Sally Beauty Holdings, Inc.

Good morning everyone and welcome to Sally Beauty Holdings' conference call to discuss the company's second quarter of fiscal 2025 results. All participants have been placed in a listen-only mode. After minutes of prepared remarks, there will be a question and answer session. Additional instructions will be given at that time. Now I'd like to turn the call over to Jeff Harkins, Vice President of Invest Relations and Treasurer for Sally Beauty Holdings.

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'd 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 ANN 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 reconciliation of its adjusting items and non-GAP 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 full remarks.

Thank you, Jeff, and good morning, everyone. For our second quarter, I'll begin by saying I'm pleased with our team's ability to deliver a 10% increase in adjusted operating earnings and 20% growth in adjusted earnings per share over the prior year despite uneven top-line trends against a challenging external backdrop. Adjusted operating margin expansion of 90 basis points was supported by healthy gross margins of 52% and strict expense control. Additionally, the business continued to generate strong free cash flow in Q2, which we deployed towards further strengthening our balance sheet and returning value to shareholders through share repurchases. Looking at top-line trends, after a choppy start to the quarter, which we discussed in our February earnings call, the latter part of our second quarter reflected a more challenging external environment than we anticipated. This impacted purchasing behavior among both our SALLI customers and professional stylists at BSG. While the beginning of the quarter primarily reflected transitory factors such as weather, wildfires, and an unusually harsh flu season, we believe consumer sentiment and spending in the latter part of fiscal Q2 were impacted more broadly by economic uncertainty. In our SALLI segment, comparable sales dipped into the slightly negative territory, declining 30 basis points. Customer behavior was similar to trends across the consumer landscape, reflecting a slow start to the quarter. While sales did pick up in March relative to January and February, trends remained below our expectations as the macro environment impacted consumer sentiment. Despite SALLI's Q2 pump decline, we delivered 130 basis points of gross margin expansion and increased profitability in the segment. Notably, we continue to see strong growth in our core category of color and robust performance coming from our newer digital marketplace's strategy. Looking at BSG, comparable sales declined 2.7%, reflecting the combination of an historic flu season and a challenging macro environment, which more than offset two key areas of ongoing momentum in the segment, expanded distribution and product innovation across categories and brands. Indeed, this year's unusually harsh flu incidents delivered a setback to stylist appointment books, resulting from the combination of their own illness and customer cancellations. This in turn naturally limited their product needs and purchasing behavior. With the flu season behind us, we're seeing a pick up in trends in the BSG segment, and while we believe the macro environment is having some degree of impact on SALLI's behavior, we anticipate that sales trends will continue to improve in the second half. In this uncertain environment, we are taking actions in the areas we can control, protecting margins and free cash flows, and continuing to execute on our strategic initiatives. From a tariff perspective, our exposure to incremental costs is limited to approximately 20% of our cost of goods sold, including approximately 10% of cost of goods tied to China, and the rest mainly coming from Western Europe. In addition to having limited exposure, we also have levers to pull that will enable us to maintain our healthy gross margin profile. This includes a combination of cost sharing with vendors and price increases in the coming quarters, and sourcing optimization in the medium to long term. The fiscal Q3 guidance and full year outlook we're providing today assumes that the macro economic environment and broader consumer demand do not materially change. Against this backdrop, we remain focused on advancing our strategic pillars of enhancing our customer centricity, growing our high margin own brands and amplifying innovation, and increasing the efficiency of our operations. Noteworthy updates this quarter include our digital marketplaces, license colors on demand, product innovation, the Sallie brand refresh, and happy beauty. First on the digital front, our marketplace strategy is enabling us to meet our Sallie customers where they are, bring new customers to the brand, and drive increasing profitability to our e-commerce channel. In fiscal Q2, e-commerce sales at Sallie US and Canada increased 29% to last year. This reflects strong marketplace growth as well as gains in buy online, pick up in store. In addition to strong performance from DoorDash and Instacart, we're excited to announce the expansion of our store fulfilled marketplace portfolio with the strategic addition of Uber Eats in March. Moving now to our license colors on demand initiative. This continues to be a highly value added service that is gaining increasing traction quarter to quarter. The online platform has grown to approximately 90 licensed colors. Consultations have also grown, exceeding 4,500 per week during our second quarter. All of the leading indicators we track tell us the potential lifetime value of this customer is much higher than non-LCOD customers. LCOD customer spend is about 25% higher, driven by increased purchasing frequency, and we continue to see a high percentage of customers using the service that are new to this brand. We view this elevated level of service as an important differentiator for Sallie that is unmatched in the market. Turning now to product innovation, which is among our core competencies and a key competitive advantage at both banners. At BSG, we're maintaining a robust innovation pipeline across categories and brands. Second quarter launches include color and care products from sought after brands like Amica, Schwartzkoff, Moroccan Oil, and Wellett. On April 1, BSG launched distribution of the cutting edge hair care brand K18 in all stores and our e-commerce site and is off to a fantastic start. We believe K18 creates an opportunity to increase the share of wallet with our stylists. Also in April, we debuted Xotis Maintenance, an innovative hair care brand emerging as a significant player in the biotech driven beauty revolution. Turning to Sallie Beauty, we saw strong performance from many of our own brands in the quarter, including Inspired by Nature, Ion, Beauty Secrets, and Bonbar. In April, we launched Madison Reed Color in select US stores and on our Sallie Beauty.com website. In the second half of the year, we have more innovation coming in color, care, nails, and cosmetics. This includes hair gloss and skin care from Soft Beauty as well as newness in color from Wella and Iro Iro, which is one of our top of vivid brands that will now be offering great coverage options. Lastly, Bonbar will be launching Color Conditioners, which provides great maintenance between coloring sessions. These three initiatives, Marketplaces, LCOD, and Innovation, in addition to personalization and enhanced performance marketing, which are all more mature initiatives underpinning our strategy, drove over 225 basis points of comp sales growth in the quarter consistent with results we saw from Fiscal Q3 2024 through Fiscal Q1 2025 before being offset by heightened macro pressures in Q2. We believe these initiatives will continue to drive consumer engagement and sales over the coming quarters and years. Now, turning to two of our longer term initiatives, starting with our Sallie brand refresh. We're moving full steam ahead with the rollout of a fully updated and modernized Sallie brand expression across all brand media touch points, in store marketing, and our e-commerce site. Beginning this month, the consumer will see a more consistent message across all channels and brand marketing with hair at the center and a focus on elevating Sallie Beauty as a modern beauty retailer that inspires core DIY customers and next generation beauty enthusiasts, which we believe will unlock new customer segments and drive stronger loyalty. From a retail store perspective, the initial eight locations we refreshed in the Orlando market in Fiscal Q1 continued to meet with positive response. We're refreshing an additional five stores in Orlando in Fiscal Q3 and expect to have over 30 total stores completed by fiscal year end, including some in other markets. We're excited about the insights we're gaining with this initial set of stores and our teams are energized by the opportunity to test, learn, read, and react as we continue to progress towards a potential refresh of up to two thirds of the Sallie US fleet. Shifting now to Happy Beauty initiative, we continue to be excited about the potential of this concept and with 20 stores open, we're taking key learnings and acting upon them to further accelerate traffic and conversion. At a high level, we listen to our customers and we're doubling down on product and in-store experience underpinned by great storytelling. A few notable call-outs, we're leaning into Happy Beauty as an indie brand headquarters and focused on key trends such as Korean beauty and fragrance stories, which is a key differentiator for our core customers. We're also making a subtle shift from a pure value message to placing more emphasis on great prices on hot products. And at the same time, we're evolving our marketing messages, highlighting on-trend brands, offering tests before you buy, and utilizing influencer partnerships and social to drive traffic and conversion. We're pleased to see continued engagement with the brand, which gives us conviction that we're on the right path with our refined strategies and focus on mall location. As you'll hear from Marlo, we're continuing to drive operating efficiencies through our Fuel for Growth program, which is on track to generate cumulative gross margin and SG&A benefits of approximately $70 million by the end of the year. While not immune in the current environment, we are operating from a position of strength given the stickiness of our core categories centered around pro color, our Fuel for Growth program, our strong balance sheet, and the resilience of our cash flow generation model. Over the past several years, we've built substantial competitive moves through our commitment to customer service, education, advice, and inspiration, supported by a modern, omni-channel, -to-market model. These differentiators and structural advantages help us navigate periods of uncertainty and create durability. We appreciate the support of our shareholders and remain committed to building long-term value for all of our stakeholders. Now I'll turn the call over to Marlo to discuss the financials.

Thank you, Denise, and good morning, everyone. We are pleased to deliver a third consecutive quarter of operating margin expansion and generate strong cash flow despite a challenging sales backdrop. Second quarter consolidated net sales of $883 million represented a decrease of .8% and included 110 basis points of unfavorable foreign currency impact. Consolidated comparable sales declined 1.3%, reflecting a combination of external factors that impacted purchasing behavior among our Sallie beauty consumers and professional stylists at BSG. This included a difficult macro environment as well as an unusually harsh flu season, the California wildfires, and inclement weather. This is partially offset by strong growth in hair color and digital marketplaces at Sallie, as well as continued momentum at BSG driven by expanded distribution and new brand innovation. At constant currency, global e-commerce sales were $94 million. That's up 6% versus last year and represented 11% of total net sales. Growth margin expanded 100 basis points to 52% in the second quarter. The -over-year improvement is attributable to lower distribution and freight costs and reduced shrink expense across both business segments and strong product margins at Looking at the balance of the year, we expect to maintain our strong margin profile despite the dynamic tariff situation. From a cost of goods perspective, our exposure to incremental tariffs is limited to about 20% of our cost of goods, roughly split between China and Western Europe. Given our current inventory levels, we expect limited to no cost of goods impact in fiscal year 2025. Notwithstanding changes in consumer demand, based on our scenario planning, we anticipate that our mitigation tactics will enable us to largely offset potential cost of good impacts as we look beyond fiscal 2025. Primarily, areas of focus include the following. Cost sharing with vendors, where we have long-standing relationships and constructive ongoing dialogue. Passing on modest price increases on select products where price elasticity is lower. And over the longer term, evaluating opportunities to diversify our pricing base to additional countries. Turning down to expenses. Strict expense control drove -over-year improvement in SG&A dollars. Adjusted SG&A in the quarter totaled $384 million, down $11 million to last year. The decline can be traced to a favorable impact from foreign currency exchange rates, saving from our fuel for growth program, lower advertising expense, and depreciation expense. In the second quarter, we captured an incremental $8 million of pre-tax benefits to gross margin and SG&A from our fuel for growth program. And through the first half of fiscal 2025, we have delivered $20 million in pre-tax benefits. This leaves us on pace to capture $40 to $45 million of savings in the full year, a cumulative program savings of approximately $70 million. Our strong gross margin performance, coupled with careful expense control, enabled us to deliver improved profitability versus a year ago. Adjusted operating margin of 8.5%, increased 90 basis points. Adjusted EBITDA margin of .9% was up 90 basis points. And adjusted diluted EPS of 42 cents was up 20% versus a year ago. Moving to segment results. Sally Beauty net sales decreased .5% to $501 million, including 150 basis points of unfavorable FX impact on 17 fewer stores versus a year ago. Comparable sales were roughly flat at a minus 0.3%, reflecting the external factors that impact consumer spending, including weather, an unusually harsh flu season, and macro uncertainty. Comparable transactions were down 1%, while average ticket was up 1%. At constant currency, Sally e-commerce sales were $41 million and represented 8% of segment net sales for the quarter. That's up 21% year over year, primarily driven by the strength of our digital marketplace strategy. For the global Sally Beauty segment, color increased 4% while care was down 8% compared to the prior year. At Sally US and color was up 6% and care decreased 8%. Growth margin in our Sally segment increased 130 basis points to 61.2%. The year over year improvement reflects three primary factors. Lower distribution and freight costs, higher product margins resulting from our improved promotional strategies and enhanced vendor relationships, and lastly, lower shrink expense. Segment operating margin was strong, coming in at .4% up 40 basis points to last year. Looking at the BSG segment, net sales decreased .2% to $383 million, including 50 basis points of unfavorable FX impact, while comparable sales were down 2.7%. Primarily reflecting the external factors that impacted stylist appointments and related purchases, including weather, an unusually harsh flu season, and macro uncertainty. Comparable transactions were up 3% while average ticket was down 6%. On a constant currency basis, BSG e-commerce sales were $53 million, representing 14% of segment net sales for the quarter. From a category perspective, color was flat and care was down 5%. Growth margin at BSG increased 40 basis points to 39.8%, primarily reflecting lower distribution and freight costs and lower shrink expense, partially offset by lower product margins due to brand mix. Segment operating margin was also strong, coming in at .5% up 60 basis points to the prior year. Turning to the balance sheet and cash flow, we ended the quarter in strong financial condition with $92 million of cash and cash equivalents and no outstanding borrowings under our asset-based revolving line of credit. Inventory levels remained healthy at slightly over a billion dollars, down about 3% to last year. During the quarter, we maintained our balanced capital allocation strategy as we continue to prioritize long-term value creation for shareholders. The business generated strong cash flow from operations of $51 million, while operating free cash flow totaled $32 million, reflecting capital expenditures of $19 million in quarter. Halfway through the year, we have delivered free cash flow of $90 million, and that puts us on track to still achieve approximately $180 to $200 million in free cash flow for the full year. We brought our net debt leverage ratio down to 1.8 times after utilizing excess cash to repay $36 million of term loan B debt in the quarter. We also deployed cash to return value to shareholders in Q2, utilizing $10 million to repurchase 1.1 million shares of stock under our existing share repurchase program. One final note before discussing guidance, you may have seen that today we announced a four-year extension to our share repurchase program, which was set to expire in September of this year. We have approximately $500 million remaining under the original $1 billion authorization. Turning now to guidance, we are introducing third quarter guidance and updating our full-year outlook based on current business trends. Given the evolving global trade policy and how that may impact consumer sentiment and spending, the outlook we're providing today assumes no material change in the macroeconomic environment or broader consumer demand trends. Our updated fiscal 2025 guidance is as follows. Comparable sales are expected to be in the range of flat to down 1% versus prior expectations for flat to up 2%. Consolidated net sales are now expected to be approximately 75 basis points lower than comparable sales due to the expected unfavorable impact from foreign exchange rates. This compares to our prior guidance of approximately 100 basis points. Adjusted operating margin is expected to be in the range of 8 to .5% compared to our prior expectation of .5% to 9%. Our guidance for the third quarter of fiscal 2025 is as follows. Comparable sales are expected to be approximately flat to down 2% versus prior year. Consolidated net sales are expected to be approximately 50 basis points lower than comparable sales due to the expected unfavorable impact from foreign exchange rates. An adjusted operating margin is expected to be in the range of 8 to 8.5%. In terms of deployment of cash, we expect to repurchase approximately $20 million of stock and repay approximately $20 million of during our third quarter. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Oliver Chen of TD Cowan. Your line is now open.

Hi, thanks a lot for all the details. I would love for you to try to compare and contrast the SALI division relative to BSG on the lighter comp versus estimates and what's in your control and what's not there. And then would also just love your thoughts as we forecast the e-commerce going forward. You had a really nice number there. What should we know in terms of that momentum and what will happen going forward? Thank you.

Good morning, Oliver. I'm happy to take those questions. While we saw a little bit lighter sales in those segments in the quarter, we're pleased with the things that are under our control, which are all of our strategic initiatives. And as I mentioned, they delivered about 225 basis points of comp on the total business, which is very consistent to what we've been doing the three prior quarters before we hit a little bit of macro headwind as we came into the second quarter. When you think about the difference between the two businesses, so SALI comps declined just about 30 basis points after growing for three quarters. And that really, that 30 basis point decline was really about a growth in color as well as marketplaces offset by a bit of decline in hair care. What we really just saw was a bit of softening in transaction and ticket compared to the prior quarter, where customers were being more choiceful, particularly at that end of the quarter with a little bit of economic uncertainty and volatility. But really, pleased with the way that we navigated with 130 basis points, improvement in gross margin, 40 basis points improvement in operating margin. And clearly the things under our control there are all of our strategic initiatives, as well as being nimble around promotional cadence. If you turn to BSG, you know, BSG comp decline was bigger. It did follow five quarters of solid sales growth. And when we looked at what really happened there, you know, the stylists got hit early in the quarter in particular with the flu season. They came in and told us they were sick, their families were sick, their customers were sick. It impacted their stylist appointment book quite a bit. And in turn, you saw the pullback in the need for supplies from us. Once again, really pleased with how color performed amidst all of that. And very pleased with the launch of K-18, which we're excited as we've turned to the new quarter to see that be able to build in the business as well. And on the BSG side, we saw strengthening as we went from January, February into March. We've seen continued strengthening in April, and we expect that that will continue as well. Clearly, the biggest things under our control there are our territory expansions and innovation, which we will continue to drive. On the e-commerce front, absolutely really pleased with the results we're seeing. You know, what we're really intersecting now is the strength of the marketplace strategy expansion beyond DoorDash, Instacart, Amazon, Walmart, and now the addition of Uber Eats. We are seeing customers enjoy the convenience of being able to shop with us through all of those platforms. I'll also say our core e-commerce platform is starting to benefit from our personalization initiatives that are ramping up in our sophistication and being able to deliver that right message to the customer at the right time. So we're right about 11% penetration today. We think it's going to continue to grow naturally as our programs evolve and as consumers understand our awareness out there. So looking forward to continued growth.

Okay, just a follow-up. How has StoreRefresh done in terms of traffic and expectations in terms of that StoreRefresh driving some change? And then we're pretty excited or happy about Happy Beauty. What's keeping you in terms of growing that and as you assess a refinement of that model for profitability? It seems like a big addressable market. Thank you.

We're pleased with the start of the StoreRefresh activity. We've had stores open for a pretty short period of time here, so it's a little early to read full results. But we are seeing customers come in and cross-shop a bit more of the store, come in and talk about it being as a sally and just the experience that you get, the sight lines through the store, the appreciation there. We're going to continue to be watching all of the underlying metrics as sales trends kind of come in and stabilize a bit as we have those stores open and get some more open in the market. But pleased with what we're seeing so far on that front. And then when you turn to Happy Beauty, really, really nice seeing that in particular the mall stores that we had opened ahead of the holidays are performing and are quite strong in the mix. With 20 total stores open, we've had a lot of learnings as I mentioned in the prepared remarks and where we're pivoting some things. Feeling good about the path on both traffic conversion as well as .P.T. What we want to see is those continue to trend in that direction that we've been seeing as we assess expansion plans. So more to come in future quarters as we watch those metrics and prepare next steps as appropriate.

Okay, final on the tariff changes which are happening so dynamically. What do you your consumer, how do you think your consumer may respond and what have they thought about in the past relative to all the headlines? Just would love your take as these rates move lower for the hopefully foreseeable future. Thanks.

As you mentioned, it is certainly dynamic. Nothing like waking up this morning with some new news. We're hopeful that with the news that came out morning with the news from the U.K. last week as well that we'll start to get a little bit more clarity and consumers will feel less uncertainty in terms of what their behaviors and their habits will be able to be. That's what we'll be watching for. The hope will be those things settle down a bit. Consumer trends will have less choppy sentiment as all the news cycles come through. But given that was just funny news last night, I think we're all waiting to see how customers respond in the coming weeks as we look ahead.

Thanks. Best regards.

Our next question comes from the line of Corinne Wolfmeir with Piper Sandler. Your line is now open.

Hey, good morning, team. Thanks for taking the question. I'd like to touch a little bit more on the guidance change and how you're thinking about each segment into the back half. It seems like you're a little bit more optimistic on BSG. Is it fair to assume that the Sallie Beauty side is the main driver of the guidance reduction or just how are you thinking about the trends for each segment into the back half?

Thanks. Hi, Corinne. Good morning. What I'd say overall is the guidance is really just reflecting the current environment that we've seen. If we came through the first half of the year, our comps were slightly positive, operating earnings up 7%, operating earnings up 8%, operating earnings rate at 8.4%. The guidance really just says a steady eddy as you kind of look to the second half, perhaps a little bit of softness given what we don't know about the consumer. The two portions of the business, I think when you think about the business, BSG had a bit tougher quarter this past quarter than what the Sallie business did. As we talked about that, our stylist told us that was flu-related behavior. We do expect there to be a recovery there as we go through the second half of the year, including Q3. There's just a bigger recovery that we anticipate. And on the Sallie side, I think we're just expecting that color remains quite robust and care business is likely to remain a bit softer just as customers are being a bit more frugal. We saw that in the fact that we run a four for $30 hair care promotion. Buying four bottles at $30 ended up a little rich to our customers in March. We pivoted and made that by two for $15, and we saw really nice uptake. But that's our indicator of that Sallie customer and where that threshold for spending might be. But overall, we think it's just prudent as we look to the back half of the year to take into account what current business trends are and the uncertainty. We're hopeful that the more upside than what we might have thought last night, in fact.

Great. Thanks, Samantha. That's really helpful. And then on the margin front, pretty good margin performance both on the gross margin and the operating margin line this quarter, but there was a bit of a guidance adjustment. So I guess first, what would you say were the biggest drivers of the margin strengths this quarter? And then what's changing in the back half to drive some of that reduction? I know there's going to be maybe some deleverage with the top line adjustments, but anything else to call out would be great. Thank you. Yeah, thank you. Yeah, so

it's really our fuel for growth program that is driving our margin expansion, both through gross margins as well as the benefits that we're seeing through SG&A. And so right now, we've got about $20 million of benefits that we've already delivered through the first half of this year. And we are on track to deliver another $40 to $45 million on the full year for incrementality. So see that flow through happening now. As we look to the back half of the year, a few things happening. We expect the strong growth margin to continue. On the SG&A side, we will see a bit of a step up in expenses, a bit of that due to the timing of advertising, as well as our investments. And that's tied to our investment in brand refresh. We do have some general cost inflation that happens with merits that come in for our store associates in Q3. But we are looking to fuel the growth offset. A lot of that mitigates. And so we do expect to see some continued strong performance on the earnings side. But we will see a bit of a step up on yesterday.

Thank

you.

Our next question comes from the line of Susan Anderson of Canaccord Genuity. Your line is now open.

Hi, good morning. Thanks for taking my question. I think maybe if you could talk a little bit about just kind of what you've seen, I guess, heading into the back half. It sounds like you're expecting maybe consumers to kind of pull back on spending, but just curious if you've seen any of that since Liberation Day, the decline in consumer sentiment. And then also I'm curious if you're seeing any trade down to consumers kind of doing their own coloring. It sounds like coloring was wrong really at both segments. So I'm curious if you've seen any of that yet.

Thanks. Good morning. Let me start with saying, we thought about the first quarter as we talked about, January and February has some transitory factors, like weather and flu that weighed on kind of retail overall. And then as we came into March, those trends really subsided. But we did see a little bit more anxiety amongst the consumer as news was starting about tariffs and potential impact to the macroeconomic environment. As we started into April, those trends remained consistent. And I think in our guidance, that's what you see reflected in our guidance. What I say underpinning that is, you know, BSG certainly had more transitory factors and we've seen those mitigate and expect that as we're going through our third quarter into our fourth, that you will continue to see a good performance at BSG, even in the current environment that we're in. And then on the Sally side, similarly, as I mentioned, we've seen transactions be a little lighter than we anticipated and that price point and unit of people putting it into their basket, there's some conservatism there. So these are minor pressure points in the grand scheme of things. We're coming off of three quarters of top line growth at Sally, five quarters at BSG. We hope that what we're seeing right now is transitory, but we have reflected that what we saw in March would continue further into the year at this point. In terms of trade down, it's a really interesting question. You know, the world that we see right now is more pressure on a lower middle income consumer than maybe on a middle to higher income consumer that's more likely to be using stylus services, coloring and highlighting and all of those items. You know, we would expect that you would really not see that trade down from pro to DIY unless you did have a full recession. So something that would be much more notable in terms of a wage challenge, employment challenge come through, that would be historically kind of the trigger that you would see there. But we certainly have seen customers looking for ways to extend their services, so ways that they can do touch up in between just to be able to get a few extra weeks between their color. And then in general, we have not seen folks trade down in terms of brand mix in either of our businesses, although people are always looking for value. And as I mentioned, you know, we've seen customers looking for that promotion or looking for that deal on

both businesses.

Thank you. Our next question

comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

Hey, good morning. Just to start, can you talk about quarter to date? Again, I know you said there was some pickup in one of the businesses. I missed that. Are you seeing a similar pickup in quarter to date for both of your businesses?

Good morning, Savannah. We are seeing improved performance as we're into Q3, as we talked about and in particular on the VFG side of the business, that recovery post to the flu situation has been, we've definitely seen that come through. So nice to see that we've picked up from some of those baselines, but remain cautious as we're just looking at the consumer further into the third quarter and fourth quarter, depending on the way the economy moves.

Okay. And then as a follow up to the prior question, because I got most of the answer, there was no tariff built into weaker margin for the back half of the year. Is that correct? Meaning you didn't have any assumption that tariffs were going to weaken the margins or the gross margins on the back half?

Yeah, that's correct. Just given the timing of our fiscal year that ends in September, the timing that tariffs are in inventory position, we do have some purchase orders on hold for China. We don't see any flow through going through of any material impact to this year.

Okay. And then just one more. I know you said there was like flu and weather and things hurt some of the stylists in the business in the early part of the quarter. Do you have any markets where you can control for that? Meaning incidents wasn't as high and or weather was more favorable where you had more normal trends that you can point to from the quarter?

Yeah, what I would say is this flu was pretty broad based, but when you look at other things like the incidents of the LA wildfires or some of the weather situations, we can very clearly see where those pockets got hit harder. When we think about both sides of the business in terms of absolute store closure days from things like weather, fires, employee sickness, it was up notably versus last year, which is the basis of the analysis.

Okay, thank you. Good luck.

Our next question comes from the line of Olivia Tong with Raymond James. Your line is now open.

Good morning. This is Lillian for Olivia, and I was wondering if you could just talk about the current commercial environment. In the past, you've talked a bit about shifting

your strategy. I'm just wondering if you anticipate having to change as things in the sentiment is weaker. Thank you.

I think we feel good about our strategy overall when we talk about the key initiatives that we're leaning into behind customer centricity with things like license colors on demand, our CRM activity and personalization, the marketplaces performance that we've seen, combine that with innovation. We believe that we're on the right track with our initiatives. When we think about anything that could pivot or we think differently about the consumer environment, we're watching that pretty closely, but we think that's more about the tactics rather than fundamental changes to the strategy. I think that we feel like we're on a good track to stay on our commitment to the initiatives that we have out there. Speaking to that, when you think about the quarters leading up to Q2, we work three consecutive quarters for both businesses of top line and bottom line growth. It is not just our sales initiatives starting to perform, but Feel for Growth really helping the bottom line as well. In terms of the core of the business, we're feeling quite positive about

it.

Thank you. As a

reminder to ask a question at this time, please press star 1-1 on your touchtone telephone. Our next question comes from the line of Stephanie Wagner with Jeffreys. Your line is now open.

Hi. I was wondering if you could kind of share what innovation you're seeing drive the most traffic or conversion in stores. Thank you.

Sure. On the pro side of the business, I think that there is definitely a trend around glossing or glass hair looks. That very much smooth look that you see out there is certainly gaining a lot of traction across all services, whether that be color or care. On the consumer side, that trend is there as well, but I'll also say a trend in press on nails is a very interesting one, a different way to get that at home DIY manicure that you can do that we've seen notable strength in. We've also seen pick up in our inspired by nature brand, which would be our free from hair color brand that we have out there. So seeing that come through a bit as well, but we're pleased on both sides of the business to have brands that really support this. So the pro side, our new launch of K-18, Moroccan oil, Amika, ColorWow, Goddess maintenance that's brand new to us are all places where we're able to lean in and support those trends. And on the Sally side, the strength of our own brands and many of those places combined with our brand partners, including Soft Beauty, Wella and others, we're pleased that we're able to support

those trends.

Thank you. And this concludes the

question and answer session. I would now like to call it back over to Denise for closing remarks.

Well, thank you. I appreciate everyone tuning in to hear our update on the second quarter and as we're looking forward to the back half of our year, I appreciate all the interest of shareholders and all that we are doing to drive long-term shareholder value. And I'd just like to take a final moment to thank our team for all they do to help our customers around the globe. And with that, we'll be back with an update next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.