Good morning ladies and gentlemen and welcome to the Sally Beauty Holdings Conference Call to discuss the company's Fiscal 2022 Fourth Quarter Results. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. [Operator Instructions] Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings. Please go ahead sir.

Thank you. Good morning everyone and thanks for joining us today. With me on the call today are Denise Paulonis, President and Chief Executive Officer, and Marlo Cormier, Chief Financial Officer. Before we begin, I want to 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. I would also like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made in 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 and 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. In fiscal 2022, we delivered full year net sales of $3.8 billion, gross margin over 50% and adjusted EBITDA of more than $500 million. We did this by leveraging our people, platforms and scale to the light our core Sally Beauty customers and BSG stylists admits persistent inflationary pressures, and supply chain disruptions. I'm particularly proud of our team's ability to navigate the numerous macro challenges of the past few years, becoming more agile and focused organization overall. Importantly, during our transformational period from 2017 to 2021 we built the infrastructure and key foundational elements to take our business well into the future, including our CRM platforms, our advanced digital commerce capabilities, and our enhanced supply chain. On today's call, we'll be sharing our vision for the Sally Beauty Holdings of the future, including new strategic initiatives will be focused on over the long term and will provide our long term growth algorithm that will be executing towards over the coming years. Ahead of that, let me take a moment to comment briefly on the current operating environment, as well as share a few highlights from fiscal 2022. First, the operating environment as we entered fiscal 2022 inflationary pressures continue to influence customer and stylists behavior. In Sally US and Canada, the inflationary environment continues to cause some of our customers to color less frequently and reduced the size of their basket when they shop with us. While the situation is not improved. Of note, we believe our focus on customer service and our pro quality for less marketing is resonating, limiting additional pressure on sale. In BSG our Sally focused on saving time and maximizing profitability. We continue to see them purchasing closer to need while responding favorably to promotional bundles and…

Thank you, Denise. And good morning, everyone. Our fourth quarter results saw trends remain steady with sales landing around our expectations. We concluded the year with fourth quarter net sales of $962 million down 2.8% and comparable sales approximately flat to last year. The results reflect a few key factors. First, the transitory pressures that Denise outlined, the ongoing effects of inflation impacting consumer behavior in both our retail and professional divisions, as well as the continued supply chain disruptions of BSG, although improving as we anticipate. Additionally, we are operating 117 fewer stores at the end of the period compared to a year ago. Foreign currency translation had an unfavorable impact of 170 basis points on consolidated net sales for the quarter and comparable sales held flat on growth of our e-commerce business, our expanded Regis partnership at BSP and positive comp growth and our Sally international business. A constant currency, global e-commerce sales increased 30% to $90 million, representing 9.3% of total net sales. E-commerce is beginning to comprise a larger percentage of the business as we scale our digital capabilities and utilize our new tools and resources to drive customer engagement. Looking at gross profit, we maintained adjusted gross margins north of 50%. Compared to a year ago, fourth quarter adjusted gross margin decreased 60 basis points and higher product margin from pricing leverage at Sally Beauty was more than offset by a sales mix shift between Sally Beauty and BSG, and we incurred higher distribution and freight costs in both segments. Moving to operating expense. SG&A totaled $398 million. That's up about $11 million versus a year ago, and can primarily be traced to increased labor costs partially offset by lower bonuses. In fiscal 2023, we expect our distribution center consolidation and store optimization programs to…

Thank you. [Operator Instructions] And our first question comes from the line of Rupesh Parikh, Oppenheimer. Please go ahead.

Good morning, and thanks for taking my question. So I just want to go back to your longer term sales targets for low to mid single digit growth. Just curious what are the key drivers to get there your competence and being able to get to that level, just given some of the challenges in recent years? How store closures impact that longer term sales growth? And if there's any timing in terms of when you think you'll be able to start delivering those targets?

Sure, thanks for the question Rupesh. I will start Denise and Marla can jump in as we need to here. I think in the very near term, we really spaced out how we think about these growth initiatives. And let me walk you a little bit through year-by-year what we see coming online, which influences the numbers when we're looking to 2023 and our priority is to get that low single comp, like single digit comp number, key sources of growth, there will be leaning in on own brands, that's Ion, that's Strawberry Leopards, that's bondbar rebuilding our nail category, we have a new nail wall set in both Sally and BSG stores and seeing good responses there, nearly doubling the Regis business that we have, which really leverages the e-commerce platform we built. And then when we think about the store optimization, DC consolidation pieces, they're a great help to operating performance for about $10 million this year. But we did talk about the fact that that store optimization, we're expecting about a 40% recapture rate. And so with that recapture rate, there will be some pressure on the top line that comes through. But of course, that recapture delivers comp sales. As we work through 2024 into 2025 we see the new initiatives start to come online. So later in '23 our style of platform was so on each queue we expect to be ramping up is only in a been a test market right now, we really want to work out all the kinks be sure it's just right before we fully roll that. And then our virtual color expert experience will roll out online later in the year as well. And we think that that will start to give that benefit and scale as we come through. And then when we get into 2024, further to 2024, it's one of those things really start to ramp up. So further own brand growth, new innovation from our vendor partners, continued tail winds from the virtual color expert and the e-commerce piece. And then when we talked about and of course, the stylist platform, then when we talked about Studio by Sally, it's a bit longer term. So we're going to pilot in fiscal ‘23, with a small number of stores. We're going to look to those results. And with positive results, we'd add some stores in '24. But we really believe it's going to be beyond '24 where we can get to perhaps up to 100 locations in the U.S. So when we think about the sales cadence this year run-a-run positive comp sales as we turn into next year, after we eliminate the drag that comes from the store consolidation work right now, net sales will turn positive. And as we work our way through '24 and '25 that's when we're really targeting that low to mid single digit comp trajectory, total sales trajectory.

Great. Thank you. Maybe just one follow up question. Maybe for Marlo. As we look at this year, your guidance, anything you can share just from a quarterly cadence perspective.

So from a quarterly cadence perspective a lot of it's about what happened this past year in 2022. As you recall, we started Q1 very strong, [perfect calm] and then as we were going into the holiday season, we were up against a COVID spike. And then as we came out of that's about when we saw the pivot to the inflationary, the intense inflationary pressure that really started to change customer behavior. And that pretty much held on throughout the rest of the year. So when you're looking at it from a year-over-year basis, and then also taking into consideration what's happening this year with store closures, which is happening mainly in December for the bulk of the closures the Q1 costs in sales will be challenged. And then we'll start to see improvement as we go through the rest of the year.

Great. Thank you. I'll pass over. I am sorry.

One more on that. If you're looking at net sales. Also keep in mind FX. We had some FX movements towards the end of this year that we won't get until we get to Q4 for sure.

Great. Thank you.

Our next question comes from the line of Oliver Chen, Cowen. Please go ahead.

Hi, thank you I regarding the door closure program, what's assume for transfers and any color on how we should think about the margin impact there? Also, on the BSG division would love further details on the gross margin and some headwinds there and what's your assuming going forward? That would be helpful as well. And then finally, the holiday period is always somewhat promotional. So what are you seeing in the environment and how you're prepared to compete and the topic of inflation? This is very pervasive across the consumer. Thanks a lot, Denise and Marlo.

Oliver, there's a lot there for us to unpack. And let's work through store closures and promotion. And then we might need you to clarify the BSG question. I'm not sure exactly what you were after there. But on the store closure front, it's about 350 stores. It is primarily a U.S. Sally stores. The vast majority of those will close in December of this year. And the work that we've done and the pilot that we've been running over the course of the last year, delivered good sales recapture rates actually above the industry average and for the stores that we're going to be closing, we're assuming about a 40% sales recapture rate. I think the important point to note in the stores that were closing is the stores were closing are all EBITDA [indiscernible] positive. And so the benefit of the closure really comes from the ability to transfer those sales and then get some efficiencies within the labor and rent types of lines coming through. So net-net about 40% sales recaptures is what we're looking for and that will really start to play into as we get from December into January, because of the timing of the closures. On the promotional front, I think you're very right. Customers and stylists are both looking for deals. When we think about what they're doing out there, they're being pretty selective, they're looking around being choice one in the decisions that they're making. That said what we've really been focusing on is what most resonates with our stylists. And what we've done is more about changing our tactics versus investing more. So what we've been doing more is going to types of promotions, like bundle offers, that there is a discount involved, but it actually ends up driving more unit sales, and we actually believe is getting us more share of wallet. Because when people are buying that quantity, it's less that they might buy somewhere else coming through that the absolute level of promotional investment has remained relatively steady. I would also say we've seen very good support from a number of our vendor partners where they are leaning in to help fund some more enticing promotions for their specific product as they want to do that through the year. But I would argue it's not been overly elevated. It's more of a mix of the tactics that we're using from what they might have been before that might have been very single unit focused. And then the third question on BSG.

I think you're referring to the BSG gross margins being down. So just to talk about a little bit, what we're seeing there is it's really a mix shift. When you look at it into an individualized basis or SKU level, the merchandising margins are strong. But what we're seeing is a mix away from stores and into full service. And a lot of that's been driven through the expansion of our Regis business. And of course, where we've gotten a higher distribution and freight costs. But when we look forward as a consolidated business there's going to be puts and takes and we see for the combined business continued strong and healthy margin above 50% going forward.

Thank you. Very helpful. The Regis partnership sounds encouraging. If you could give us thoughts on why that's the right partner? That would be helpful. And lastly, on digital, sometimes store closures can have unintended consequences, given that they can be great recruitment opportunities for customer acquisition online as well like, have you thought through that and any thinking you have around that? I'm sure you've tested it. Thanks a lot.

Sure. So on the Regis front I think the real benefit in the Regis businesses when we think about how many people there are out there who use Regis franchise salon as their main destination and 5000 plus salons out there in the marketplace. It's a huge reach and they're not the only chain that is out there. So when we look at the penetration we've got, you've got people for early in their careers as stylists. You've got customers through all walks of life who we can introduce a product that can stay with them for the long term. So whether those stylists stay with Regis or they choose to go out onto on their own or join another salon, they will have been nicely ingrained with all the types of products that we can offer them and we'll be building that relationship with them. So beyond the day-to-day sales today, the longer term view of us becoming a more important part of our stylists decision making, is really a strong point that we're going after. And it really fits nicely into the idea of the stylist ecosystem that we want to build, to help them grow their businesses and help them be more profitable. So all in all, a good business to be getting into. It does primarily it comes at a slightly lower margin, because it's more managed, like our full service business than it is our store business. But when you think about the longevity of those stylists, it's really something that we think will serve us well longer term. In the store closures we've spent a lot of time thinking about this, I think it's actually been a number of investors and analysts that have actually asked us why we weren't moving faster. \ And…

Thank you. That's great guys.

Our next question comes from the line of Ashley Helgans, Jefferies. Please go ahead.

Hi, thanks for taking our questions. I know you touched on it briefly, but any more details you can provide us on the trends and salon channels? And then as consumers spend has started to soften. We're curious if you're seeing a pickup in things like the DIY hair color. And then last, just any color you can give us on the recapture rate? Thanks so much.

Sure. So let's start with the launch channels and then work our way through. So [indiscernible] channel if we put in our prepared remarks that some commentary about just what we're seeing, in general in the business and you think salon had a pretty good back to school intro to fall season. The business has softened a little bit following that more in line with what it had been midsummer. But in general, our stylists are still talking about having good business, but seeing their customers stretch a little bit more between services. And certainly the idea of stocking up on inventory, everyone's being very cash conscious about where else they need to use their cash in their own personal lives. So those trends haven't really changed. If we look back to the what they are trying to figure out, they are trying to figure out how to be even more efficient with their businesses to be able to make more money and turn their chairs more quickly. So we have seen an uptick in interest in engagement around express color, and what that can do for their business in terms of being able to serve their clients a little bit more expediently and we've also seen them shopping and looking for where those promotions make sense to them leaning in a little bit more in terms of units that they might have bought versus historical where maybe they weren't as focused on watching for those opportunities. So net-net, as we said we haven't dramatically increased our promotional intensity and where we are offering promotions or vendors have been a great support in building both of our businesses together and doing that. So we're anticipating as we go through the coming year that same level of a slight bit of…

Yes. From a recapture rate as you know, we've spent a lot of time studying this build a very sophisticated model, that proved out with results even better than what we had going in assumptions. So the one thing to keep in mind is we have data on 75% of our Sally customers, our Sally sales, our Sally sales and customers, we know 100%, on BSG. So we can track them very closely and really get some robust insights as to what's happening there. And then you combine that with our CRM capabilities, to be able to personalize messaging, talk to them, market to them, make sure they understand where they can go when we close the store. So we feel pretty good about well, first of all, the 40% that we're quoting now is, is all coming out of our tested pilot, and from a go forward basis in terms of being able to continue to deliver that, and feel pretty good about our capabilities to do that.

And I just had one point, I think one of the most interesting observations through the pilot period was, we originally had a model that assumed a customer would only potentially think about one additional store, maybe two additional stores that might be in their sphere of where they would go, instead of their current store. We actually thought to be a much wider radius, that you would see most of our stores that we close. Those sales were transferred to four or five different stores. And so back to that idea of the ability of that recapture, to be fairly sticky. And that was actually a very good indicator for us.

Wonderful. Thank you so much for all the color.

[Operator Instructions] Our next question comes from the line of Olivia Tong, Raymond James. Please go ahead.

Great, thanks. Good morning, I want to talk a little bit about the margin targets, your expectation for fiscal '23 for 8.5 to 9.5 versus a long term target for low double digits. Can you talk about how much of this is just assumption of some of the macro pressures that are out there as opposed to the desire to, obviously increased investment in some of the strategic initiatives, and then just the timing that you expect sort of a glide path to get to the low double digit target over time? Thank you.

So how about I will let Marlo take on the current state and where we are and then we will follow up with the long term trajectory.

So just as we're looking forward to 2023, we really see that as a transitory year. The reality is we've been operating for the past few years that are very challenging consumer environment. But through that all we've been pleased to be able to deliver the healthy gross margins up upwards in the more than 50% really what we're seeing the pressures on expenses. We are planning for 2023, higher expenses, and mainly driven through the wage pressures that we've seen. It just point out there, it's a, conscious investment in wages, we are not talking about adding headcount. But really just looking at the labor markets, especially for the retail worker, it's been challenging over the past couple of years, and really where we see our differentiators in our associates, the expertise of our associates, in our stores to be able to really help our customers understand and get confidence to take the leap into the do it yourself color. So we think it's an important element of our growth driver going forward. And we believe it's a very important investment for us to make. So when we're looking at next year, it's really about investing in our associates as well as refilling our realities when we need to refill our bonus pool. So but beyond optimization efforts, and we are continuing to look for more efficiencies. Denise touched a little bit more on the longer term, but certainly are keeping an eye on cost control.

And then when I think about the longer term what we're focused on this year, as Marlo said was is making sure that we're set up for our initiatives to be as productive as they can and reinvesting wages into the organization. But as we turn into 2024 the opportunity with own brands, it is quite significant. And it'll be important contributor to gross margin expansion in 2024 and beyond, we talked about on the call moving from 33% own brand penetration in the business, in the Sally business north to close to 50% over the next four to five years, that comes with anywhere from 1000 to 1500 basis points of margin difference, versus branded product. So that really will pick up more in 2024, as we continue our work in that space. When we think about the fuel for growth initiatives that I commented on at the end of the call, and one of our third pillars about becoming more efficient in what we do. Now, this is not about slashing short term costs. This is about actually thinking very differently about the way we work. I'm continuing to look at network optimization, continuing to look at sourcing, looking at opportunities around outsourcing, looking at the structure of things like our loyalty programs. And we think that that's also going to start to play out towards the end of 2024, and then to 2025, with some improvements on the margin front as well. And then I think under currents, all of that that I know you guys know very well. But as we move past the net sales decline of this year that is happening with the store closures impacting us and into 2024, start to see net sales turn positive and continue on that trajectory, you will get some natural SG&A leverage that will come through in the P&L as well. So a combination of cost savings, longer term, bigger picture cost savings, efficiency initiatives, own brands, and then sales trajectory returning positive really add us up to that low double digit operating margin that we are pushing towards.

That's super helpful. Maybe if I could follow up just in terms of the health of the haircare category that feels like this if there's a fair bit of interest and quite a bit of activity in the category to the extent that the number of new entries can be used as a guide. And obviously you have your own bondbar launch. So at home color bonding your own brand. So can you talk a little bit about the balance between driving growth for external brands versus your own brands and perhaps what drives customers and thinking about the profit profile, obviously, relative to between your brand and externals? Just a little bit of color, there would be super helpful. Thank you.

Absolutely, I mean, first and foremost, we greatly value our vendor partners, whether those be entrepreneurs that we bring through the first time through some of our support programs for newer innovators or whether that's with our some of our long standing vendor partners. So our objective is to keep a very healthy mix between own brand and vendor products and in our Sally businesses go forward. So when we think about that own brands, and what we're able to do is bring to bear products that are a great price point, great efficacy, that resonate with our customers coming into the stores. We see that we feel that we want to grow that a lot of new innovation, a lot of very, maybe perhaps more technical products, things tied to textured hair, and other elements our vendor partners continue to bring great innovation. They do a great job communicating with consumers, and we want to support them as well. So we actually think that both should be able to grow and be a good balance go forward. And then on our BSG business we have great vendor relationships, a lot of exclusive relationships and the focus of our BSG business is continuing to support our vendor partners. And I just want to be crystal clear about that front. When we think about anything that is owned brand within BSG, you're only talking about bowls and brushes the very basics. We are not talking about color and care in that space. That is a great partnership that we have with our external vendors.

Thanks so much. I'll pass it on.

And at this time, there are no other questions in queue.

Great. Well thank you all for joining us today. We are very excited about pursuing our new strategic initiatives to drive growth into the business. Our team members our associates out in the field are our most valued asset and more excited about bringing these strategic initiatives to them and growing our businesses together. So I wish all of you a happy holiday season and we'll talk again in January.

And ladies and gentlemen, this conference will be available for replay in the company's press release. That concludes our conference today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.