Sally Beauty Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2021 fourth quarter and full year results. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Additional instructions will be given at that time. Now, I would like to turn the call over to Mr. Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. With me on the call today are Denise Polonis, our new president and chief executive officer, and Marlo Corbier, chief financial officer. 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 sallybeautyholdings.com forward slash investorrelations. I'd 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 factor 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 Denise to begin the formal remarks.

Thank you, Jeff, and good morning, everyone. I'm thrilled to be here with a little over a month under my belt, and I'm looking forward to meeting and talking to our analysts and shareholders in the coming months. Having served on the Sally Beauty board since 2018, I'm fortunate to be bringing firsthand perspective and a deep working knowledge of the business on day one. I see a significant opportunity to utilize my leadership skills and retail and finance background to drive the business into a new era of profitable growth. capitalizing on all the new capabilities enabled by the transformation of the business over the past four years. Virtually every aspect of the company's infrastructure has been retooled across technology, marketing, merchandising, supply chain, HR, finance, and talent, creating a robust platform from which we will grow. I'm incredibly proud of our exceptional teams who took on this challenge and helped us evolve into a modern, dynamic, omni-channel beauty retailer that is now set up for long-term success. Before talking a bit more about our future, let me share a few highlights from last year. In fiscal 2021, full-year net sales grew 10%, gross margins exceeded 50%, and adjusted EPS was up over 97%. Additionally, we generated strong cash flow from operations of $382 million. We delivered consistent performance throughout the year and concluded fiscal 2021 with fourth quarter results ahead of expectations, reflecting strong operational execution. We're particularly pleased to see ongoing momentum and consistency across the business, despite the various impacts of the pandemic. As we embark on our new fiscal year, our mission to recruit and retain color customers remains a core component of our roadmaps. and continued tailwinds around self-expression through hair, product sustainability and innovation, and the growing number of independent stylists continue to reinforce the strength of our color and care business. Putting the customer first and enhancing their experience with us is critical to our success. We're continuing to prioritize the customer through personalization, inspiration, education, and training. We're also focused on creating the easiest shopping experience for our customers. Through our robust omnichannel platform and multiple fulfillment options, our customers can get product how they want it and when they want it faster than ever before. Against the backdrop, we'll be focusing on four strategic growth pillars to drive the top line in fiscal 2022. Leveraging our digital platform, driving loyalty and personalization, delivering product innovation, and advancing our supply chain. First, I'll talk about digital. As we increasingly become the unrivaled source for color inspiration, education, and training, our goal is to create an easy, reliable, omni-channel platform for our DIY enthusiasts and stylists. At BSG, we completed a critical set of strategic initiatives in fiscal 2021 that positioned us to become the go-to platform for stylists. We redesigned the Cosmoprof website, introduced new value-added services around ordering, and rolled out focus and two-hour delivery. In addition, we'll be connecting our store network to the Cosmoprof app this month to further enhance focus and two-hour delivery. In short, our BSG stylists can now access everything sold by Cosmoprof on their phone and within two hours. Bringing together all these initiatives truly positions BSG as a compelling resource for the stylist community. providing them with the tools they need to run their businesses most efficiently and profitably. At Sally, we've seen a positive customer response to our expanded fulfillment model, and we're continuing to gain traction across BOPIS, ship-from-store, and rapid two-hour delivery. In our most recent quarter, Sally U.S. and Canada stores fulfilled 34% of e-commerce sales, as BOPIS fulfilled 34% of e-commerce sales, as both have comprised 22% and ship from store accounted for 8%. Rapid 2-hour delivery was launched in the middle of the quarter and represented 4% of Sally US and Canada e-commerce sales. Additionally, the adoption of these new fulfillment options exhibits our power of scaling our new tools and capabilities to meet the strong desire our customers have for this incredible convenience. We're also laser-focused on improving in-stocks across our store and VC network through our new JDA platform so our customers are able to access our inventory, however they choose to shop, and get most products in just two to three hours. As we continue to scale and optimize a full suite of omnichannel services for both our SALI and BSG customers, we believe e-commerce can reach 15% or more of sales in the coming years. In fiscal 2021, global e-commerce sales penetration was just over 7%. Importantly, we know that an omni-channel customer at Sala US and Canada spends approximately 75% to 80% more with us annually than a brick-and-mortar customer. So this is not just a sales channel shift. It is a tremendous opportunity for growth. Moving now to our second growth pillar, loyalty and personalization, which ties directly to our digital strategy. As many of you know, the rise of personalization has changed the table stakes in retail. With our rapidly growing loyalty program and a new push towards personalization, we have a significant opportunity to drive increased customer engagement and sales. At StyleUS in Canada, approximately 74% of our fourth quarter sales came from our loyalty program. At BSG, because stylists have to register to shop with us, we have data on 100% of our customers. Additionally, approximately 8% of our BSG sales in the quarter came from our rewards credit cards that was launched about a year ago. These are remarkable numbers, and we've only scratched the surface in leveraging this asset. In fiscal 2022, we'll be utilizing data science to engage our customers with inspiration, education, and personalized offers at every touchpoint. At SALI, this includes recommendations on product usage, reminders to replenish on time, and incorporating DIY and educational components at key moments in their journey. At BSG, this means showcasing new product arrivals, reminding stylists to restock their back bar, and notifications to replenish key stylist products. We believe these actions will drive higher customer lifetime value by minimizing attrition, growing spend per transaction, and increasing purchase frequency. Fiscal 2022 will also see us investing further in digital marketing and social media campaigns to drive traffic and sales. Our current marketing campaign, You by Sally, continues to generate a tremendous amount of attention from customers and the trade. Celebrating the transformative power of hair color, the campaign has received extensive coverage from beauty editors and generated millions of views on social media. Our third growth pillar is product innovation. Fiscal 2022 will be highlighted by a big infusion of innovation across Valley and BSG, and we'll be driving a large part of that ourselves. The pipeline of new products is robust and includes our own and third-party brands across multiple categories. We will continue to emphasize and support sustainable and clean products, which are increasingly being selected and commanding a premium from customers. Importantly, we believe our authority in color and care provides a logical path and powerful platform for standing up new brands that go beyond our four walls. The first initiative is our new exclusive brand line of vivid colors at Sally called Strawberry Leopard. Launched to a positive response in October, this is a youthful, Gen Z-focused brand that speaks to our ability to increasingly attract younger consumers who value self-expression. Concurrently with the launch, we created an individual digital platform for Strawberry Leopard that immerses consumers in the brand egos and enables a direct shopping experience. As the brand gains velocity, we expect to unlock potential opportunities for expansion into additional distribution channels, including mass, beauty, and third-party e-commerce. The innovation pipeline at BSG is equally exciting, starting with Olaplex's new toning shampoo that just launched in September. Olaplex is a great example of a high-profile brand that continues to innovate and remains a key partner to us. Looking ahead, we're continuing to focus on being at the forefront of innovation with new product and brand launches to excite the consumer planned for 2022 and beyond. Turning now to our fourth growth pillar, another critical element of our focus on putting the customer first is supercharging our supply chain to ensure that we are in stock in color and care every time. A great deal of the heavy lifting has been done, and we're now executing the final phase of JDA implementation. The system is up and running in all BSG locations and the majority of our Sally stores. We're currently rolling out JDA to our remaining locations and fully integrating with our North Texas DC. Once completed, we'll have a highly automated, integrated network with the best-in-class capabilities across inventory forecasting, localized assorsement, pricing and promotions, and in-stocks. We believe our initiatives under these four growth pillars will allow us to drive top-line growth of 3 to 4 percent and generate strong operating cash flows this year. This reflects our ability to maintain strong gross margins while mitigating inflationary pressures through careful cost controls, pricing levers, and store optimization. To that end, our 90-store optimization pilot remains in progress. We are continuing to gather and analyze data from the sample. And I'm pleased to note that we're significantly exceeding our sales transfer targets. In fiscal 2022, we expect to launch a multi-year program designed to maximize the value of our large store portfolio while offsetting inflationary headwinds. By rationalizing this leak, we can improve productivity and profitability while delivering a convenient omni-channel experience that benefits our customers. We're entering fiscal 2022 with solid infrastructure, a well-defined roadmap for growth, and favorable industry dynamics that support the significant opportunity in front of us. In the coming months, I look forward to working with the team to build out additional growth opportunities that will fuel our business and create meaningful shareholder value in 2023 and beyond. In addition, I'd like to thank all of our associates across our store networks, field operations, distribution centers, and support centers throughout the globe for their passion, dedication, and hard work which helped us finish a strong 2021. Thank you for everything you do each day to make us better and for serving our customers. With that, I'll turn the call over to Marlo to discuss the financials, and then we'll look forward to taking your questions.

Thank you, Denise, and good morning, everyone. We're pleased to conclude the year with strong fourth quarter performance, which exceeded the expectations we provided on our last earnings call and reflects strong consumer demand coming out of the pandemic. Topline growth, solid growth margins, and careful cost control drove strong earnings and cash flow. Net sales increased 3.4%, and same-store sales rose 2.1%, reflecting strong consumer demand with only some minor impact from pandemic-related restrictions in Europe. Fourth quarter traffic and conversion trends remain consistent with what we've experienced throughout the pandemic. Traffic was down, but units per transaction, average unit retail, and average ticket all increased versus prior year. Basically, customers are still shopping less frequently but are buying more when they transact with us. Global e-commerce sales were $71 million, representing 7.1% of total net sales as compared to $63 million in the prior year. The year-over-year increase reflects ongoing strength as we continue to scale our digital capabilities and implement our strategic initiatives around fulfillment and customer engagement. Looking at gross profit, we achieved fourth quarter gross margin of 50.6%, reflecting our ability to maintain solid performance above our 50% target level. On a year-over-year basis, gross margin deleveraged by 50 basis points, reflecting a higher mix of BSG sales, which carried a lower margin profile in the quarter. Moving to operating expense, fourth quarter SG&A totaled $387 million, up 5% versus a year ago, primarily reflecting higher labor costs and planned increases in marketing spend. Looking at the new fiscal year, we anticipate that SG&A dollars will increase and rate will be up slightly on a year-over-year basis. Our expectation takes into account increased labor and freight costs, increased expense planned in our international markets related to a full reopening in 2022, as well as investments across our growth pillars that Denise discussed earlier. We believe our store optimization program will serve as an important offset to wage inflation beginning in the latter part of 2022 and then more significantly in 2023. Turning now to earnings. We delivered strong profitability in Q4. Adjusted operating margin came in at 11.7%, adjusted EBITDA margin was 14.5%, and adjusted diluted EPS increased to 64 cents. Looking at segment results, at Sally Beauty, we saw strong consumer demand in the U.S. Same-store sales increased 2.3%, and e-commerce sales totaled $29 million for the quarter. For Sally U.S. and Canada, the color category increased 4%, while vivid colors grew 5%, representing 28% of our total color sales as comparisons normalized to prior years. Other categories also performed well. Styling tools increased by 31%, and textured hair was up 16%. Gross margin declined slightly at Tally, which reflected strong product margins offset by higher distribution and freight costs. Segment operating margin increased to 18.1% compared to 18% in the prior year. In the BSG segment, same-store sales increased 1.7% as salons returned to more normalized capacity levels in virtually all of our U.S. markets. E-commerce sales totaled $42 million for the quarter. The color category grew 9%, Hair care was up 5% driven by Olaplex, and styling tools increased 9%. Gross margin and profitability at BSG reflect the same dynamics we saw in Q3. Specifically, we're experiencing higher sales from our larger volume full-service customers coming out of the pandemic, and those customers tend to be lower margins. Segment operating margin was down slightly versus prior year at 13.2%. Moving to the balance sheet and cash flow. We ended fiscal 2021 in strong financial conditions. For the full fiscal year, we generated $308 million of free cash flow and retired approximately $420 million of debt. We ended the quarter with $401 million of cash and cash equivalents and a zero balance outstanding under our asset-based revolving line of credit. Inventories at September 30th totaled $871 million, up 7% versus a year ago. as we've reinvested in our inventory levels coming out of the disruptions from the pandemic. In addition, we were pleased that our strong performance over the course of fiscal 2021 helped drive our net debt leverage ratio down to 1.69 times at the end of September. Now, turning to our full year fiscal 2022 guidance. We are confident about how the business is positioned heading into 2022, and we expect to achieve the following. Net sales growth in the range of 3% to 4%. Net store count to decrease by approximately 1% to 2%, driven primarily by Sally US stores, as we continue to optimize our portfolio. Growth margin expansion of 40 to 60 basis points. Gap operating margin growth of 90 to 110 basis points. And adjusted operating margin approximately flat to 2021. The business has demonstrated remarkable resilience during the past 18-plus months, and our teams have done a terrific job of navigating the dynamic macro environment. As the business continues to strengthen and generate strong cash flows, you can expect to see us prioritize strategic growth investments as well as return cash to shareholders through the restart of our share buyback program. As a reminder, during the fourth quarter, our board of directors approved an extension of our share repurchase program through September of 2025. which currently has over $700 million remaining under the authorization. Additionally, we are evaluating opportunities to further optimize our capital structure, which could result in incremental interest expense savings. Finally, I want to call out a housekeeping item related to disclosure. Beginning in fiscal 2022, we will be replacing our same-store sales metric with comparable sales. which will include sales from our full service divisions and franchise operations, including any related e-commerce sales. In 2022, for each quarter, we will disclose both current and prior year comparable sales under the new definition. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A.

Thank you. And ladies and gentlemen, if you wish to ask a question, please press 1 and then 0. You will hear tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the same one, zero command. Once again, for any questions or comments, please press one and then zero. And one moment please for our first question. And our first question will come from the line of Oliver Chin and your line is open.

Hi there, this is Katie on for Oliver Chen. I would just love to know sort of the trends in the color cycle and what you guys are seeing, particularly in terms of, you know, we see the world reopening and more people going into the office. We'd just love to know what you guys are seeing in color.

Yeah, so, you know, we've seen some really, really strong trends, you know, in the last several quarters in color, certainly on the self-expression side, the vivids. I'm still continuing to see that remain strong. You know, again, trending to plus five compared to last year. And that was a really strong quarter last year as well. So really excited to see those trends continued. What we have seen now is the styling categories are starting to take hold and gain traction as well. We're starting to see a little bit more comfort, I think, in people going out. The back-to-school sessions all started to contribute to that. So not only in the styling elements of our care category, but also styling elements within our equipment categories as well.

Okay, great. And then just to follow up really quickly, I would love to know more about sort of the margin profile of your e-commerce channel versus the store channel, and especially if you ramp up the e-commerce penetration, how you expect to, you know, get to your margin expectations for that channel. Thank you.

Yep. So e-com, you know, you've heard us talk about this over several quarters. We've been in a kind of pivot in the model, if you will. As we ramped up e-com through the pandemic, you know, our first you know, order of business was really to make sure that we could get the product to the customer, especially during shutdown periods. So we ramped that up very quickly. Really excited about what the team could do in a very short order to be able to turn on a lot of capabilities. We're now at a point where we have a full suite of capabilities. We are in a position now where through this year we've turned on, you know, started with ship from store and curbside. We now have BOPUS, and now we have rapid delivery and two-hour delivery on both the SALI and BSG sites. The other exciting part that's happened most recently is in Q4, BSG launched their app. And we've seen really tremendous traction there. We're up to about 25% of our e-comm sales right out of the gate are transacting through that platform. If you look at e-comm for BSG in the fourth quarter, e-comm was up 10% or 30% actually. Really strong growth there. BSG overall was up 6% in the quarter. Half that was being driven by the e-comm strength. The other half was being driven by full service. So really excited about the traction we're making there. From a profitability standpoint, we are more profitable on the pro side. That is approaching more of what you would expect from store margins. On the Sally side, we have work to do. We've talked about that over the quarters. We did pull back intentionally this last quarter. our SALI site and have repositioned that, just really focused on customer satisfaction. We've seen those results start to take hold, and we're starting to see our customer satisfaction scores go up. We're seeing our splits go down, our cancel rates go down, and we're also seeing what Denise commented in her prepared remarks. We're starting to see more of a shift and a take hold on the BOPIS and the rapid delivery Bobus, as you know, has the same store margins and actually has increased profitability profiles in that we end up with basket ads most often there. On the rapid delivery, that is mostly paid for by the customer. So with a shift towards those fulfillment options, we're also seeing an improvement in the profitability of Sally and starting to gravitate that more towards what we would expect to see from a store margin. And then the other thing, like I said, with the splits coming down and the cancel rates coming down, that also helps with profitability.

Thank you. Thank you. Our next question will come from the line of Rupesh Pathak with Oppenheimer, and your line is open.

Good morning. Thanks for taking my question, and congrats on the nice quarter. So I guess the first area I just wanted to start with is with your sales guidance. So you guys did guide to a 3% to 4% increase for the year. Is there any more color you can provide in terms of the cadence, either, I don't know, maybe on the quarter farm, maybe by the half in terms of how you guys are thinking about that growth, just given, you know, how volatile the business was even, you know, as we lock these comparisons?

Yeah, no, good question. You know, as for the way that sales pacing is, you know, we're not that seasonal, but historically our sales are slightly higher in the back half of the year versus the first half. And we would expect the same as we look into fiscal 2022 from an absolute dollar perspective. But when you're looking at it in terms of growth rates, the growth rate percentages will be slightly higher in the first half compared to the back half, and that's because we're comparing against the prior year COVID disruptions that you just alluded to. We had some significant disruption from really the November to February surge, and that included significant international shutdowns. And then we came out of that with some heavy restrictions. But then as the year progressed, things did get better on the COVID front. So the back half of the year is expected to have more normalized comparisons. We'll also continue ramping digital and e-com capabilities to grow sales as we progress through the year. And we'll also see benefits from what we think are supply chain disruptions that will be tapering. And then also as we have growing benefits from leveraging and supercharging our supply chain, supply chain initiatives that you heard on the call as we have better assortments and our in-stocks will improve as well as we go through the year. So inventory will continue to build. It'll get healthier in the coming months. When you think about gross margin, that's expected to expand between 40 and 60 basis points. It will ramp over the course of the year with the majority of the expansion will be coming in the back half. And then as you think about SG&A, those dollars will vary slightly with sales. But the dollars will be a little bit more level-loaded when you think about that across the quarters.

Okay, that's really helpful, Collar. And then as you guys look at the top one, I mean, you know, pretty positive comment just on the innovation front. And, you know, your business had a lot of pandemic headwinds in this past fiscal year. Can you just help us frame, like, you know, how you guys are thinking, you know, within that 3% to 4%? Like, you know, is that a conservative guy, just, you know, some of the drivers you see there? And then internationally, I know, is at least I think is not fully recovered. So is there a way to quantify, I don't know, you know, where international is today versus 19?

Hi, Rupesh. You know, I think the color we give you on sales is we feel good about the plan that we built. The plan is mostly based upon the four key items that I talked about earlier today around digital personalization, loyalty, and innovation, and then the help of our supply chain continuing to improve with in-stocks improving behind that. When we think about the role that innovation and product will have, it's certainly one of the pillars, but it doesn't really stand alone. It ultimately has to get through the customer, through the channels, with the communication around it. So we feel great about our exclusive brand, Strawberry Leopard, and what's going to be coming through Sally with that and the ability to grow it. And as we talked, thinking about that as an incubator brand that might be able to go outside the walls of Sally over time, but really building it as a digitally native brand in terms of how we're going to cover with its own e-commerce channel. And then on the BSG front, we continue to see good innovation there, and we expect to continue to see good innovation come through as well. So innovation is one of the four pillars that is out there. As Marlo mentioned, we did still see some headwinds in Europe last year with the pandemic that was there. So part of our plan is hinged upon, you know, recovery in Europe and to a lesser extent in Mexico. But I would say all the businesses are well poised for growth. And when we think about the numbers that we're putting out there, we think that they're realistic about what we can go and do. And the plan is really built to deliver on it.

Okay, great. And I'll seek in one quick last one, just on the supply chain. I know last quarter, you guys called out supply chain headwinds. There wasn't much mentioned in that, so is that a significant headwind going forward, or do you guys generally feel like you've been able to manage it, or you're in a good position to manage it this year?

Yeah, Rupesh, I'd say both. You know, it is a headwind. There's no doubt that we can't overlook the fact that whether it's ocean freight, domestic freight, labor to fill and work in both the DCs and drive the trucks, that it's a real concern for all of us out there. We feel like we have built a good plan to mitigate all the parts that are within our control to mitigate. So I think, as you know, we're not as exposed to some other specialty retailers in terms of overseas markets. Only about 10% of our business really comes in from overseas, so a little less exposure there. We've been working really hard with our vendor partners, and they've been great partners in helping us understand what lead times need to be and when we need to get orders placed to be able to keep things on the shelves. So we're working hard around that as well. We're also working to consolidate our POs so that when trucks and boats arrive, we're able to move them as quickly as possible, as full as possible across the country and manage that as well. So all in all, working the levers that we can best control, and I think we still have a bit of a tailwind from our implementation of a pooling delivery system that we did here in the U.S., where we've just taken a little bit less over-the-road trucking going forward and a little bit more localized shipping that seems to be a bit more reliable today. So by no means are we overlooking as a headwind, but I think that we have a really well-thought-out plan how to manage as much of it as we possibly can.

Thank you. Best of luck.

Thank you. Our next question will come from the line of Mark Altslager with Baird, and your line is open.

Good morning. Thanks for taking my questions, and congrats on a solid quarter here. So the first question is for Denise. As you come in here with fresh eyes, we'd love to just get your initial views on what's left to be done to really position the company for success and what you see as maybe the top incremental opportunities, medium to longer term.

Yeah, happy to talk about that. I was absolutely thrilled with the opportunity to come and join the organization, and And I'd start a little bit with what I'm most excited about because I think it's things that we've actually already done or are real tailwinds that are going to help drive the business. I think the combination of a strong team and a strong foundation has set us up so that initiatives we undertake have a real chance of success. And by that, you know, we have a team that successfully navigated through the pandemic and delivered a transformation, changing our ability to execute against CRM, loyalty, e-commerce, merchandising, technology, And that's just the short end of the list. But when you think about the initiatives that we're talking about today, continuing to propel our digital and e-commerce business, having and building a personalization program in the way that we can speak to our customers, knowing 74% of our sales and where they're coming from from customers and the ability to reach that. I think it is one of the biggest untapped opportunities that we have to really leverage our ability to know our customers. I can't say it enough, 74% across Sally and 100% of our customers across BSG we can have a direct conversation with, which is, I think, just a fantastic statistic and something I'm very excited about and a big opportunity. I also think that we're playing in the right space. The hair category has a ton of resiliency, good economy, bad economy. Everybody still wants to take care of their hair. And there's great tailwinds. Tailwind's around self-expression. So some of that is vivid, but some of it's also just about people feeling great about themselves and wanting to think about their hair as being part of that. Product innovation is probably ramping at some of the fastest rates that I think we've seen in the industry. And then with independent stylists, it's a very different go-to-business model, and we're really set up well to serve them. So another real good point for us to be able to build on and drive growth go forward. When I think about the pillars that we have out there, knowing our customers at the top of the list, getting after that customer with personalization, with our digital capabilities, clearly at the top of our list. And then I think some of our most untapped potential remains in leveraging our supply chain. The foundation that we've set up is absolutely phenomenal. We need to finish a little bit of work in JDA, particularly in the fulfillment to our stores using the JDA platform. And as we get that going and we get all of our stores in stock as supply chain pressures ease, I think we have a nice opportunity to continue to build customer satisfaction and loyalty, which we hope will build lifetime value of a customer.

That's really helpful. Thank you for all that detail. A follow-up for Marlo. I just wanted to ask about the labor backdrop and if you could provide a little bit more color on that. the level of incremental investment in wages you're anticipating in the coming year, if you're able to quantify that, and maybe the levers that you see to offset that inflationary pressure.

Yep. Yeah. So, you know, we've been talking about this for several quarters as well. And even, you know, in the last probably back half of 2021, we've certainly felt some wage increases. As we look into 2022, we know that that will be even more intense. So we've certainly planned that in. We've also planned in increases in freight and other distribution and supply chain costs. So we are seeing inflationary pressures. We have planned that in. We've also planned in to return marketing back to kind of more pre-COVID levels as a percent of sales. So you'll see incremental marketing spend in there as well. And then if you compare it year over year, I just don't want to forget that we will have international markets that we'll be back to fully open, and so we'll have to see that there too. But most importantly, we've created capacity to be able to invest in our growth initiatives. We still have more technology investments that we want to make, some that will be about scaling and optimizing and supercharging our supply chain with supply chain tools. We'll be implementing more pricing and promo tools, And then we'll continue to enhance and evolve our digital platform. So excited that we're continuing to focus on our priorities, continuing to invest in our most strategic initiatives that are going to drive the top line. You know, as you think about the offsets, we're very focused on offsetting and mitigating the cost pressures. Store optimization will be a key element to that. We'll start to see benefits now. That will continue to – to gain traction more towards the back half of this year and then further into 2023 and beyond. I've talked about econ profitability. That also helps. But a big lever for us is pricing. We will pull pricing levers. We started to do that over last year. The good news is we haven't seen a whole lot of change in volume or spending behaviors or consumer behaviors there. So with a differentiated core product and being very strategic about the pricing that we take, We believe that we've already had success and have confidence that we'll have that going forward. So, you know, with our business returning to a strong top line, you know, we think we're positioned really well to continue to invest in growth. We'll drive leverage in the model. We'll expand margins over time, but in the near term, you know, we'll offset the cost headwinds, and we'll deliver the operating margins near last year and pre-pandemic 2019 levels. But it will be strong sales and will grow profit dollars and will generate a significant amount of cash. So, really looking forward to this year and I think we're positioned really well to deliver some really strong results.

Thank you. Best of luck and Denise, welcome.

Thank you.

Thank you. Our next question comes from the line of Steph Wissink with Jefferies and your line is open.

Margin. So the fiscal year 22 guidance calls for operating margins to be flat, but guides 40 to 60 basis points of gross margin expansion. So just wondering what's offsetting the SG&A drag. And then I have one more follow-up afterwards.

Yeah, so you mentioned gross margins. You cut off a little bit in the beginning, but I think gross margins were guiding to 40 to 60 basis points expansion. Again, we're going to be offsetting costs both in that line item with supply chain and freight costs that we'll overcome with some pricing levers that will help drive that expansion. In terms of SG&A, I just mentioned some really strong headwinds there when it comes to inflation, both from wage and other costs like freight, and then also making sure that we continue to invest in our growth initiatives. So that's where you get the offset. So, again, pretty excited about the model. We believe we're set up well to continue to generate really strong cash flows and position ourselves well for long-term profitable growth. And then over time, you know, we'll be able to leverage and continue to expand operating margins over time.

Okay, thank you. And then could you just talk about the fleet rationalization? So what are you seeing in terms of transfer rates, pickup and e-comm, and your ability to retain those customers when a store closes? Thank you.

Sure. We're really excited about the program and where it is headed. We're still in the very early stages. We have 90 stores that we've put through a closure test. We're continuing to evaluate that. It's still a little early for a full read, but early indication is promising that the sales transfer rate is there. Interestingly, the sales are not transferring necessarily all to e-comm. We're seeing a good mix of transfers to stores. As well as e-comm, we're also seeing transfers in our BSG business over to full service. And with the growth of the app in our BSG business as well, yet another vehicle for folks to continue to access the brand. So it's not one size fits all, and good to see that customers are finding us in different ways. And I'd also say, you know, we've gone through a pretty concerted marketing effort to be certain that our customers know where to find us when we have chosen to close a store. So I think a really good execution there in doing that. The key to us is now watching this a little bit longer over time, right, to understand if the transfer rate we're seeing is temporary or if it remains consistent at these high levels. We do have plans to continue to close some stores in fiscal 22. Net store count will be down, you know, around 50 stores or so, which is 1% or a little over 1%. That's really a mix of closing about 100 stores across Valley and BSG, but being offset by some opportunistic new store openings. This is the real opportunity for us to position where our customer is and where we think that growth potential is. And so we will continue to open new stores very selectively where it would make sense to do so. And then as we watch through this year, we'll hope to be able to talk to all of you guys a little later this year about the longer term program around where we are on a longer-term optimization plan. Like I said, we're just a little early to call the final results, but we have a good batch of stores that we're monitoring now and some more to come in 22 to be able to make that call. And if we can make all of that work, which I think we're feeling pretty good about, as Marlo mentioned, it's one of the key offsets we have in terms of driving some efficiencies into the P&L while continuing to grow the business.

Great. Thank you so much.

Thank you. Our next question comes from the line of Simeon Gutmann with Morgan Stanley, and your line is open.

Good morning, everyone. Hey, Denise. How are you? Hi, Marlo. So I wanted to ask around the fourth quarter and then within the guidance, if you could, I know you mentioned the transactions and the ticket trends were consistent with the prior run rates. Can you give us a little more color on that? Can you talk about comp transactions versus ticket at SBS, and then in particular for the U.S., and then within the guidance for next year, the total sales guidance of up three to four, how much is price versus volume?

Let me start with the last, and then I'll come back to the detailed questions. You know, when we look at the three to four, you know, I think, you know, Denise hit on the main growth pillars there. We're coming into the year pretty excited. We have a great foundation that we're going to be able to leverage. We've got a great roadmap going through the four growth pillars. We have really favorable industry dynamics as well. We've got a resilient category. Our categories are in demand. We have trends that are in our favor. All that points to some nice tailwinds, I think, that give us confidence into the top lines. Pricing is an important lever that I've talked about, both through margin enhancement as well as driving top line. But it is not the majority. The majority of our growth is coming from the growth initiatives, whether it be the digital initiatives, the innovation initiatives, and then also the supply chain and really improving our in-stocks and our offerings to the customers. In terms of what we're seeing in spending, it's really a lot of the same that we've been seeing. The traffic patterns are getting better, especially as you compare to last year when you're looking at the pandemic periods. But when you compare to the pre-pandemic periods, we're still in the high teens, kind of low 20s. It gets a little choppy here and there. You get some spikes, whether it be stimulus or maybe mid-month child care credit increases. So we see a little bit of choppiness, but for the most part, I'd say the traffic patterns are fairly consistent. They're getting a little bit more consistent month to month, and I would say that they're probably more on the pivot to improving than the other way. So in terms of spending metrics, again, we're seeing reduced trips, but we are seeing more spend per outing. And we do see our average ticket and average unit retail is going up.

Got it. Maybe to follow on to that, if you look across the Sally Beauty business, can you talk about the range of inflation across the store? I don't know if you can talk about product categories, but which categories are seeing the greatest versus which categories are seeing the least? And then if you could talk about how well you understand the elasticity there, because I think we'll be in an inflationary environment The lower income consumer may be under some pressure, at least in the first half of the calendar, 22. Curious how that could be managed, how you've thought about that into your plan.

Sure. I mean, I'll start off with a little bit on elasticity, and then Marlo can cover off on a little bit of where we're seeing more or less inflation. You know, I think the team has done a great job over the past year. We've had a good chance as we've kind of moved prices across various categories and stores and geographies. to be able to look pretty closely at where that elasticity is. And for the most part, first I'd start by saying I think we have the tools to continue to watch it. And the team spends a lot of time talking about what unit movement is looking like, particularly looking where we've taken price and where we haven't. To date, we have seen it be relatively inelastic for the most part across the places that we have raised price. I mean, at the end of the day, people are still choosing to buy And we haven't necessarily seen a tradeaway from a specific product or brand. What I would say, you know, going forward is it's also the focus for us for this year and being able to be very attuned to what people are choosing and not choosing. And the great news is with the basket data that we have, we can actually look at specific customer baskets and be able to diagnose for that customer. Are they trading down a brand? Are they trading away from something where we might have done price? So we're going to be really focused on it as we work our way through the year. I'll turn it over to Marlo just to talk a little bit about where more or less inflation might be coming through right now.

Yeah, I think it's probably, you know, we do see it coming, obviously, wages hitting everybody. But as we look to our vendors and as they continue to pass pricing on to us, which is a normal course, it might be a little bit more intense as we hit these inflationary periods. But we have the ability to pass those costs on and we've done that. And we've actually, you know, now talked about with more informed tools that Denise was just referring to, you know, being able to expand on top of that as well. So we feel like we're in a pretty good spot there. The other thing I would say is just in terms of the consumer behavior, you know, in terms of tough times, whether it be recessionary, whether it be pandemic, whether it be, you know, tough economic times, you know, I think that the priority is still, you know, our consumer, we find they prioritize their beauty, and they aren't going to let their hair go. So that's been a good thing to see, again, to continue, you know, through the pandemic, that there's such resiliency in this category that gives us confidence that we'll be able to continue to service the customer even when the times get tough.

And I'd add one final point, and that's specifically on the color business. When we think about the color business, whether it be for a retail customer or a pro, They're generally quite loyal to a brand. They've figured out what works for them. They know how to use the product. They're comfortable with the outcome and results. So in all places where you think about the stickiness of a customer to a particular brand, you probably see that more in color than you do in many consumer categories out there just because they want that outcome that they want. We also see that being a piece of traction in both businesses to be able to mitigate what a bit of price increase might do in terms of how consumers might think about their choices.

Okay. Thanks, everyone.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James, and your line is open.

Great. Thanks. Good morning. First question is actually on share or purchase, which obviously you've got the authorization program in place, but haven't done much in terms of the program of late. Just as you're thinking about next year and sort of recovery in place and a little bit more of a return to normal, Vivid's still pretty strong. How are you thinking about share or purchase and other decisions on capital allocation? And then I'll follow up. Thank you.

Yes. Yeah, you know, I think we're in the best position we've been. We have $400 million of cash on the balance sheet. We don't have anything outstanding on our ABL. You've seen us pay down over $400 million of debt this past year, and we're really pleased about our net debt leverage ratio. It's at 1.69 times, and our liquidity is well above pre-COVID levels. So all that said, we are well positioned to deploy excess cash It has not been our goal to keep cash on the balance sheet. We generally run somewhere under $100 million if you go back to historical pre-pandemic levels. So we're pretty excited about our position here. We're going to continue to stay committed to investing in our growth priorities, but now we are in a great position to be able to start to add buybacks to our capital allocation priorities. We will restart our share repurchase program in 2022. As you mentioned, the board did authorize $700 million, which is left on our authorization plan, to be extended into September of 2025. And the other thing I'd mention is we do have some good options coming up on our debt. So we'll take a look at further opportunities to optimize our capital structure and look for some interest savings along the way as well.

Great. Thank you. And then, Denise, welcome first. As you think more about what you might do differently, you mentioned more on technology, but perhaps can you give a bit more color on a few other areas, for example, like stores, just footprint, assortment, and then also your thoughts on product mix and your ability to push price points from here? Thanks.

Sure. Thank you for the welcome. A lot built into that question. You know, I will say there are many, many ideas that we have underway and under discussion. And kind of four weeks in, lots of places where I think that we have room to grow and expand. You know, the couple of things that are on my very near-term priority list are around digital and e-commerce. We now have the capability to maximize how we utilize those tools and those areas of our business. Taking that modernized approach and getting it into the hands of our customers, which is about transacting, but it's also about education and influence and the ways that we can communicate and make things more simple for our DIY customers, but also reach our stylists with more messages about what's more new and different and training opportunities. I think that the tools that we have today are poised to be better utilized and poised to do more messaging for us and as we can start things like personalized journeys. You can think about a customer who, for the first time, comes into Sally. They buy color because they want to try to do their own hair. Well, we now have the opportunity to follow up with them and be able to tell them about how to now take care of their colored hair, what the right care products might be, how to think about when it's going to be time to come and repurchase and try again, give them videos to help them make that whole experience easier. We can actually connect that with people. As I mentioned in my prepared remarks, one of the things that I'm most excited about and I think we have the most opportunity to push on is how many of our customers we know, how many of them we can talk to. It's a really untapped potential for us to grow in that space. Now, I also think about the opportunity that we've talked about where we are definitely leading with color and care. It's who we are. But we have the ability to expand that conversation with the customer to the more peripheral spaces of how we serve them. Marlo mentioned, with people trending back to going out and kids being back in school, things like styling tools are becoming more relevant and there's more innovation there to come too. So even pushing around hair, I think we have some great opportunity in Tailwind. But one of the things that we are working on, and we'll have more to come and talk about over the next few quarters, is a much broader definition of where our growth could come from and what we are poised and have capabilities to be able to do that others might not be able to do in this space. You know, a lot of it could still touch around hair, but could also be a bit broader than that in terms of leveraging the relationships that we have and more of a teaser of work underway. So I'd just say more to come on some other growth building opportunities that we are thinking about internally right now.

Great. Best of luck. Thank you.

Thank you. Our next question comes from the line of William Warder with Bank of America. And your line is open.

Hi. I just have two. The first is you've mentioned the wage pressure. I guess I was wondering if we could try and put that into a little better context. Would it be in the kind of 5% range that you're seeing? And I guess are there stores where you're having trouble staffing where you may be having to operate with reduced hours.

Let me start. I think overall, I think wage pressures, it's a universal problem and universal challenge right now in terms of just the labor market. We're not immune to having some of those pressure points, and we do have different areas of the country where maybe there's a little bit more pressure than not in terms of staffing. I will say that the team does a great job in thinking about this at a very localized approach. You know, you're not going to hear us talk about a standardized increase in wages that you might hear from some of the largest retailers. But looking very locally in terms of what the appropriate wages are for the markets that we're in, thinking hard about what our definition of flexibility means in terms of, you know, hours and shifts in our DCs as well as in our stores. And then we have what is a natural benefit to us in our stores in particular in that many people who work in our stores are tied to a larger beauty environment. They might work in our stores part-time and also be a stylist. They might be in school and learning to become a stylist, and they have a bit more of a natural affinity to the product that we sell that also creates a different sense of belonging of opportunity when we think about going to market. So still seeing things that a lot of other folks are seeing, but I think managing it very much on a localized basis to be working to keep our stores kind of fully staffed, our team members developing. And I'll turn it over to Marlo to talk a little bit more about overall wages and what we've built into our plan.

Yeah, I guess if you think about it from a P&L structure, you know, wages obviously one of our largest components of our cost structure. I think we've talked about a little bit in the past trying to kind of give some sort of context to size. You know, if you look at it from a segment point of view, it runs anywhere from 35% to 50% of the total cost structure would be related to payroll. You know, I've talked about we have taken some very strategic wage increases to invest in our best talent as we went through this year and saw that intensify a bit in the back half. As we look into next year, it's another probably 6% to upwards of 9%, just depending on where you are in this localized grid, of further wage cost pressure that we built into the plan.

That is very helpful. And then secondarily, with regard to, I think your net leverage target is 2.5 times. You guys are at 1.7. Should we kind of assume that these shareholder-friendly activities that you'll pursue this year will will kind of get you back towards that target?

You know, I think what we're coming on is we're in a very, very good place with our leverage ratio right now. And so, you know, with our cash generation and cash on the balance sheet, we have a tremendous runway to do it all, to invest in the business, to return shareholder value back through buybacks, potentially other means, as well as continue to look at our capital structure, look at our debt stack, continue to optimize that. So, We think we're in a good place with our leverage ratio and we just kind of leave it there.

Thank you.

Thank you. And at this time, I'm showing no further questions. Speakers, please continue with any closing remarks.

We thank you all for joining us today and we are incredibly excited about how we ended our fiscal 2021 year. We feel like we're set up for a great fiscal 2022 as well. And we look forward to being able to talk and meet with as many of you as we can in the coming year. And a final thank you to all the teams for everything that they do every day to help us grow a business and serve our customers. So with that, thanks for participating in the call today.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

We're sorry. Your conference is ending now. Please hang up.