Sally Beauty Holdings, Inc.

Good morning, everyone, and welcome to Sally Beauty Holdings' conference call to discuss the company's fiscal 2023 third 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. Additional instructions will be given at that time. 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.

Thank you. Good morning, everyone, and thank you 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 would like to remind everyone 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 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. Three quarters into our fiscal year, we are on track with our operating plans and the financial guidance we laid out at the beginning of the year. Engagement from our SALI and BSG customers remains strong, and our core color category is growing in both segments. In Q3, we delivered net sales of $931 million and strong gross margin performance of 51%. Additionally, SG&A expenses were below prior year, supported by a continued focus on cost efficiencies and the realized benefit of our store and distribution center optimization effort. As a result, we delivered third quarter adjusted EBITDA of $119 million and free cash flow of $32 million. On our last earnings call, we needed some softening of transactions and ticket at Sally beginning in late March and continuing into April. Trends picked up in May and remained relatively steady through quarter end. While our low- to middle-income customers continued to spend in our core categories of color and care, they limited their basket ads and remained conservative on what they considered to be non-essential purchases. In turn, at Sally, comparable sales increased by 3%, while comparable transactions were flat, with average ticket up 6%, driven by average unit retail prices up 7%, and units per transaction down 1%. Total color sales increased 3%, and care was down 1%, which includes the impact of store closures. Color continues to see strong momentum at Sally, with gray coverage up 10%. Turning now to BSG, comparable sales decreased by 2%, reflecting a continuation of stylus demand trends we've been seeing for several quarters now. Comparable transactions were up 1%, while average ticket was down 4%, driven by units per transaction down 10%, and average unit retail prices up 7%. From a category perspective, total color sales increased 1%, while care was down 7%, as we lapped some product launches in care in the prior year. We're pleased to see the resiliency in transactions and color sales, as both key performance indicators reflect the healthy ongoing engagement we have with our customer base. At a time when macro dynamics are impacting spending on consumer goods, we remain focused on our strategies to support the long-term growth through our core strategic initiatives, enhancing customer centricity, driving innovation, and increasing operating efficiency. We're seeing good traction in the early days of this work and feel confident that our strategies will continue to build upon our modern and dynamic retail platform that will take us well into the future. Before I provide an update on several of the initiatives that we previously shared, I'm thrilled to tell you about our newest customer-centric growth initiative, the launch of our Happy Beauty Co. value concept. This concept grew out of our focus over the past two years to drive top line growth, best serve our customers, and expand our reach. In our journey to build out our strategic initiatives to grow our core businesses, it became clear to us that there was also ample opportunity for an engaging beauty experience with a value price point offering. Happy Beauty Co. was developed to provide quality beauty at great prices in an accessible, fun, and expressive environment, leveraging our understanding of the industry and our extensive capabilities across product, operations, sourcing, and supply chain. All of our merchandise is priced under $10, and product offerings encompass four key categories, cosmetics and facial care, bath and body, nails, and hair. Our offerings will be comprised of a strong mix of entrepreneurial third-party brands and our own proprietary brands. With our strong track record of product and brand development, we'll be exercising this muscle to bring our customers compelling value alternatives to well-known premium price products. At the same time, we'll be partnering with smaller vendors who view this as a valuable opportunity to build visibility and drive growth for their brands. Our target demographic includes savvy millennials, value seekers, and discount beauty buyers with an average income under $100,000. The concept tested well in our focus groups, and we're excited about the opportunity to pursue a new avenue to drive long-term profitable growth. Over the last six weeks, we have opened three pilot stores, two in the Dallas-Fort Worth area and one in Phoenix. We plan to open an additional seven stores over the next few months to have a total of 10 pilot locations that will serve as a learning environment for us over the coming quarters and allow us to assess the long-term potential of the concept. Now, let me provide some additional updates on our ongoing strategic initiatives. Starting with customer centricity. Our 17 million active loyalty members accounted for 78% of the sales at Sallie US and Canada in Q3. At DSG, rewards credit card purchases represented 9% of sales for the quarter. We are pleased to be holding our Sallie loyalty count steady after executing roughly 350 store closures, and our teams are deploying strategies to attract new members going forward. Sales transfer is in line with our expectations, with more than half of our customers impacted by a store closure spending more with us versus a year ago. In short, we are seeing a more engaged and valuable customer at Sally. Our virtual color expert program, which we're now calling Licensed Colorist on Demand, is currently in 75 stores and continues to perform well with great customer response and feedback. Customers utilizing the service continue to have a higher average ticket and higher net promoter scores than our already strong baseline. Additionally, I'm excited to announce that this program will be launching on our e-commerce platform later in August in the states of Texas and Ohio. We expect to have this rolled out to approximately 20 states by the end of this fiscal year. We're pleased with the trajectory of our Studio by Sally concept as well, which is gaining momentum in its initial month as customers experiment with all aspects of the salon, from tinsel extensions to simple chair rentals. Customer feedback has been positive, particularly around education, inspiration, and the digital experience, and units per transaction are trending above the Sally fleet. We are on track with our expansion plans for the coming months and expect to open five additional locations prior to our fiscal year end. Moving to BSG, as our pilot of Solon HQ enters its next phase of maturation, we made the strategic decision to rebrand the platform as Cosmoprof Direct. During the quarter, we expanded the platform to an additional seven states, ending Q3 with nine states and more than 1,700 storefronts. Our stylists are embracing this new tool and gaining a deeper understanding of how they can leverage this resource to profitably grow their business. Moving on to our second strategic initiative, product innovation and owned brand growth. Product innovation continues to be an important growth driver at both Sally and BSG. In Q3, we saw strong performance at BSG from new product launches, including Amica, as well as Ultimate Repair and Danger Jones, as well as expanded distribution with ColorWow. The pipeline at BSG continues to be robust. We have newness coming in color, care, and nails across key brands. In color, this includes new bright hues from Paul Mitchell, grays and silver tones from Matrix, and a continued focus on blonding, which is a consistent traffic driver. Additionally, this month, VSG will be collaborating with Schwarzkopf on their exciting partnership with the iconic Barbie franchise, with a focus around lighteners, including Barbie Dream Salon Kit and Home Spa Kit. In the care category, we have units from Olaplex, Paul Mitchell, and ColorWow. At Sally, we're bringing innovation across color, nails, tools, and textured hair. This includes two of our highly successful own brands, Bond Bar and Strawberry Leopard. On the heels of our initial success with Bond Bar, we'll be introducing a color line in September, which is among our biggest launches of the year and plan to be a sizable business for us over the long term. Of note, Bond Bar is resonating with our existing Sally shoppers while also bringing in new customers. 20% of our Bond Bar customers are new to Sally. In addition, next month our Strawberry Leopard brand will be rolling out new colors and sprays. In the nail category, we recently completed the launch of Sally Hansen's Miracle Gel and Nail Boo's Gel Polish, where we have an exclusive through calendar year end. Lastly, we're continuing to prioritize textured hair and have a number of new brands hitting the shelves later this month, including Kiss, Aussie, The Dew, and Uncle Funky's Daughter. In Q3, own brand penetration for Sally's segment was 34%, up 150 basis points over the prior year. We expect this to continue to increase as we advance our goal to exceed 50% of sales over the next four to five years. Turning now to our third strategic initiative, capturing efficiencies and optimizing our capabilities. The benefits from our store optimization efforts continue to track in line with our expectations. As a reminder, the bulk of the optimization efforts occurred in December 2022, and we expect SG&A savings to be approximately $50 million, with a $10 million benefit to operating earnings in fiscal 2023. Additionally, as we disclosed in our last earnings call, We've been testing a new shipment frequency to our stores that we believe will unlock more benefits to our transportation costs as well as better labor productivity in our stores and distribution centers while maintaining healthy in-stock levels. I'm pleased to announce that this initiative tested well enough that we have expanded this process to approximately half of our Sally and BSG stores in the U.S. as of the end of July. We're confident that the actions we are taking to fundamentally change the way we operate will enable us to capture efficiencies in the near to medium term, effectively fueling our future and setting us up to reap sustained benefits over the long term. We appreciate the hard work of our teams across the organization and their commitment to serving and delighting our customers. While the macro environment remains dynamic, we remain agile and data-driven as we navigate the near term while advancing our long-term growth agenda. Our path is clear, and we have a relentless drive to deliver sustainable growth and value to our shareholders. Now, I'll turn the call over to Marlo to discuss the financials.