Sally Beauty Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings second quarter 2021 earnings 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, 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. Thank you for joining us. With me on the call today are Chris Brickman, President and Chief Executive Officer, and Marlo Cormier, Chief Financial Officer. Before we start, 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 sallybeautyholdings.com forward slash investor relations. I would also like to remind you 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 in this call represent our views only as of today, and we undertake no obligations 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 Chris to begin the formal remarks.

Thank you, Jeff, and good morning, everyone. I want to start by commending our teams for their commitment to the business during these remarkable times. We are all pleased to see store closures and restrictions easing in certain markets, but the global environment remains dynamic and requires that we continue to operate with added discipline and agility. Our teams continue to perform at a high level in Q2, and most importantly, they remain focused on serving our customers. Due to their hard work and dedication, we achieved net sales growth of 6% despite store closures in many of our international territories and the shutdown of California salons in January. Traffic and sales trends started picking up in the latter part of February and accelerated more substantially in the final month of the quarter, resulting in stronger than expected performance across the P&L. There are a few key factors that drove the top line. We saw increased demand at Sally U.S. from improving consumer confidence and government stimulus actions. Next, reopenings in Canada and easing restrictions in the U.S. drove stronger than expected pent-up demand at both Sally and BSG. As you may have seen, the Province of Ontario subsequently shut down again in early April, but this is a Q3 dynamic. Lastly, in the final month of the quarter, we saw a significant shift in trend at BSG as salons were permitted to operate at higher capacity levels. At the same time, we continue to see a trend towards more independent stylists. As they are displaced from their salons and move to booth or suite rental, these stylists are increasingly likely to become BSG store customers. The combination of strong consumer demand and the effectiveness of our promotional strategy allowed us to maintain solid gross margins above our target level of 50% in the quarter. Additionally, expense favorability also helped drive strong earnings and cash flow. We ended Q2 with a strong liquidity position, including $408 million of cash on the balance sheet and a zero balance outstanding on our $600 million ABL credit facility. Subsequent to the close of the quarter, we fully repaid the outstanding balance on our 5.5% senior notes due 2023, making further progress towards our goal of bringing our leverage ratio closer to 2.5 times by the end of fiscal 2021. Looking at the business by category, during the quarter, we saw ongoing strength in hair color, including vivids. Color increased 27% and vivid colors grew by 53% at Sally US and Canada versus the prior year. Vivids continue to be an important driver and represented 27% of our total color sales for Sally, U.S. and Canada in the quarter. In addition, BSG also saw strength in the color category, which was up 17% versus the prior year. Other categories also performed well, with nails up 20% and hair care up 9% at Sally, U.S. and Canada and hair care up 16% at BSG. As the quarter progressed, we saw a pickup at Sally in going-out categories such as styling and tools, which really speaks to the improving consumer confidence and vaccine optimism that was building. Our e-commerce business was also an important growth driver, delivering a sales increase of 56% versus a year ago. Looking at our expanded digital capabilities, We're really starting to see our investments bear fruit this year. We're currently offering multiple fulfillment options, including buy online pickup in store, ship from store, and curbside pickup at Sally Beauty, and same day delivery and curbside pickup at our BSG stores. For the second quarter, approximately 40% of our e-commerce sales for Sally US and Canada were fulfilled by our stores, which speaks to the value of our large store portfolio when combined with our enhanced digital capabilities. To that end, we are closely monitoring customer behavior and evaluating key learnings across all of our fulfillment options. At the same time, we are mindful of macro factors such as wage inflation and balancing that with the need to maintain highly productive store economics. In the coming months, we will be testing a small number of store closures to analyze sales transfer and purchasing patterns, which will help inform our future plans for the portfolio. The initial test will consist of approximately 90 stores, roughly 70 Sally Beauty and 20 BSG locations, and will be spread across the country to provide us with a range of learnings in various markets. Our teams remain focused on the three major priorities for fiscal 2021 that we outlined on our last earnings call. As a reminder, those include the following. We expect to substantially complete the remaining elements of our transformation. We expect to be leveraging all of our new capabilities and tools in service of our core mission to recruit and retain color customers. And we expect to bring our debt leverage ratio closer to our target of 2.5 times. In support of these priorities, we are working on four key initiatives. I'll talk about our expanded delivery service model. We are pleased to see adoption rates rising on our most profitable fulfillment option, BOPUS, which accounted for 20% of Sally US and Canada's total e-commerce sales during Q2, up from 11% in the prior quarter. Ship from store represented an additional 20% of Sally US and Canada's total e-commerce sales for the quarter. Next month, We will begin offering highly competitive same-day delivery times for both our Sally and BSG customers. Our Sally customers will be able to get product to their front door in as little as three hours, and our salon pros will have the ability to receive product within two hours. We believe that BSG has a unique competitive advantage in its ability to provide this high-value option to its pro customers based on its nationwide store footprint. In the second half, we'll be adding another convenience option for our BSG customers with the rollout of BOPIS, which is currently slated to commence in the June timeframe. A second initiative we've been focused on is the replatforming of the BSG digital storefront, which I am pleased to tell you is on schedule to be completed this month. This new, more robust platform will be a game changer in terms of how we recruit and engage with our stylists. Equally important We are now able to offer our stylists new, value-added features like product reorders, bulk orders, and navigation enhancements that ultimately improve efficiency and strengthen the profitability of their businesses. A third and important area of focus is loyalty and CRM. As you may recall, we relaunched our Sally Beauty Rewards loyalty program just over two years ago, and BSG just launched its first loyalty program last fall with our Private Label Rewards credit card. As we've layered on the Private Label Reward card and added CRM capabilities and tools, we're really poised to increase customer interaction along the entire purchasing journey and ultimately drive incremental sales. In Q2, purchases from our loyalty members at SallyUS in Canada exceeded 72% of total sales, and BSGUS surpassed 7% of total sales. The fourth key initiative for fiscal 2021 is continuing the rollout of JDA, which represents an important step in our multi-year transformation journey. We continue to expand the operations and functionality of our North Texas Distribution Center and remain on track to bring JDA to the majority of our remaining DCs by the end of the calendar year. At the core of all of our strategic initiatives is our mission to be the leader in color with an underlying focus on customer centricity. To that end, we are currently executing a full reset of our color offerings in all Sally US stores that will be completed in May. This initiative, which really puts color at the heart of every Sally location, included the relocation of all hair color, including vivids, to the front of the stores We also brought in new brands and SKUs, added eight feet to the color aisle, and dedicated four feet specifically to lightening and blonding, which has become a high volume category over the past year. We designed the new layout to create a better experience for our color customers. Looking at the second half of fiscal 2021, we believe the business is well positioned, especially within the context of an improving external environment. Consumer demand for our core categories is robust. Both the Sally Beauty and BSG segments are strengthening as consumer confidence improves, our gross margins remain strong, and our teams are executing well against our key initiatives. That said, our expectations are somewhat tempered by ongoing store closures in international markets and salon capacity restrictions in the U.S. Notwithstanding any incremental disruptions from the pandemic, We are expecting Q3 net sales growth in the high double digits, primarily reflecting the easy comparisons to last year when we experienced broad-based store and salon closures. More specifics on this shortly from Marlo. Before turning the call to Marlo, I would like to briefly touch on our ESG initiatives. First and foremost, we recognize the importance of our social and corporate responsibilities, ESG issues, and the essential role they play in our long-term performance and value creation. Our strategy is focused on five key areas where we believe we can have a meaningful impact. Our employees, diversity and inclusion, energy and the environment, product development and sourcing, and data protection and security. We encourage you to review our full ESG report, which provides a detailed view of our best practices, and was recently posted to our Investor Relations website. Now I'll ask Marlo to discuss the financials and then we'll look forward to taking your questions.