continental Europe were already closed by that date, except for the 30 stores in the Netherlands, which continued to operate throughout the COVID interruption, and the stores in the UK and Ireland, which closed on March 26th. So let's talk about how consumer behavior changed. The direction will not surprise you, but the magnitude of the change might. Within Sally Beauty U.S. and Canada, e-commerce demand spiked to unprecedented levels. For the period from March 12th until April 30th, online demand for the Sally Beauty U.S. and Canada business spiked by approximately eight times the prior year. Not 8%, not 80%. 800% at approximately five times the prior 50-day period. In April alone, Sally Beauty US and Canada had e-commerce sales of approximately $33 million. We also discovered that our customer base changed. In the retail business, approximately one-third of the huge e-commerce demand was driven by new customers to Sally Beauty One-third was conversion of Sally Beauty store customers who were not known to have previously shopped online with us. And one-third was pre-existing e-commerce customers. In the same period, notwithstanding the widespread closures of salons across the country, e-commerce demand at Beauty Systems Group also increased by approximately 190% versus the prior year, and by approximately 100% versus the prior 50-day period. Because of our scale, we also saw new customers coming to us in Beauty Systems Group. Now, some of you that know our story well might be thinking, hold on a minute. Sally Beauty Holdings has a relatively modest e-commerce operation, even though they have been focused on building digital capabilities. And you would not be wrong. At the end of Q1, our digital penetration was 4.5%, and our scale was modest as we were still building capabilities. However, when I referred to the fact that we executed a fast pivot to the future, I was talking about digital. As we planned, on March 1st, prior to the onset of the COVID-19 impact, the company had launched a limited test of its new ship-from-store technology in 16 of its Sally Beauty Canadian stores. and a one-city test of same-day delivery with Postmates for Beauty Systems Group. In early March, as we understood what was coming our way, we quickly moved to stop everything we had underway that wasn't focused on digital growth. And we pivoted to the dramatic acceleration and rollout of ship-from-store across the United States and Canadian store fleet. As of this week, 1,100 Sally Beauty stores are operating daily as flexible e-commerce fulfillment nodes. This makes the vast majority of our inventory accessible to our customers, provides the company with incremental e-commerce shipping capacity, and increases the operational impact of 1,100 of our stores. The Sally Store fleet e-commerce shipping capacity is now twice the capacity of the company's entire traditional e-commerce distribution network. and additional stores are being added daily. That happened in 60 days. Last week, the stores, even when they were not open to the public, fulfilled approximately 45% of our e-commerce sales and some weeks that has gotten as high as 60%. The company also accelerated its rollout of same-day delivery to additional beauty systems group stores. As of this week, 300 Beauty Systems Group stores are now offering this service, and another 400 are awaiting launch. I'd like to give you a sense of the magnitude of what this means. In the month of April, the first full month of our stores being closed to the public, the company had approximate sales of $94 million, more than half of it from our newly robust e-commerce operations. For comparison purposes, This implied e-commerce penetration would have equaled 16% of sales in the same period in the prior year, a significant change from the 4.5% penetration we were at in Q1. This was our e-commerce business without marketing and without promotion. This is the pivot to the future I want to focus your attention on. Our continued expansion of our digital capabilities, our continued expansion of our fulfillment capabilities, our continued focus on customer marketing and giving her what she wants, where she wants it, and at a price that makes sense for both of us, regardless of channel. Now shifting to our store and network restart. While we have made great progress on digital, the practical reality remains that we have a multi-billion dollar business rung through our stores that we want to bring back online as quickly as possible. We are closely monitoring developments on a county-by-county and a country-by-country basis, while actively planning the phased restart of customer-facing operations of the store fleet. The timing of specific store restarts has been and will continue to be driven by the return to work conditions set by local authorities, the return from furlough of store staff, the implementation of new safety protocols, social distancing programs in stores, and inventory replenishment. As of this week, more than 1,500 stores are now open to the public globally. with additional stores being added to the open door roster on a weekly basis for the foreseeable future, consistent with evolving government orders. Sally Beauty Supply US and Canada opened its first two stores in the United States on April 16th. As of this week, 1,100 Sally Beauty Supply stores are open to the public. We also have 1,500 stores operating as curbside pickup locations. and we have adopted rigorous social distancing and safety procedures. Some of these curbside stores are also open to the public. However, many are in jurisdictions that do not allow us to serve customers in the stores as of yet. We expect that additional salad beauty stores in the United States and Canada will come online in the coming weeks and months. We also started reopening stores in Europe, first in Germany. Our Dutch stores never closed. France and other countries will follow as government regulations are lifted on retail operations. Beauty Systems Group reopened its first small tranche of U.S. stores to the public on April 21st, with an emphasis on selling sanitation and personal care products while implementing supplemental social distancing and safety procedures. As of this week, 375 Beauty Systems Group stores were open to the public and more than 800 stores were offering curbside pickup. All employees will be required to wear masks and gloves for the foreseeable future. Additional Beauty Systems Group stores will come online in the coming weeks and months. Let me offer a few initial thoughts on why we believe Sally Beauty Holdings has a great opportunity to do well as the world emerges from the COVID-19 shutdown. Our categories are in high demand, and our customer will sacrifice other things before she sacrifices her hair and beauty regimen. We can see this in our March traffic and in our April e-comm results. As I mentioned earlier, our business has been relatively recession-proof, and we have a built-in hedge between Sally Beauty and Beauty Systems Group. As DIY moves to the forefront, Sally may benefit over Beauty Systems Group, but we see opportunities within Beauty Systems Group as well with PPE growth and the potential failure or downsizing of smaller distributors. We do not face the overhang of mall stores and the fear that consumers may have of mall crowds going forward. In addition, our store footprints are relatively small and social distancing is relatively easy to enforce. We are building strong digital platforms at an accelerated pace that should position us for further growth as the consumer establishes a new normal in retail. Finally, our team is aggressively pursuing the restart of our continent-spanning store networks with an emphasis on safety for our customers and for our team. Significant work remains, but I am immensely proud of the creativity and the passion with which our teams have reacted to COVID-19. Now I will turn it over to Erin to discuss our financials and our liquidity in more detail.