Sally Beauty Holdings, Inc.

will be given to you at that time. If you need assistance during the call, you may 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.D. Holdings Third Quarter Earnings Conference Call. Before we begin, I want to remind everyone that we have made a presentation available for today's call that can be viewed from the link provided on our investor site at sallybeadyholdings.com forward slash investor relations. In addition, given the impact of COVID-19 and consistent with our recent disclosures, we will be providing limited supplemental disclosure for some operating and financial metrics for the months of April, May, and June within the quarter. I would also like to remind you that certain comments, including matters such as forecasted financial information, Contract for Business and Trend 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 Salad 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 Style Beauty 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 third quarter, as well as why Style of Beauty Holdings is uniquely positioned to take advantage of consumer trends, respond with agility to the COVID environment and generate cash. Aaron will then discuss our third quarter consolidated and segmented financial results, touch on our liquidity and provide some perspective on our fourth quarter. Finally, Chris, Marlo, Aaron, 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. On our last earnings call, we spent time highlighting our aggressive response to the COVID-19 pandemic, the successes earlier in the second quarter on our transformation initiatives, and the positive comps our business experienced prior to the onset of COVID. During that May call, we also highlighted our views of changes to consumer behavior, the recession-resistant nature of our categories in our company, and our aggressive efforts to reduce cash burn and to tap additional sources of liquidity. Since our last earnings call, we have provided a number of COVID-related updates on all of these topics. and each month the consistent message has been one of agility, resiliency and decisive action as we continue to grow cash on the balance sheet and maintain liquidity while quickly getting our store fleet up and running, bringing our team back from furlough and pushing ahead with our fast pivot to the future in our digital business. Progress continues, but I think our team can be quite proud of their efforts in the quarter. In the face of everything COVID could throw at us, we got a lot done. Here are some of the key highlights I want to emphasize for you about the third quarter. We brought down the entire store fleet and then brought it back up again so that as of today we are now operating everywhere except a handful of stores in international territories. We pivoted rapidly to e-commerce by rolling out ship from store and same day delivery. We quickly set up contactless curbside pickup at many of our stores as COVID forced us to shut down customer-facing operations. We saw significant growth in digital over last year, even as our store sales were surging as we reopened. As the quarter progressed, we saw strong demand. While the overall quarter will show a decline in sales due to COVID and the shutdown, as the network has opened up, sales have been coming back strong. Both Sally Beauty and Beauty Systems Group had positive same-store sales in June, even with parts of the network closed at the start of the month. Beauty Systems Group had its highest monthly sales ever, with revenue of $155 million in June as stylists and salons refilled their supplies in response to strong customer demand. We exercised incredible discipline relative to both cost and cash control. We aggressively managed our working capital, including inventory dropping to a six-year low during the quarter. We reset our inventory open-to-buy process and cleared out an overhang of inventory and componentry in Europe and the United States. We grew our balance sheet cash to $839 million. We executed a restructuring in the United States, which prioritizes our digital future and capability builds, consistent with the outlines of our transformation plan. and we did all of that while much of our staff was on furlough, allowing us to regain sales momentum fast and bring back most of our team by mid-June. I would also like to highlight some observations about our consumers. We have seen data which suggests the consumer sentiment was increasing until the middle of June, largely in line with states reopening and the hope that the country had beaten COVID. but sentiment then leveled up and retreated late in the quarter as COVID fears reemerged in new parts of the country. In contrast, we also saw consumers change their purchase patterns. While spending early in the quarter was quite depressed as consumers were addressing sudden unemployment and the uncertainty of COVID, over the quarter we increasingly saw our consumers less cautious of spending even in the face of high unemployment and fears of recession. While impossible to quantify with certainty, we believe this increased spending was driven by three things. First, the historical experience in our categories that consumers will cut other expenses before they stop investing in their appearance. They want to feel good about themselves. Second, the fact that our consumers may have some surplus discretionary spending because they are spending less elsewhere on things like restaurants, entertainment, or travel. or because they received stimulus payments. Lastly, some of you may have seen third-party data, like we did, suggesting that the beauty consumer is trailing consumers in other categories like housewares, auto parts and toys. We have not seen that materialize in our own demand and believe it is due to the categories within beauty where we lead. Hair color is fundamentally different from cosmetics. There is no escaping that we are operating in a world of uncertainty. Investors are seeking assurances from companies that key fundamentals are in place to drive performance going forward. This is particularly true in retail and even more so in specialty retail. I recently heard a well-known investment manager comment publicly that, in his mind, companies that deserve investors' attention in this market have three things in common. They can take advantage of consumer trends initiated by COVID and changing consumer needs. They have proven they can operate effectively in an environment impacted by COVID. And they have strong cash flow and cash on the balance sheet. Sally Beauty Holdings hits all three of these characteristics. So I'm going to structure my remarks accordingly. Let's talk about the investment manager's prioritization of companies that can take advantage of consumer trends initiated by COVID and changing consumer behaviors. We are seeing several trends for which our business is uniquely positioned to respond. First, do-it-yourself. Whether in home improvement or hair color, consumers have responded to the fear of COVID by spending more of their time at home taking on tasks that they previously would have paid others to do for them, such as coloring their hair or doing their nails. Our Sally Beauty retail business is perfectly aligned with this trend. Sally is the industry leader in professional color for home use. Our customers can find all of the needed solutions or products either online or in our stores. Additionally, they can find how-to content on our digital sites, starting with Hair Color 101, all the way through more complex application techniques. Alternatively, a consumer can talk to a Sally associate at a store who has been trained in hair color. We have the right products and the right expertise to respond to the consumer DIY trend. Second, there is a consumer trend around creative experimentation. which is driven by customers with time on their hands as they social distance, deal with boredom, or revel in the escape from normal workplace appearance expectations. With more of our customers working from home or learning online, there is an opportunity to express themselves in how they look, which previously may have been constrained. The result of this strong interest in creative categories like vivid colors and nails. Since the start of COVID, we have seen increased interest in vivid colors in our Sally retail business in the U.S. and Canada. The category actually grew 22% in the quarter compared to the prior year, despite stores not being open for the entire period. Vivid colors now represent 27% of the total color category compared to 20% in the prior year. During the quarter, we also observed that many consumers desperately wanted to get back to their stylists once restrictions were lifted, and our beauty systems group business was ready to provide the needed products for our stylists and salons. We see signs that we have been more nimble than some of our competitors in getting back up and running, and with BSG delivering its strongest month ever in June, we believe that we have gained share by better serving the professional during this difficult period. The second criteria called out by the fund manager was companies that have proven they can operate effectively in an environment that will continue to be impacted by COVID. We believe that the agility with which we have moved in the last three months makes a strong case that we are that type of company. We have been successful in launching new assortments to allow our retail customers to protect themselves and to allow our professional customers to protect both themselves and their clients. Whether it was hand sanitizer, barbicide, gloves, masks, or canes, Sally Beauty and Beauty Systems Group were in stock with these items before the crisis hit and quickly moved to bring additional assortment and inventory into our network. It was not by accident that during the crisis we were identified in the national media as one of the few places that consumers could find hand sanitizers. While the supply and demand curve is normalized in connection with sanitizers and masks, we believe that personal protection will continue to be a customer need, particularly in salons, and we will continue to support it in our assortment. In addition, we rapidly change our service model during the COVID crisis to provide our customers with more choice on how they interact with us and more access to our inventory chain-wide. We have continued to iterate on the changes to our service model and believe that they will serve us well as consumer preferences change and as we see outbreaks of COVID across the country. We started this journey by putting safety first. Our team members are required to wear masks and gloves, and we are actively monitoring for compliance. We have installed the plexiglass screens at the counters, created social distancing operating procedures, and our stores are regularly cleaned. We took similar steps at our distribution centers while increasing capacity. We also offer flexibility. We created curbside for our customers and have recently re-energized that offering in areas seeing COVID increases. We rolled out same-day delivery at Beauty Systems Group to address the needs of busy stylists. We rolled out ship-from-store at Sally Beauty to increase the inventory that was available to our retail customers. We have spent time optimizing both efforts and growing our capabilities and expect to continue to add services. And in contrast, it is also the case that we are able to operate in the COVID environment because of what we are not. We are not a mall-based retailer. Very few of our stores are attached to a mall complex. and most of our small footprint stores are located in strip malls or in developments with big box retailers like Walmart or Target or other large food retailers that stayed open during the crisis. This means that we are not dependent upon foot traffic at department stores or apparel outlets for our business. It also means that we do not have to rely on others to create a safe environment for our customers. Finally, let's talk about Sally Beauty Holdings as a company with strong cash flow and cash on the balance sheet. In our last earnings call, we updated the investment community on our successful efforts to increase liquidity, including increasing the size of our revolver and issuing a $300 million bond. We also commented on our aggressive efforts to manage cash. As you can see from today's earnings announcement, we delivered strong positive free cash flow for the quarter of $180 million. This was by design. We also continue to increase cash on our balance sheet. With our quarterly books now closed, we can report that we now have $839 million of cash on the balance sheet as of the end of the third quarter. At the start of the crisis, we shifted our management focus from profit to cash, and that has worked well for us. Our success in generating cash was driven by several key tactics we deployed in response to a changing environment. Removing unnecessary promotions, limiting advertising, adeptly managing working capital, and delivering against key initiatives such as negotiating rent abatements from landlords. This is all work that the team will continue as we carry forward, but I want to emphasize that our company is in an excellent liquidity position. In closing, let me offer a few final thoughts on why we believe Sally Beauty Holdings has a great opportunity to do well as the world manages through the ongoing pandemic and the associated economic downturn. To begin with, Our categories are in high demand and our customer will sacrifice other things before she sacrifices her hair and beauty regime. Our business has been relatively recession-proof and we have built 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 DSG 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. And let me be clear that we will continue to prioritize investments in our digital platform and new delivery service models in order to better serve our customers and drive growth in a disrupted environment. Finally, our team is aggressively pursuing our transformation while leveraging the impact of what we have done with the restart of our continent-spanning store networks with an emphasis on safety for our customers and for our team. This all means that we are well positioned to serve our customers, strengthen our leadership position in professional color, and grow our business despite the continuing impact of COVID in coming quarters. Now I will turn it over to Aaron to discuss our financials and our liquidity in more detail.