Sally Beauty Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2022 fourth quarter results. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question and answer session. If you have a question, please press 1, then 0 to place your line in queue. As a reminder, this conference is being recorded for replay. Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Please go ahead, sir.

Thank you. Good morning, everyone. Thanks for joining us. With me on the call today are Denise Polonis, President and Chief Executive Officer, and Marlo Cormier, 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 sallybeattieholdings.com. 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 factor section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made on 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. In fiscal 2022, we delivered full-year net sales of $3.8 billion, gross margin over 50%, and adjusted EBITDA of more than $500 million. We did this by leveraging our people, platforms, and scale to delight our core Sally Beauty customers and BSG stylists amidst persistent inflationary pressures and supply chain disruption. I'm particularly proud of our team's ability to navigate the numerous macro challenges of the past few years, becoming a more agile and focused organization overall. Importantly, during our transformational period from 2017 to 2021, we built the infrastructure and key foundational elements to take our business well into the future, including our CRM platforms, our advanced digital commerce capabilities, and our enhanced supply chain. On today's call, we'll be sharing our vision for the Sally Beauty holdings of the future, including new strategic initiatives we'll be focused on over the long term, and we'll provide our long-term growth algorithm that we'll be executing towards over the coming years. Ahead of that, let me take a moment to comment briefly on the current operating environment as well as share a few highlights from fiscal 2022. First, the operating environment. As we ended fiscal 2022, inflationary pressures continue to influence customer and stylist behavior. In Sally US and Canada, the inflationary environment continues to cause some of our customers to color less frequently and reduce the size of their basket when they shop with us. While the situation is not improved, Of note, we believe our focus on customer service and our pro quality for less marketing is resonating, limiting additional pressure on sales. In BSG, our stylists are focused on saving time and maximizing profitability. We continue to see them purchasing closer to need while responding favorably to promotional bundles and education for express services. We believe salons had a healthy back-to-school season followed by some softening of demand once customers transitioned into their fall routine. On the supply chain front, while improving, some of our vendors are still experiencing raw material shortages, which is impacting stock levels in a few of our top performing SKUs. As we look to fiscal 2023, we're expecting a similar operating environment to what we saw at the end of fiscal 2022. Turning to wins in fiscal 2022, I am pleased to share several highlights. Throughout the year, we remained at the forefront of product innovation across both the SALI and VSG segments. This includes our strong partnerships with premier brands like Wella, Matrix, Joico, Olaplex, and WeDad, as well as owned brands like Ion and Strawberry Leopard. We also grow our loyalty programs. As you know, our loyalty program drives the majority of our sales at Sally U.S. and Canada and is an important indicator of customer retention. As of year end, the number of Sally U.S. and Canada active loyalty members was 17 million and represented 77% of sales for the fiscal year. At BSG, our rewards credit card continues to benefit our pro customers in helping them manage their working capital needs for their business. The rewards credit card comprised 9% of BSG sales for the fiscal year. New conveniences and increased personalization enable us to better serve our ROA customers. Initiatives ranging from Sally's virtual color expert and two-hour deliveries to personalized shopping journeys were met with tremendous customer response and continue to gain traction. Another important means for better serving our customer is the advancement of our supply chain. As a top destination to shop for professional color and care, our goal is to be in stock in these core categories every time for our customers. And we made great strides last year towards increasing speed to market and improving our in-stock levels, notwithstanding macro-related supply chain disruption. The underlying strength of our supply chain also allowed us to significantly expand our partnership with Regis Salons during the latter part of 2022. After a multi-quarter rollout, we now have full distribution for all 5,000 plus redislocations. Finally, we further strengthened the balance sheet in fiscal 2022 with the full repayment of $300 million outstanding under our senior secured notes, while returning $130 million to shareholders through the repurchase of almost 7 million shares. Our historically strong cash flow generation and our healthy balance sheet leave us well positioned to invest in new business models and services to drive growth and return value to shareholders. As I shift my comments to our longer-term vision and strategic initiatives, I think it's important to reiterate that underpinning our advancements in fiscal 2022 is our operating model centered on owning professional hair color and care, for both the DIY enthusiasts and professional stylists. At Sally Beauty, we are distinguished by our differentiated core in color and care for home use, and this is supported by the unparalleled expertise, education, and content we provide to our customers. At BSG, we are the largest North American distributor of professional color and care, and we offer stylists and salons the most extensive portfolio of third-party brands in the market, most of which are under exclusive distribution rights. Beginning in fiscal 2023, we will be leveraging and building upon these core competencies and competitive advantages as we embark on our new strategic initiative to drive growth and profitability. Our three strategic initiatives are as follows. Enhancing our customer centricity. Growing high margin owned brands at Sally Beauty and amplifying innovation. and increasing the efficiency of our operations and optimizing our capabilities. Moreover, we'll also be focused on advancing our ESG and our diversity, inclusion, and belonging commitments. Let's dive into our strategic initiatives. Our first initiative is enhancing our customer centricity. I'll start with how this comes to life at VSG. Designed to drive continued growth at BSG, we are building a services ecosystem for our stylist community, designed to empower them to operate more value-added and profitable businesses. This fall, our first step in these efforts was the launch of a new strategic partnership with Salon HQ, which enables our stylists to increase retail sales through strategic customer engagement while carrying less inventory. PlanHQ's customizable digital storefront platform gives our stylists the ability to curate a product selection from thousands of choices and enable clients to purchase directly from their shops without having to hold inventory. By providing our stylists with a digital storefront, a seamless funnel, and powerful support pools, they'll have the ability to sell the full line of BSU products and increase the profitability of their business. In addition, stylists and salons will be able to engage their customers using advanced marketing tools to present product recommendations and follow up on previous orders. Initial response from the stylist community has been tremendous and the concept is gaining traction. As we look beyond fiscal 2023 for BSG, in addition to our stylist platform with Salon HQ, we are exploring additional value creating services while continuing to amplify innovation and leverage our exclusive distribution rights to help our stylists grow their businesses. On the retail side of our business, we know how much our customers value the inspiration, education, and advice they get from Sally. We're leveraging this core competency to create an unraveled platform for the future. We already have certified color consultants who provide in-store education and advice. And for more complex needs, Sally customers can access next level expertise by connecting with our virtual color experts through a live video call conducted onsite in our stores. We began piloting this convenience in the first quarter of last year and have found that our Sally customer loves this incrementally higher level of touch and counseling. We currently have 45 stores offering virtual color experts and plan to expand this to approximately 30 additional stores as well as our Sally website in fiscal 2023. Building upon this high-touch service offering, we've created Studio by Sally, a new concept store that includes a DIY-centric salon. Studio by Sally allows for personalized appointments with a licensed stylist who will train and educate the consumer on how to color their own hair and achieve their desired results. This is a new and inventive way to engage, educate, and empower consumers using interactive experiences to showcase our on-trend color and care expertise and ensure drive product sales. We conducted extensive market research to vet this concept, and the results tell us that there's a great deal of excitement among not only our core customers, but also lapsed customers and non-Sally customers alike. Studio by Sally will have a digital first focus from virtual check-in and digital education throughout the store to DIY demos streaming at the storefront and take-home videos from individual salon teaching sessions. We plan to pilot an initial six stores in fiscal 2023 and believe there's an opportunity to grow this concept to 100 locations throughout the US over the next three to four years. Turning to our second initiative, growing our high-margin owned brands penetration, and amplifying product innovation. While you note that delivering product innovation has been a core tenet of our operating and growth model for years, this remains of crucial importance for our company, and you can expect to see us build upon our already strong track record in the quarters and years ahead. Indeed, innovation has been a key differentiator for both Valley and BSG, and is expected to be an important driver of growth going forward. We will continue to cultivate differentiated products through strong relationships with the best innovators and beauty companies in the world. We see our customers and stylist reach as an exceptional asset in driving joint growth with our vendor partners. As part of this effort, we'll also be prioritizing secondary categories, notably nails, to ensure that we're on trend and in stock with focused assortments beyond our core. Additionally, we see great opportunity grow our high-margin owned brands. This includes powerful brands that we have built from the ground up, like ION, which today is a $280 million brand. Strawberry Leopard is another great example of our innovation engine. We're pleased with the traction we've gained with it in just one year. We will continue to be highly selective in our approach to developing proprietary brands, focusing on areas where we can leverage our expertise to fill a void in the marketplace and garner meaningful share. Our latest innovation, BondBar, showcases this strategy. As we announced back in October, BondBar is a new line of pro-quality bonding products that we are bringing to market at a tremendous value to customers. We're incredibly proud of this innovation, which leverages our vast knowledge of hair care addresses the growing consumer demand for powerful hair repair solutions, and fills a void in the market for bonding products at accessible price points. As we look ahead, we believe owned brand penetration at Sally can increase from 33% of sales in fiscal 2022 to over 50% in the next four to five years. Now I'll turn to our final strategic initiative, increasing the efficiency of our operations, and optimizing our capabilities. We'll focus on three opportunities in this area, including optimizing our store base, consolidating and leveraging our enhanced supply chain, and capturing efficiencies by rethinking the way we work. First, store optimization. Our investments in recent years allowed us to build a robust omni-channel platform that will serve us well into the future. As we focus on delivering a seamless omnichannel experience, we've enhanced our digital offerings to meet customers where and when they want. In turn, our channel mix has shifted, and we expect it to continue to evolve. In response to this shift and continued expense inflation, during the past year, we conducted a 90-store optimization pilot, which yielded positive results, with sales transfer exceeding our target. After extensive analysis of those sample stores, We've made the decision to accelerate our store optimization program and close approximately 350 additional locations with the majority closings in December of 2022. Most of the closing stores are Sally stores based in the US. This optimization program allows us to improve productivity and profitability while delivering a convenient omnichannel experience that benefits our customers. Moving on to our supply chain, the progress we've made in modernizing our supply chain enables us to increase efficiency while supporting growth. On the efficiency side, we'll be closing two small distribution centers in Oregon and Pennsylvania and transferring the volumes to larger distribution centers. While continuing to delight our customers, these actions will enable us to realize cost savings and serve as an important offset to inflationary headwinds. Further, the muscle we have built within our supply chain in recent years has become a source of growth. Notably, it has enabled us to significantly grow our Regus partnership, with sales volume expected to double from fiscal 2022 to fiscal 2023. The visibility and strategic importance of this expanded relationship raises our profile among other brand partners and establishes a solid foundation for future chain growth. Last, but certainly not least, we have launched a Fuel for Growth initiative that is focused on rethinking the way we operate our business over the longer term, supporting our longer term operating profit margin objectives. Our teams are energized by our new strategic initiatives and remain committed to delivering innovation to both our SALI and BSG customers across product, services, and education. Over the long term, We believe these initiatives will enable the business to generate low to mid single digit net sales growth, gross margins over 50%, and low double digit operating margins. I'm confident in our strategies and impressed by our team, whose passion, perseverance, and creativity are allowing us to build upon our core strengths and create new pathways for growth in the face of a highly dynamic external environment. Looking ahead, I have tremendous conviction that our ability to leverage our infrastructure and capabilities while introducing exciting new initiatives will set us up to deliver improved top-line growth and profitability. We appreciate the support of our shareholders as we embark on a new set of initiatives to drive growth and create long-term shareholder value. Now I'll turn the call over to Marlo to cover the financials.