[Operator Instructions] I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Sally Beauty Holdings Third Quarter Earnings Conference Call. Before we begin, I will 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 sallybeautyholdings.com/investorrelations. In addition, given the impact of COVID-19 and consistent with our recent disclosures, we will be providing limited supplemental disclosure for some operating and financial metrics for the months of April, May and June within the quarter. I would also like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and similar words or phrases. These statements are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings' filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. The Company does not undertake any obligation to publicly update or revise its forward-looking statements. 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. With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer. Chris will start by offering thoughts on our third quarter as well as why Sally Beauty Holdings is uniquely positioned to take advantage of consumer trends, respond with agility to the COVID environment and generate cash. Aaron will then discuss our third quarter consolidated and segment financial results, touch on our liquidity and provide some perspective on our fourth quarter. Finally, Chris, Marlo, Aaron and I will be available for your questions. Now, I'd like to turn the call over to Chris.

Thank you, Jeff, and good morning, everyone. What an incredible couple of months it has been. On our last earnings call, we spent time highlighting our aggressive response to the COVID-19 pandemic, the successes earlier in the second quarter on our transformation initiatives and the positive comps our business experienced prior to the onset of COVID. During that May call, we also highlighted our views of changes to consumer behavior, the recession-resistant nature of our categories in our company and our aggressive efforts to reduce cash burn and to tap additional sources of liquidity. Since our last earnings call, we have provided a number of COVID-related updates on all of these topics. And each month, the consistent message has been one of agility, resiliency and decisive action as we continue to grow cash on the balance sheet and maintain liquidity, while quickly getting our store fleet up and running, bringing our team back from furlough and pushing ahead with our fast pivot to the future in our digital business. Progress continues, but I think our team can be quite proud of their efforts in the quarter. In the face of everything COVID can throw at us, we got a lot done. Here are some of the key highlights I want to emphasize for you about the third quarter. We brought down the entire store fleet and then brought it back up again, so that as of today, we are now operating everywhere except a handful of stores in international territories. We pivoted rapidly to e-commerce by rolling out ship-from-store and same-day delivery. We quickly set up contactless curbside pickup at many of our stores as COVID forced us to shut down customer-facing operations. We saw a significant growth in digital over last year even as our store sales were surging…

Thank you, Chris. Good morning. I would like to start my comments by thanking the Sally Beauty CosmoProf and Pro-Duo associates in our stores around the world. Their hard work and creativity in the face of the COVID challenge was and continues to be frankly incredible. I'm going to spend my time today providing some context on the complexity or the puts and takes that are contained within our quarterly numbers. Let's start with revenues. Consolidated revenue was $705 million for the quarter, down 27.7% for the prior year. Consolidated same-store sales for the quarter were down 26.6%. Our primary revenue decrease for the quarter, of course, was driven by the shutdown of customer-facing operations due to COVID with the shutdown impacting all of April, May and June. We did lose one entire selling day in our largest business, the Sally U.S. retail business as a result of a one-day total network shutdown surrounding the civil protests for racial justice. We estimate this cost was $5 million in sales for the quarter. We also operated 27 fewer stores during the quarter, given that we had put a stop to store remodels, relocations and new store openings due to COVID. Finally, we saw unfavorable impact from foreign currency translation of approximately 30 basis points on our reported sales. In contrast, on the positive side of the equation, our global e-commerce business showed strong growth. For the third quarter, e-commerce sales were $137 million, representing growth of 278% as compared to the prior year. This growth was enabled by three things. Our quick pivot to digital options for our customers, a noticeable channel shift between stores and e-commerce early in the quarter and a large group of new customers in our online retail channel with almost 50% of the total e-commerce customers…

[Operator Instructions] And our first question will come from the line of Rupesh Parikh with Oppenheimer. And your line is open.

Good morning. Thanks for taking my question and congrats on managing through the pandemic so far. I guess...

Thanks.

First, just on gross margin -- on the gross margin line. So Aaron, that's helpful, the color you gave for Q4. I was just hoping you could provide more clarity in terms of puts and takes you see in Q4. And I'm really interested on the e-commerce side, for other retailers, e-commerce has been a negative to gross margins, but I think you guys actually it called a favorable impact. So I'd love to just understand the dynamics with e-commerce as well.

I think your question is, how are we thinking about gross margin for Q4? If I'm...

That's correct.

And in particular, on e-commerce. And what I can tell you is this, we are benefiting from all of the actions that we took in Q3. As we carry into Q4, our promotional environment isn't changing dramatically and that we are in contrast to prior years running much -- far fewer on promotions than we have historically and the consumer has still been showing up to buy, and so, we've learned from that. And that's true across both the e-com business and the store platform. We're also benefiting from the actions that we took in Q3 and as you heard me allude to in the comment -- in my comments, our merchandising teams do not expect further more aggressive clearance action in Q4 the way we did in Q3, in part because we took the action in one fell swoop in Q3. So we are feeling pretty good about our gross margin opportunity in Q4. And I guess I would add as well, you also heard me allude to the fact that we are buying into inventory being very careful about but buying into it and as we buy into it as well, that will offset some of the diminish in gross margin we saw around vendor allowances and vendor income.

Okay. And then, just on e-commerce. I think you mentioned that's been positive for gross margins, if you can explain why. I guess, for other retailers gross margins related to e-commerce have been negative impact, I was just wondering...

Right, so...

If you can just provide some more color on that.

I guess, a couple of thoughts, right. As we look at the business, setting aside shipping costs for a second, right. If you set that aside, our pricing tends to be consistent across both stores and e-com, a vast majority of items. And the P&L is burdened by some additional marketing, which hits SG&A, it's burdened by some additional distribution costs as well. But the only real difference for us is the cost of shipping and given during the quarter, what we did around minimum free shipping thresholds and our efforts to get the goods to the consumer as fast as possible, while we saw some higher cost and higher variable cost in SG&A tied to that shipping cost, it didn't hit gross margin and we've -- and just given how our P&L structure, we don't expect it to hit gross margin in Q4. If anything, it's a modest positive to gross margin, because with the way our accounts were set up, we take some of those costs in SG&A. Now, I would observe that e-commerce for us grew exponentially in the quarter and we are really pleased with the effort, with the results of the quick pivot -- the faster -- the future that Chris refers to in that respect. We have more work to do, but we also do believe that by enabling our continent spanning store network to be distribution points to our consumers that we'll be able to deliver increased speed at lower cost, because of course, we don't have to add to the labor -- to labor hours to service the orders that go to our stores, that is effectively some labor cost already that we're just better optimizing. So it's improving our economics in-store as well as with e-com.

Okay, great. And then, just one quick follow-up question. So just on geographical performance, if you look at markets like Florida, California and Texas, when you tend to see these spikes in COVID infections, any color you can share in terms of what you end up seeing in your business? I guess in any -- specially, in these markets given the recent spikes?

Yes. No, Rupesh, it's something we deal with and what we expect we're going to continue to deal with. When you first get the spike, you tend to get a period where consumers are more cautious about going out and that can last for a couple of weeks or so and then it seems like it begins to rebound some but yes, there is a consumer reaction when the spikes occur. We see it in reduced traffic in Sally or reduced transactions in BSG and then it tends to normalize after a while.

One thing which has been interesting to watch and react to Rupesh is with the different parts of the country being in different states relative to reaction to COVID and restrictions, etc. If we see slowing traffic in Texas and many times for instance, and many times it's offset by increasing traffic in New York, right. And so, we are managing the portfolio on a metro-by-metro, state-by-state basis and the aggregation of -- Though the puts and the takes for the end of Q3 and certainly July, as you heard me reference twice in the script, has been positive, notwithstanding some concerning trends in particular parts in the country.

Okay, great. Thank you.

Yes. Thanks, Rupesh.

Thank you. Our next question comes from the line of Mark Altschwager with Baird. And your line is open.

Good morning, everyone, and thanks for taking my question. Nice job managing through these challenging times. So I want to start off and just ask on SG&A. With stores reopened, how should we be thinking about the normalized SG&A run rate from here? And I'm wondering if you anticipate any catch-up spending and some shifts from the aggressive cash management back to your broader transformation agenda?

Mark, it's a great question. We are being incredibly careful, right. We had already been in the process of optimizing our labor, our investments before COVID. And then, as part of bringing the network backup, we've been very careful to focus on number of people in the stores, focusing on our power hours as well as when do we need to be open. And so while parts of our fleets is back at pre-COVID hours for instance, right that is not true for other parts of the fleet as we are testing where are the consumers coming out and when do we need to be open and what's the return on the labor hours that we're allocating. And I offered that as an example, because it helped to drive the decline in absolute SG&A dollars that we saw and it was $44 million, $45 million; I believe down. And we expect to continue to keep very careful control over SG&A as we carry forward.

That's very helpful, thank you. And then, I just want to follow-up on -- related to just top-line trends. So I'm curious as salons reopened, are you seeing any waning of the DIY trend or just how sustainable is that? And then, kind of separately, but related to BSG, bigger picture, do you think COVID has impacted the growth potential of the professional industry moving forward and whether that'd be a permanent shift to DIY or an accelerated shift to booth renting? Just any bigger picture comments and how you're thinking about the industry outlook. Thanks.

So Mark, why don't I take the second question there and I'll turn it over to Aaron to talk about some of the DIY trends we're seeing. Listen, I do believe that we don't know yet, there's going to be a lot of puts and takes in the salon industry here, as we call out there are areas of the country like California where salons still can't operate or have been forced to shut down again. We also are seeing lots of disruption with some of our competitors in supply situations and of course, there is new categories like PPE that we're selling that have grown significantly as a percentage of the spend of a stylist. There are salons that will go out of business, but that doesn't mean the demand goes away. In many cases those salon -- those stylists go on to other salons or they become booth renters or suite renters and they still buy it from us. So what I would say is, I think it's hard to predict when this will all settle out, there'll be a lot of puts and takes. We think we're better positioned than most, but I think it's going to be -- well, it's going to take some time before we really fully understand how demand shapes out in the pro channel.

And as for DIY and on the retail side of the house, we are really pleased with both the consumer desire to go DIY and how they're shopping at our stores. And there is an incredible amount of creativity involved, Chris called out earlier, the growth in the vivid color category, which has been across virtually every brand we offer in vivid color and we see that increasingly in nails as well. And from an enterprise perspective, we have the good news of BSG is up and performing well against its competitive set and supporting the stylist and those that aren't going to the stylist and there are many of them still are coming to Sally. Although, I should also point out that Sally is somewhere between 15% and 20% of its sales are also to professionals.

Yes.

And so as salons potentially break up, as stylists go on their own, they can go to BSG or they can come to Sally and it's driven in part by convenience. So the fact that we have the nationwide network of stores that we do and the new e-commerce options, I think is good news for the enterprise, whether it's BHP or Sally servicing the pro.

Great, thanks for all the detail.

Thanks, Mark.

Thank you. Our next question comes from the line of Oliver Chen with Cowen. And your line is open.

Nice quarter. Regarding the clearance activities and the strategy there, why was it the right time now and as you look forward, what are the biggest changes in the assortment and how that may apply to how you assort the stores execution and pricing good, better, best? We are also curious about going forward, should we expect the BSG trends to outpace Sally in terms of modeling and what you're seeing with that customer dynamic? Thank you.

Why don't I take that last one and then I'll turn it over to Aaron on the gross margin side. I think we don't know. We don't know how this is all going to sort out, we do feel that our both businesses are performing well right now. We'll see how the -- and we think the DIY trend is one that's very much tied to a consumer trend that will last, but we don't know how the competitive market in the pro channel will settle out and how much the economic impact of the virus will impact salon demand. So that part I think is one of the reasons why we want to continue to be cautious and stay focused on serving our customers, focused on conserving cash and focused on driving our digital agenda to make sure we're doing the right things for our customers long-term, but the DIY trend is certainly strong and we'll see how the competitive pro channel settles out over the next few months. On gross margin?

Sure, three observations. The first is, you have to keep in mind that unlike a lot of retailers, we are at a six-year low at our inventory base and that was -- that is driven by the aggressiveness that we applied in the face of the crisis to turn off the spigot, if you will, and to be relentlessly focused on making all of our inventory, wherever it may be, available to consumers through the e-commerce options if they weren't able to come to the stores. Part of managing our inventory so aggressively also meant that we had a ringside seat to consumer behavior and we got insights that we were not -- did not have as much visibility to before, particularly around switching. As we brought our inventory down, if the consumer was willing to switch and we saw a lot of switching over the course of the quarter that gave us better insight into the value of various categories or various SKUs, if you will, that we still had them on the shelf, what they were switching to. So in parts of the business it was -- it resulted from the observation of our consumer reaction to the assortment we had there and then, that visibility. The second thing going on was of course we are in the midst of a merchandising transformation that we've talked about a number of times in the past and having put in place during the quarter in the face of everything else going on, a much more rigorous open to buy process, a much better collaboration between the store's organization, the merchandising organization, P&A, supply chain, etc. Now was the time for us to reset the baseline as we carry forward. And lastly, I would just say it's just to focus on what sells and where can we drive the profitability. We did take a write-off on some private label componentry that was frankly driven by the fact that we said as we look to maximize our cash and maximize our operating income, now was the time to switch those suppliers, switch to new lower cost suppliers and as a result, when you do that sometimes you are left with componentry that you have to deal with. And so, we chose to write it off in the quarter.

Thank you. And you've done a great job managing promotions this quarter and during this time, what are you seeing with competition such as Amazon and others that have -- that are more broadline retailers like Target and Walmart in terms of their online businesses and how the overall environment looks and your ability to compete? Thank you.

Oliver, I do think in general, it's been a less promotional environment, and I don't know how that will progress, we assume that will slowly work its way back in, perhaps not to previous levels. I think the more important thing to focus on is what does the customer want right now? All right. And they want multiple delivery service models, they want to make sure your stores are safe and that they feel safe in your stores interacting with your associates and they want to make sure that you have the products and the expertise they want as they pursue new things like DIY. So we're very much more focused on that and leveraging our expertise and our strength in these core categories. And so, I think you're going to keep seeing us continue to try and whittle down or keep low the promotional cadence as we go forward and focus more on that. Aaron, I don't know if you want to add that.

There's no escaping the fact that many of our competitors, particularly in mass continue to be much more promotional than we are, I mean, much more promotional. And we have may -- we have taken the strategic approach that with the differentiation we provide in our assortment, with the differentiation we provide with the advising [ph] store, etcetera, that the consumer will continue to purchase with us even in the absence of a broad promotional calendar. So if you compare year-on-year Q3 to Q4 and I would observe, coming Q4 versus Q4 last year, our promotional cadence is much smaller than it was previously, that's intentional on a strategy, it'll be true in stores, it will be true in e-commerce because I go back to we're using the benefit of Q3 to reset our operations in a number of ways, and that's one of them.

Thank you, very helpful. Best regards.

You bet.

Thank you. Our next question comes from the line of Steph Wissink with Jefferies. And your line is open.

Thank you.

Good morning, Steph.

Good morning.

I just have a few follow up questions. Good morning. I wanted just to close the loop on Rupesh's earlier question. I think his question is one we're getting as well, which is this concept of margin comparability across channels. So I'm wondering if you can just take us through to the operating margin level. I think, Aaron, you mentioned from higher marketing and higher shipping at the SG&A line, but how does the operating margin compare across channels. And then, I have one follow-up on your inventory efficiency.

Sure. It would -- we don't disclose the channels, so I'm not going to provide you with the number. It is fair to say that the operating margin on e-commerce is of course lower than the operating margin on stores because of the delivery cost.

Okay, that's helpful. And then Chris, you had talked a lot about kind of inventory as an agenda and it strikes me that with e-commerce you may need fewer weeks of supply to begin with and then, also the omnichannel initiative really creates more dynamicism out of inventory as an asset. So can you talk a little bit about your systems, how you see your inventory? If we may be able to see some improvement in working capital as a contributor to free cash flow going forward from both the channel mix, but also just a hyper-focus on inventory efficiency.

Yes. And I think there is a lot of puts and takes there, right. So as Aaron alluded to, we're changing our open to buy process and putting in a much more professional process there. We are thinking much harder about SKU productivity and making sure we're only buying the SKUs that are really going to turn in our stores and online. We're obviously managing our promotional cadence differently, so we don't have quite the surges in demand and ups and downs in demand. So there is a lot of things changing, which I do believe over time should allow us to continue to improve our overall working capital efficiency, but there's a lot of puts and takes there. It's not just one thing, it's a lot of components even the JDA process in North Texas will be part of that as well over time. So Aaron, I don't know if you want to build on that, but in my mind, I think we're -- that this is all the pieces we're working on and there's a lot of work left to go.

Teams continue to be aggressive, they're looking across every element of working capital and we're going to reinforce what Chris said, we're just going to have to turn the dials every day to make sure that we have the right level of inventories in support of the demand, but we're going to be very careful about it. And I observed somewhat recently that if you walk into store and see a gap on shelf for a period of time that's probably intentional because we're being very careful to ramp our inventory up consistent sales, while maximizing our cash as the number one priority as we look at the future of COVID for the next few months.

Thank you.

You bet.

Thank you. Our next question will come from the line of Joe Altobello. Please state your company and your question.

Hey, good morning guys. This is Adam on for Joe. I was just curious from more of a housekeeping standpoint, looking at -- it appears that EPS included that $27 million in non-cash inventory write-down or the $0.17 that you mentioned, but EBITDA seems to back the number out. Is there any reason for this given -- it seems to be obviously, non-recurring? And then, was this charge on the Sally or the BSG side? Thank you.

Well, look we are remaining loyal to our reporting practices on EBITDA and so, we did adjust out the $27 million non-cash charge tied to the inventory for which we took a cost loss accounting charge, right. So that is consistent with our historical practice there. And then, remind me what the first part of question was.

Well, that was it, how was the $27 million adjusted out?

All right. Yes, that's the way we report it and we view it as non-cash when we're going to take it out.

Got you. Okay, that's what I figured. And then, if possible, I know you guys may not break it out, you gave a lot of good detail on e-commerce, is particularly in cadence by month. But is it possible, that you guys could share how brick-and-mortar comps looked in June and maybe how much e-commerce particularly contributed to that plus 11% for the month?

We were -- all I can tell you is, we were positive comp, both e-com and brick-and-mortar in all of BSG, Sally U.S. and Canada and Europe.

That's very helpful. And if I can ask one more question. I was curious if you could provide some additional color on Sally international both for Q3 and maybe for just more recently in terms of trends and if things are picking up a little bit in July versus the third quarter. Thank you.

Yes. So the European business did open at a slower pace, especially, specifically in the U.K. We're seeing good strong demand there as it opens, but it did open later in the quarter and as a result of that, it didn't have a strong of a month honestly as we did in the U.S. where we got our stores open faster. And Latin America has trailed Europe and they still have some stores closed, although they are slowly reopening both in Mexico and in South America. So they're trailing by a little bit, but we fully expect they will get up and running here in the coming months.

Great, that's really helpful. Good luck. Thanks a lot guys.

And with that, I'd like to thank everybody for their questions today. If I could summarize, we executed exceptionally well during a disrupted third quarter. The team aggressively managed costs and cash, drove an accelerated pivot to support digital growth and scale our key digital transformation initiatives and we reopened the store network faster than competitors. Because of the speed and agility of our team, we are well positioned to take advantage of emerging customer trends and gain share in a disrupted environment. As we enter the fourth quarter, we will continue to invest in our digital transformation, take advantage of the strong demands for our key categories and adapt quickly to any new local restrictions or changes in consumer shopping behavior tied to the pandemic and of course, we will stay disciplined in terms of cost and cash management. Thank you for joining us today.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.