Sally Beauty Holdings, Inc.

Good morning, everyone, and welcome to the Sally Beauty Holdings conference call to discuss the company's third quarter fiscal 2026 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.

Thank you. Good morning, everyone, and thank you for joining us. With me on the call today are Denise Paulonis, President and Chief Executive Officer, and Adrianne Lee, 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 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. We're pleased to report a solid quarter, delivering top and bottom line results within our guidance ranges. Fiscal Q3 net sales totaled $935 million, with comparable sales flat. Gross margin expansion and ongoing cost management translated to strong bottom line delivery. Adjusted operating income totaled $87 million, and adjusted diluted EPS came in at 55 cents, an 8% increase versus a year ago. This performance enabled us to generate strong cash flow from operations of $81 million and continue to return value to shareholders in the quarter. These results highlighted both the underlying strength of our business model and the benefits we are delivering from our strategic initiatives. The quarter was led by strong growth in the SALI segment, which delivered comparable sales growth of 1.6%, including a robust 3.5% increase at SALI US and Canada, driven by balanced growth in both transactions and ticket, as well as strong performance across both stores and e-commerce. From a category perspective, color continued to be a standout performer. On a total Sally segment basis, color was up 8%, while Sally US and Canada delivered growth of 9%. Additionally, fragrance continues to build impressive momentum. Hair care trends have started to improve leading up to the category reset we talked about last quarter, which is rolling out this month. We believe our plans to refine our hair care product assortments, as well as the expansion of men's, will enable us to drive improvement in hair care sales performance over the coming quarters. New brands coming as part of the assortment update include Yellow and Nature Lab Tokyo. We're also expanding Design Essentials, The Dew, and Camille Rose. And in men's, we're doubling down on key on key brands, including Clubman and Level 3, to name a few. Importantly, our push into new, highly relevant categories, such as men's and fragrance, expands our total addressable market and positions us to capture increasing share over the long term. Looking now at our BSG segment, stylist sentiment has remained fairly consistent through fiscal 2026. Appointment books are steady and color services continue to be strong, while add-on services have been inconsistent. In regards to shopping behavior, stylists remain value-focused and choiceful with additional spending, particularly in hair care and styling tools. For the quarter, VSG comparable sales declined 2.1% with strength in color and nails offset by softness in hair care. In the quarter, we lapped the April 2025 launch of K18, pressuring the flat hair care sales trend of the last few quarters. We know that both value and newness drive this category, and we are laser focused on accelerating our innovation pipeline, expanding distribution, and reinforcing our value proposition to reignite the care category in the coming quarters. In fact, we have recently started to action stronger price-forward messaging, which is translating to higher customer engagement and an improvement in trends. Additionally, as we start Q4, we have expanded Milkshake to hundreds more stores, and just launched VirtuLabs in 300 stores. I'll now walk you through the latest updates on the initiatives supporting our four key growth drivers. Our first strategy is understanding and activating the customer. At Sally, CRM and performance marketing are driving new customer acquisition. The success of save and skip the salon messaging has been a key driver and we'll be building on that in Q4 with the rebranding of the campaign to Your Beauty Journey, No Salon Required. As we continue to reimagine beauty retail through immersive education and community connection, we're building on the success of our recent Sally Color Fest celebrations with college campus events across the southeast this month. Our experts will be bringing beauty resources, product discovery, and career networking opportunities to students at the University of Florida, Florida A&M, University of Alabama, University of Houston, and University of Texas at Austin. This is another great example of how our teams are always developing innovative ways to position Sally firmly at the center of beauty culture while driving customer engagement and new customer acquisition. Another important tool for driving customer acquisition at Sallie is our licensed colorist on-demand service, offering free color and care advice. In fiscal Q3, average weekly consultations exceeded 5,200 and the number of new customers increased by 28% versus the prior year. LCOD customers continued to outspend non-LCOD customers driven by increased frequency. In a nutshell, this service brings new customers to Sally and increases engagement by providing the digital equivalent of the accessible, friendly education and support that our store associates are known for. Now shifting to our second growth driver, unlocking and harvesting digital value. Global e-commerce sales increased 11% in fiscal Q3, driven by continued strength in Sally's marketplaces as well as the rollout of updated updated apps of both business segments earlier this year. On the Sally app, we're seeing strong engagement and higher conversion with order and sales growth outpacing sessions. Average order value is strong, up 6% in fiscal Q3. Notably, buy online, pick up in store represented the majority of app order volume in the quarter, our most efficient delivery channel. At VSG, order and sales growth also outpaced sessions as features such as faster checkout, simplified reordering, inventory near me, and Apple Pay provided an improved customer experience. Similar to the Sally app, a significant portion of orders are being fulfilled through buy online, pick up in store. Moving to our third growth driver, differentiating with product assortment and innovation. Across both segments, innovation has always been a key competitive differentiator and central to unlocking growth. At Sally, strong performance in both own and national brands is being fueled by innovation. Newness and brand refresh initiatives are resulting in improved performance across own brands like Beauty Secrets, Ion Lux, Salon Care, and Texture ID. As mentioned earlier, we also have a significant newness update coming on the national band front with the assortment update in hair care. At BSG, recent brand launches like Milkshake, Keratin Complex, and Epilogue by Danger Jones continue to build momentum. As I mentioned, we have more innovation coming in fiscal 27. Our fourth growth driver is accelerating new growth pathways. Let's start with our Sally Ignited initiative, where we have seen significant runway ahead. As of the end of July, we have completed 33 store refreshes year-to-date, and we have another 17 planned for fiscal Q4. This puts us on track with our plan to complete 50 remodels in fiscal 2026, which will put us at 80 ignited locations by the end of September. As we watch KPIs, we are incredibly pleased with the way customers are responding. Traffic, dwell times, UPT, and ATV all continue to move up and to the right with sales growth nicely outperforming the fleet. From a category perspective, nails and fragrance remain standout performers. We are well underway with planning for the next phase of the rollout. More to come next quarter on our strategy for increasing scaled ignited business in fiscal 2027. In the skin and spa category, we are ramping DSG's presence and methodically expanding our footprint. During the quarter, we added Image and Matter of Fact brands to another 250 stores and launched Amika skincare across all of our US and Canada locations. Before wrapping up, I'll briefly touch on our Happy Beauty initiative. At a high level, our mall locations continue to outperform with strong performance in key categories such as cosmetics, fragrance, and skincare. Ahead of the holiday season, we plan to open another 10 mall locations Equally exciting, we're preparing for the upcoming launch of our Happy Beauty e-commerce site at the end of the fourth quarter. As we focus on driving sustainable, profitable growth, our Fuel for Growth program is delivering benefits across gross margin and SG&A. We are tracking to our plan to generate $45 million of benefits in fiscal 2026, and we'll have captured about $120 million of cumulative run rate savings over a three-year period at the conclusion of our fiscal year in September. Entering the final months of our fiscal year, the strength of our operating model, the traction we're seeing across our strategic initiatives, and our ability to navigate dynamic macroeconomic environments give us confidence in the path ahead. I want to thank our teams across the organization for their relentless focus on our customers and disciplined execution as we work to deliver long term shareholder value. Now I'll turn the call to Adrianne to discuss the financials. Thank you, Denise. We're pleased to report another solid quarter. Fiscal Q3 consolidated net sales totaled $935 million, approximately flat to last year, including 50 basis points of favorable impact from foreign currency translation, partially offset by operating 39 fewer stores. Consolidated comparable sales were flat, reflecting strong growth of 3.5% at Sally U.S. and Canada, Offset by Softness in the Balance of the Portfolio Global e-commerce sales growth remains strong, up 11% year-over-year, representing four consecutive quarters of double-digit growth. We maintained healthy gross profit in the quarter, with adjusted gross margin expanding 40 basis points to 52.4% when compared to a year ago. This improvement is primarily driven by higher product margins from our Fuel for Growth program. Looking to Operating Expenses Q3 adjusted SG&A totaled $404 million. This is an increase of $5 million versus the prior year, partially due to higher labor and rent expense, partially offset by $2 million in Fuel for Growth benefits. Important to note, our adjusted SG&A has been relatively consistent quarter in and quarter out, reflecting continued focus and discipline. During the third quarter, we captured pre-tax Fuel for Growth benefits of $9 million across gross margin and SG&A. For full year 2026, we remain on track to deliver approximately $45 million in savings, and as Denise mentioned, this would land us at our committed run rate savings of approximately $120 million over the course of the program. Adjusted operating income totaled $87 million in the quarter. Adjusted diluted earnings per share was $0.55, which is a $0.04 or 8% improvement versus the prior year. both adjusted operating income and adjusted EPS came in at the high end of our guidance range as healthy growth margin and disciplined SG&A management resulted in strong bottom line performance. Moving briefly to segment results. For Sally Beauty, top line grew 2.2% to 539 million and operating earnings were up 7.3%. Net sales growth of 2.2% included 90 basis points of favorable impact from foreign currency translation, partially offset by operating 30 fewer stores. We delivered comparable sales growth of 1.6%, driven by transaction growth of 0.6%, and an increase in average ticket of 1%. For the global Sally Beauty segment, color grew 8%, partially offset by care down 6% versus the prior year. Sally e-commerce continued its double-digit growth trend and grew 20% to $52 million, representing 10% of segment net sales for the quarter. DALI US and Canada e-commerce sales grew an impressive 28% in the third quarter. Growth margin increased 60 basis points to 61.5%, driven primarily by our Fuel for Growth program. Segment operating margin expanded by 80 basis points to 16.6%. In the BSG segment, net sales were 397 million, a decrease of 2.4% versus a year ago and includes operating nine fewer stores. Comparable sales declined 2.1% with transactions down 3.2% while average ticket was up 1.1% versus prior year. From a category perspective, color grew 1% and care declined 5%. BSG e-commerce sales increased 4% to 58 million representing 15% of segment net sales for the quarter. Gross margin at BSG expanded 70 basis points to 40.1%, primarily driven by higher product margins from our Fuel for Growth program. Segment operating margin declined 20 basis points to 12.3%. We ended the quarter with a healthy balance sheet and strong cash flow. At quarter end, cash and cash equivalents totaled $173 million, and we had no outstanding borrowings under our ABL credit facility. Inventory levels at quarter end totaled $996 million, down 1% versus last year, and in line with our expectations. The business generated strong cash flow from operations of $81 million and free cash flow of $62 million. This enabled us to invest in the business, pay down $20 million of term loan debt, bringing our net debt leverage ratio to 1.4 times, and to return cash to shareholders through the repurchase of 25 million of stock under our share repurchase program. Moving to guidance. Entering the final quarter of fiscal 2026, we are narrowing our full-year outlook to reflect our current top-line trends of sales growth momentum in Sally, U.S. and Canada, the underlying strength of our core hair color category, double-digit e-commerce growth, and the effectiveness of our marketing initiatives offset by softness in the care category. We are pleased with how our teams are navigating and delivering results. For the full year fiscal 2026, we expect consolidated net sales in the range of $3.725 to $3.733 billion, which includes approximately 30 basis points of favorable impact from foreign currency rates. Comparable sales are now expected to be approximately 0.5%. Adjusted operating earnings are now expected to be in the range of $329 to $335 million. Adjusted diluted earnings are now expected to be in the range of $2.04 to $2.08 per share, which compares to our prior range of $2.02 to $2.10. The following guidance remains unchanged. 50% of free cash flow is expected to be deployed to share repurchases Capital expenditures are expected to be approximately $100 million, and free cash flow is expected to be approximately $200 million. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A.