Good morning everyone, and welcome to Sally Beauty Holdings Conference Call to discuss the company’s Fourth Quarter and Full Year Fiscal 2023 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 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 Factors 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 obligation 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 full year financial results in line with the expectations we laid out at the beginning of fiscal 2023. We also advanced our strategic priorities during the year, engaging our Sally customers and BSG stylists through new concepts and services, product innovation and distinctive omnichannel experiences. We delivered a comparable sales increase of 1.4% and net sales of $3.73 billion, down 2.3% versus a year ago on 308 fewer stores. We also maintained our healthy gross margin profile above 50% and captured $50 million of expense savings under our DC and store optimization program, while investing in wages and our strategic initiatives. In turn, we achieved adjusted operating margin of 9.1% and adjusted EBITDA of $459 million. Additionally, the business generated strong free cash flow of $159 million. We concluded the year with fourth quarter results in line with our expectations. The primary shift in trend line we saw from Q3 to Q4 was on the Sally side, where the increase in average unit retail price year-over-year was lighter in Q3 and Q4 than Q3, as we lapped some pricing actions from the prior year and saw a modestly higher mix of products sold on promotion as customers continue to seek value. We believe the business remains healthy, most notably in our core categories of color and care, where we are holding share. Stepping back for a moment to look at fiscal 2023 as a whole. At the beginning of the year, we outlined a set of new strategic initiatives, designed to advance our vision for the future and position us to achieve our long-term growth target of low to mid-single-digit top line growth and low double-digit operating margins. Our three core initiatives include; enhancing our customer centricity, growing our…

Thank you, Denise and good morning everyone. In the final quarter of the year, we navigated a tough topline environment, while maintaining strong gross margins and strict cost control and we landed our full year financial guidance that we laid out at the beginning of the year. We also utilized our strong cash flow in the quarter to strengthen our balance sheet, complete a small but important strategic acquisition, and return value to shareholders through share repurchases. Looking at the P&L. Fourth quarter consolidated net sales declined 4% to $921 million on 308 fewer stores. Consolidated comparable sales declined 2%, primarily reflecting the macro factors and consumer spending patterns we've seen in recent quarters. Global Ecommerce sales were down 4% on a constant currency basis to $87 million and represented 9% of total net sales. Turning to gross profit. We maintained strong adjusted gross margins, which came in at 50.6%, up 50 basis points to last year. The increase can be attributed to higher product margin in both the Sally and BSG segment as well as lower distribution and freight costs, resulting from our initiatives to drive supply chain efficiency. Fourth quarter adjusted SG&A expenses totaled $387 million down more than $10 million to last year. This year-over-year improvement primarily reflects the savings from our DC consolidation and store optimization plan as well as lower advertising costs, partially offset by higher labor expenses. Notably, the wage investments we made in fiscal 2023 have resulted in lower employee turnover and increased retention in stores, driving improved customer experiences, which we see in our high NPS scores. As a reminder on a full year basis, our DC consolidation and store optimization plan enabled us to capture approximately $50 million of expense savings and $10 million of operating income benefit. Looking at fiscal…

[Operator Instructions] The first question is from the line of Oliver Chen from TD Cowen. Please go ahead.

Hi, thank you very much. Good morning, Denise and Marlo. Regarding the next quarter's guidance, what's underpinning the flat to down to? And as you articulated consumer spending pressure, I would love to hear how that's manifesting and if it's manifesting in traffic. Also at the Sally division, the comp was a little bit light relative to street expectations. Would love either contrast -- what's happening there? Second question is you have a lot of great modernization initiatives including merchandise as well as store concepts, which ones would you say impact traffic and/or younger customer exposure most if you had to help prioritize the needle movers? Thank you.

Absolutely. It's Denise, I will start with those. Thanks for the questions. Let me start with Q1. In Q1, we expect to see the benefit from the strategic initiatives that we're working on. As we indicated, we believe for the full year there are 200 basis points to 300 basis points of comp goodness for us. It will also be the last quarter where we see benefit to comp sales from the store closures last year. But we are expecting that more than offsetting that in Q1 we expect the trend from Q4 to continue. One important trend is the rapid in the care category at BSG. And then in general just the macro headwinds that are out there. Importantly, we see sequential comp improvement throughout the year. As the year progresses, strategic initiative benefits are going to accelerate and the negative impact of that softness in the care category at DSG really lessens in Q2 and dissipates further as we get through the second half. So Q1 by all means the lightest quarter of the year but I think really well understood the trends that we're operating underneath that. More broadly I think your second question was just about consumer trends and what we're seeing. Overall consumer and purchasing trends in our mind are largely consistent with Q3. Within that Sally customers just remain frugal. They buy what they need versus perhaps what they want or a more impulse type of purchase. We actually saw transactions and UPT trends largely consistent with Q3. And then Color and Care the core categories remain the strongest performers. And based on the share data we have we believe we're holding share in both of those categories. When you asked about the impact of Sally comp the impact to sales in Sally compared…

Thank you. The next question is from Korinne Wolfmeyer from Piper Sandler. Please go ahead. One moment. Your line is now open.

Hey, good morning, team. Thanks for taking the question. My first one is on operating margin. I mean it does look like it came in a little bit towards the lower end of the range. And I think you did mention some added wage pressure and some other things going on. Can you just touch on what – on the operating line and I guess the SG&A line, what is within your control to start to bring down a little bit more versus what are things that maybe likely persist into next year? I know you gave a little bit of color on the cadence but anything more specifically, you can think about in terms of modeling the cadence of SG&A over the course of fiscal 2024? Thank you.

Yes. Thanks, Korinne. As you think about operating margin and kind of areas as we're looking forward to influence that really comes down to our Feel for Growth initiatives on top of all the sales growth initiatives that we're driving. But thinking about areas that we've been working through, we've now started to see some of the benefits come through in our supply chain with our shipping frequency and we're seeing that flow through now just in a test environment. We're now working to ramp that up. We will be looking to bring about 80% of our fleet online with that. But when we look to 2024, we've talked about a $20 million benefit that we're working to deliver as we go through that. It's about 75% of all to the SG&A line, 25% on the margin line. So within the margin, we've got expansion opportunities both within our own brand penetration but also with the Fuel for Growth activities that we'll be driving. And that's happening largely in the back half of the year as we start to deliver more on that. From an SG&A point of view, again more back half loaded. We'll have higher dollars overall. But from a cadence perspective, we'll start to see leverage as we get into the back half of the year. And that's being driven by the Fuel for Growth efforts. Things that we have in flight again that are going to continue to ramp. We are putting in energy management systems within our stores. We're also implementing LED light across the fleet. Like I said, we'll continue to ramp up the shipping frequency and a lot of the benefits that we're getting within our transportation efforts. And then we're also working on non-trade spend. So as we're going through contract negotiations, those will continue to come online as well as we get through the year.

Thank you. The next question is from Ashley Helgans from Jefferies. Please go ahead.

Hi, thanks for taking our question. I know you mentioned about traffic, but do you think consumers trade down at all in any categories or even trade out. And then anything you can tell us about your expectations for the promotional landscape. Thanks.

Sure. Thanks for the question. I think when we think about trade down or trade out, it's not really what we're seeing our customers do. As I mentioned in the prepared remarks, what we are seeing customers do is search more for value. So they do gravitate a bit more to when something is on promotion more likelihood to be buying it on promotion. And so with that we certainly see a little shift in behavior from what we had seen earlier in the year about a little bit more frugality. The trend that's persistent from the beginning of the year as people does not buying things that they don't need. So we talk all year along about things like styling tools that seem less demand simply because that's a bit more of a you only buy it if you need it unless you feel like you have extra money in your wallet. So a general sense of frugality, but not much more than that in terms of new trend or new behavior. And if you could remind me, what was your second question again?

One moment. Let me reopen your line. Your line is open.

Okay. Thanks. And then just anything you can tell us about your expectations for the promotional landscape as we move into the next fiscal year? Thanks.

Absolutely. So overall, what we saw if I separate Sally and BSG, so promotional activity at Sally this past year was generally consistent through fiscal 2023. So what we put out there on promotion. In Q4, we saw a bit of step up in the mix of products sold on promotion, as I just mentioned in terms of how people are searching for value. We expect value to be important as we go through 2024. In BSG, promotional activity was up modestly through 2023. We expect that to remain constant in 2024 as stylists also continue to seek out deals. When we think about that holistically, the way we're planning for the year is because our customers are remaining conservative, we're going to stay conservative on pricing. And we'll also though continue to lean in where we see that there's a UPT opportunity. We'll lean in on promotions, importantly, our vendor partners are continuing to be supportive and aligned with that strategy. So good confidence about our gross margin level staying above 50% continuing to execute the business we did, but being realistic that customers are searching for value and finding the right ways to do that. Underpinning it all is the focus on our strategic initiatives. Our strategic initiatives will actually help us drive units. And at the end of the day, while we might not see as much coming through from pricing as we've seen in the last few years, that comp growth from the strategic initiatives is all about customers leaning in and buying more units.

Thank you. Your next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Hi. This is Zack on for Simeon. Thanks for taking my questions. You guided to a flat comp and 9% margin. What can happen if the comp is negative or weaker than expected? How much cushion do you have for the 9% guidance? And in an adverse scenario, what type of negative comp would potentially jeopardize that 9%?

Yeah. Thanks for the question. Yeah. So guiding to the 9% is about where we are right now today. So flattish sales and overcoming some cost increases, typical cost increases like merit, as an example is what we're working to offset with our feel for growth as well as to continue to invest in our strategic growth initiatives. So we feel good about the gross margins at least 9%. As sales -- bring differences come to -- we do have good cost management that we've been able to deploy over the years. You should have seen that. So feel like we can protect that. On the upside though, we talked about the growth initiatives delivering 200 to 300 basis points. So, in a more normalized environment, if the macro pressures were to dissipate, we see top line modest growth and that's where we see some nice expansion on the operating margin line.

Thank you. Our next question is from the line of Olivia Tong from Raymond James. Please go ahead.

Great. Thanks. Good morning. First, just on the Q1 guide, I just wanted to understand that a little bit better, because the company seems fairly straightforward and the closures have -- haven't yet lapped in Q1. But you also what's driving the 7.5% op margin target versus the 9% for the year.

The key driver there is the ramp of our Fuel for Growth initiatives. So we're lapping the last quarter of our store closures from last year. So our sales number is a bit more pressured which as you'd expect pressures a bit SG&A leverage. But what really happens through the year is the Fuel for Growth initiatives, the $20 million that will be incremental is more realized later in the year than it is in Q1 which is really what's driving the operating margin being a bit softer in Q1, fully in line with our expectations as we're getting through that last quarter of the store closure impact. You also have a bit of a ramp, but a sequential improvement modest, but through the year with the top line as well. Beyond just the store closures you've got the ramp of the strategic initiatives as well.

Got it. And then can you just touch a little bit more on the Walmart partnership you mentioned? I don't recall you talking about that before, but just what exactly is it? And -- and how many -- and what's involved in that, whether there's a store component as well?

As you guys know, we've been out there and participating on Amazon.com with our marketplace for a number of years now. The initiative we have in place right now is recently fully launching our own brands on to the Walmart marketplace. So it's a digital play. It's really for us to get access to a new customer base that might not shop regularly at Sally today, but that we can introduce them to our own brands. And opportunity to sell through Walmart to accomplish that, but also opportunity for them to learn about the brand and learn a bit more about Sally. So we're excited about that and then furthering that growth within the digital space in Sally. We'll look as the first half of the year moves on to also start to participate in some other marketplaces including Instacart and DoorDash.

Got it. But just to clarify, this doesn't impact your Amazon related actions in any way?

Not at all, not at all. This is a build on to that. So just understanding that marketplace has been a great vehicle no matter who the partner happens to be, to be introducing some of our own brands and expanded the reach of those owned brands. Is the focus on walmart.com today. It will -- it's also the focus on amazon.com today and that will continue.

Understood. Thank you, so much.

Thank you. And at this time, there are no further questions in queue. Please continue.

Well, I just want to thank everyone for joining the call today and thank all of our associates around the world. We delivered fiscal 2023 results in line with the expectations we laid out at the beginning of the year. We also advanced our strategic priorities in the year with the launch of new concepts and services, product innovation and distinctive omnichannel experiences for our Sally customers and BSG stylists. We're looking forward to successful 2024. And appreciate your interest in the company. Thank you.

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