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 mentioned its 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.

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 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. 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 Sally customers and professional stylist 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 Sally 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 Sally's Q2 comp decline, we delivered 130 basis points of gross margin expansion and increased profitability in the segments. Notably, we continue to see strong growth in our core category of color and robust performance coming from our newer digital marketplaces strategy. Looking at VSG, 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 incidence delivered a setback to stylus 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 pickup in trends in the BSG segment, and while we believe the macro environment is having some degree of impact on stylus 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 flow, 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 macroeconomic 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, licensed colorist on demand, product innovation, the Sally brand refresh, and happy beauty. First on the digital front, Our marketplace strategy is enabling us to meet our Sally 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 Sally 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 Licensed Colorist 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 colorists. 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 the brand. We view this elevated level of service as an important differentiator for Sally that is unmatched in the market. turning out a 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, Schwarzkopf, Moroccan Oil, and Wellet. On April 1st, 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 Goddess Maintenance, an innovative hair care brand emerging as a significant player in the biotech-driven beauty revolution. Turning to Sally 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 U.S. stores and on our sallybeauty.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 Sauce Beauty, as well as newness in color from Wella and Eero Eero, which is one of our top of vivid brands that will now be offering great coverage options. Lastly, BondBar 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 the 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 Sally brand refresh. We're moving full steam ahead with the rollout of a fully updated and modernized Sally brand expression across all brand media touchpoints, 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 Sally 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 continue 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 Sally U.S. 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 conversions. At a high level, we've listened 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 locations. As you'll hear from Marlo, we're continuing to drive operating efficiencies through our Fuel for Growth programs. 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 ProColor, 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 a substantial competitive moat through our competitive through our commitment to customer service, education, advice, and inspiration, supported by a modern omni-channel go-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.