Good morning, everyone, and welcome to Sally Beauty Holdings Conference Call to discuss the Company's Fourth Quarter and Full Year Fiscal 2024 Results. All participants have been placed in 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 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 conclude our fiscal year with strong results in our fourth quarter which met our expectations on the top line and exceeded our expectations on the bottom line. The results reflect our fourth consecutive quarter of positive comp sales in our BSG segment and our second consecutive quarter of positive comp sales at Sally Beauty. This is a testament to our teams who have been navigating a dynamic environment with agility, while meaningfully advancing our strategic pillars. As we anticipated, our business strengthened in the second half of the year as our initiatives continued to mature and gain traction, contributing more than 250 basis points to our comparable sales in the fourth quarter on top of the 250 basis point contribution in the third quarter. In addition to this top-line momentum, Q4 represented another quarter of strong gross margin, effective cost-control and improved profitability with adjusted operating margin expansion of 80 basis points over the prior year to 9.4%. It's clear that our actions around performance marketing, product innovation, digital marketplaces, expanded distribution, and new services are driving operating and financial improvements across the business. Touching on the financial highlights of the fiscal year. We delivered consolidated net sales of $3.7 billion, strong gross margins of 51% and adjusted operating income of $315 million, enabling us to generate $247 million of cash flow from operations. We significantly strengthened our balance sheet with the refinancing of our senior notes and the repayment of our outstanding ABL balance while also returning value to the shareholders through $60 million of share repurchases throughout the year. There are also a number of operating successes to highlight. We built new and lasting relationships with customers through effective engagement, education and marketing initiatives. In fiscal year 2024,…

Thank you, Denise, and good morning, everyone. We are pleased to be wrapping up a strong second half of the year with continuing momentum across our key financial metrics. Our Q4 results mark our second consecutive quarter of a positive top-line performance in both business segments. Additionally, we delivered healthy gross margins well above our 50% target range. Adjusted operating margin ahead of our guidance and strong operating cash flow that allowed us to reduce our debt levels and return value to shareholders. Fourth-quarter consolidated net sales of $935 million increased 1.5% while consolidated comparable sales grew 2%, reflecting an improvement in new and reactivated customer trends at Sally Beauty as key strategic initiatives continue to mature, and continued momentum at BSG, driven by expanded brand and territory distribution. Global e-commerce sales were $91 million and represented 10% of total net sales. Fourth quarter gross margin expanded 60 basis points to 51.2%, reflecting lower distribution and freight costs from supply-chain efficiencies. Adjusted SG&A expenses in the quarter totaled $391 million, down slightly from the third quarter and up 1% versus a year ago, which was in line with our expectations. The modest increase from the prior year primarily reflects higher labor and other compensation-related expenses as well as planned increases in advertising spend, partially offset by $5.5 million in savings from our Fuel for Growth program. On a full-year basis, we achieved $28 million of pre-tax benefits to gross margin and SG&A in fiscal 2024, and expect to capture a cumulative $70 million of savings in fiscal 2025. Additionally, we expect to incur approximately $10 million in charges related to our Fuel for Growth initiative in fiscal 2025 which are expected to be excluded from adjusted earnings. As Denise mentioned, we remain on track to achieve up to $120 million…

[Operator Instructions] And our first question today comes from the line of Oliver Chen with TD Cowen. Please go ahead.

Hi, Denise and Marlo. The brand refresh sounds really encouraging. Why is now the right time? And what are your thoughts on how that will manifest in comps and traffic and the timing of how we should think about that as you phase it in? Also across the comp metrics, as we think about the forecast at either in both divisions, do you expect AUR to continue to be positive and would love commentary on Color, Nails and Hair as we think about those forecasts at the divisions as well going-forward? Really nice momentum in all of those categories. Thank you.

Good morning, Oliver. I appreciate the question. This is Denise. Let me start with brand refresh on the Sally side. We are excited about the potential that we have here. And you specifically asked about the timing and why now is right. I think you've been on the journey with us, but we made the strategic decision to close a set of stores a few years ago to really reposition us into all the markets that we needed to be in and wanted to be in. We returned to positive growth coming to the end of our fiscal '24 as we've just discussed. And we've been doing a lot of test and learn whether that was through our Studio by Sally initiative or other small pilots. So we feel like we're well armed with the information now on what can move the needle and engage our existing customers as well as new customers. So what we're really working on is changing the way customers can experience the store as well as how they talk. We talk about the brand externally. So store will be about new floor plans and fixtures, more opportunity for discovery, really moving away from a supply house to a beauty experience. We're going to have the opportunity to test some new assortment which we're excited about. When we think about what we're testing in Orlando right now on the storefront, we're testing a range of options at different levels of investments. That average investment is about $150,000 a store, but testing a range around that. We'll see how that works through. We'll see how those different tests come out, but we're optimistic that we'll be able to expand on what we're doing as we would look into fiscal '26 on that front. And importantly, we're going…

Okay. One follow-up. You've competed really strongly in a promotional environment and the middle and lower definitely continues to have pressure, indoor volatility and confidence -- consumer confidence. What are your thoughts on the promo environment? And Marlo, the compares get tougher, as you mentioned in the back half. Does that imply that comps will likely be negative on the back half? I know you embed a lot of conservatism in the guidance as well generally? Thank you.

Sure. So on the promo front, we're really seeing consistency over the last couple of quarters. Value continues to be important on both sides of the house. In the quarter, Sally was actually down a bit in terms of promotional frequency compared to the prior year and which just reflects some of the strategic choices we've made on how to navigate promotional penetration. BSG was pretty consistent. We're looking for that to continue into the new year. I think we feel like we have the right levers to be able to pivot as we need to not materially change our promotional cadence, but still give customers that value that they want.

Yes. And thanks for the question on the quarterly cadence of the top-line comp. From a top-line perspective, we don't see necessarily going negative, but it's certainly lower than the front half where those compares get a bit harder but we do see the momentum coming out of 2024 into 2025 continuing strong. So stronger first half than we see back half, but that's only from a compare point of view. From a dollars point of view, we still see the volumes very strong.

Thank you. Best regards.

And our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Hi, good morning. This is Sarah on for Korinne. Just one on transaction versus ticket at the beginning and end of the quarter and how that has trended for BSG? And then for the Happy Beauty stores, what you're seeing in terms of transaction versus ticket trends there?

Sure. I'm happy to talk about that. So on the BSG front, transactions were quite strong in the quarter. We definitely saw a frequency increase in terms of stylists coming to shop, up low-single digits which we felt really good about that. We saw a little lighter UPT, but not unexpected given that we saw the frequency build. So net-net coming out to be that positive one comp, which we felt nice about and complements the rest of the year that we had there. On the Happy Beauty front, we continue to see great strength in our average unit retails, which is a testament to the UPT of what people are putting in their basket and seeing -- and shopping across the stores. They come into the store. We continue to see transaction trends improve and we are excited as we launch our next 10 stores that will be open Black Friday to continue to test into locations where we believe that transaction strength can come through, which includes some strip mall locations, but also includes testing in traditional mall environments that have built-in traffic with them. So, seeing nice progress, but we'd like to see more there and that's what we're working through in the next phase of the test.

And our next question comes from the line of Olivia Tong with Raymond James. Please go ahead.

Great. Thanks. Good morning. I was wondering if you could talk about the building blocks to margin improvement and whether you think the 50 basis point expansion that you're seeing this year for fiscal '25, excuse me, is the right way to think about long term?

Sure. So it's probably one for both Marlo and I. I think the starting point of that is really the sales growth and the sales growth trajectory. We're definitely on that path to delivering low single-digit, top line growth. We exhibited that in the third quarter and the fourth quarter this past year. And with that continuity that we get there, we certainly can get some leverage. What's behind that is behind all the things that we've talked about with Sally around Product Innovation, Marketplaces, Licensed Colorist OnDemand, personalization, and what we hope we'll be building into with the brand refresh and the marketing side of that, that will come in the second half of the year. And then BSG, we continue to show strength as a leader in this distribution space. The brands that we're bringing in, the distribution expansion and the M&A that we have in front of us get us into that low single-digit range, which as I said, is the foundation to getting us to margin improvement. Marlo, do you want to talk a little bit about Fuel for Growth?

Yes. So in addition to the low single-digit range that we're working over the long term, that contributes to SG&A leverage, in the near-term, what we're working towards is our Fuel for Growth program, which in 2025 we have slated to deliver over $40 million on our way to a cumulative run rate of $70 million over the program life. In 2025, it will come mainly -- well, not mainly, 60% of that will come through gross margin, 40% in SG&A. So as we look to the near-term, we see leverage building through operating or gross margin expansion with sales or selling SG&A expenses basically at the same percent as last year. Over the long-term, we see further leverage in SG&A. So as we look into our Fuel for Growth program, we're expecting about $120 million of run-rate by 2026. So that will create leverage both through gross margin expansion as well as SG&A leverage over-time.

And I think when we wrap all that up, the trends that we're on right now, we look at our long-range horizon, which is about a three year planning cycle to be well within our algorithm of low double-digit operating margin as we get to the end of that cycle.

Thank you. That's very helpful. And then just two follow-ups. First, given the challenging macros that we're seeing, are you seeing any benefit from consumers who haven't historically shopped in your store coming in to find value, whether switching to DIY color or any other initiatives like that? And then in-terms of the digital side, the E-commerce side, could you talk a little bit more about some of the initiatives that you have? We talked a lot about store less so on E-com. So just wondering what additions you're planning for fiscal '25 there? Thank you so much.

Yes, sure. I'm happy to do that. When we think about our customer base on the Sally side, the trajectory changes that we've seen in the last two quarters come from both new and reactivated customers. Certainly, some of those new customers are coming and getting introduced to us through Licensed Colorist OnDemand, which is our online platform to be able to give education and coaching to customers about coloring their hair and the journey they can be on. We do think some of those are first-time colors of their hair. So to the point of bringing in that new customer we're seeing some nice traction there. And then reactivated customers, I think the messaging about the assortment that we have, that customer service of what we can deliver to customers, newness in things like nails, it's nice to see the re-engagement of customers happening there as well. So we always have that great loyal base, but those other two populations are exciting for us to see. And we think that that's going to continue and we have the momentum with our initiatives to make that happen. On the digital e-comm front, certainly didn't mean to not do justice there compared to what we're doing in the stores. We should have a lot going on. And -- so when you think about different component parts of that, over the last couple of months, the biggest launch has been the expansion of our marketplace program into DoorDash and Instacart, which uses our stores as the point of distribution. But we do think also reaches some new customers who might not be thinking Sally first or might not have a Sally in their backyard, but need or want that product in a timely fashion. So we've seen nice growth there. And in fact, for the full fiscal year this past year, we saw about $13 million in total growth coming from marketplaces, which feels like a good number to us. But we're also going and focusing on growing against our own platforms as well. Our app is getting some really nice engagement. We complement that with our SMS and CRM activities becoming more personalized and the journey we're on to continue to deliver on that personalized communication is there. And then we're going to be working on the digital side with our owned platforms as well to roll out that brand refresh and kind of updated Sally persona, still Sally to the core, but maybe a little bit more modern, a little bit more sophisticated view of how customers will see us and act with us online. So when we combine personalization and CRM with continued expansion of marketplaces and the improvements against our own sites, it's certainly an important area of growth for us.

And our next question comes from the line of Linda Bolton Weiser from D.A. Davidson. Please go ahead.

Yes, hi. So it sounds from your tone that you're really -- you've made these changes in the business and you're finding success in many areas that you're -- and you're talking about this consecutive quarters of positive comp growth. So I'm wondering if that's like your goal. I mean, I don't mean to put you on the spot, but are you kind of saying that you want to have like more consistency where you actually produce a positive comp overall, every quarter, I mean, is that kind of like a goal of yours? Thanks.

I think our -- I just go back to our guidance and how we think about our guidance. Our guidance really is low single-digit comp growth, expanding our margin underneath that, so delivering operating growth a little bit faster than that sales growth and getting back to a double-digit operating margin. We are building towards and expect that we will drive comp growth in both of our segments, contributing to the entire portfolio and see us on a good path to do that as we've talked about all of our initiatives. So absolutely, the path we're on, have a lot of conviction about how we're managing through that and the plans we have in place.

And can I just follow-up to about, on the Sally side, I know the long-term strategy does involve increasing the percentage from owned or private-label type brands. But you didn't really mention that on the call in terms of any percentages. How do you marry that idea of having your own private-label brands with trying to modernize the concept a little bit and have a more test-and-learn kind of thing? It seems to me that that might mean having a reorientation toward more popular outside non-owned brands. Can you talk about that?

We think the marriage of owned brands and national brands and up-and-coming brands is a great one. When we think about the business that we're building in Sally, it's about giving people brands they recognize. It's also about giving them great high-quality brands at good price points that are things we can generate in our own brand business. Our own brand's business in penetration grew modestly in fiscal '24, in line with our expectations. And we felt great that as an example of Bondbar -- of -- modernizing with owned brands like Bondbar is a great example of how we're actually utilizing owned brands as part of that modernization. But Bondbar grew to be our number five owned brand in the store in only 18 months to 24 months since we originally launched that very first SKU. And so a nice trajectory there. But deep partnerships with other brands out in the industry. We talked about launching more product with Sauce Beauty. We have a great partnership with Soapbox to name just a few as well as some of our largest partnerships with folks like Wella. And all of those really build a robust engine behind what we can offer our customers. And we think marrying the both together is a great outcome for a specialty beauty play.

Great. And then my final question, if I could fit it in, is on the drug store closures that we're seeing in that channel and I know that in some ways you view yourself as competing with drugstores, at least on the DIY color area. But are the drug store closures benefiting your business in any way?

Yes, we don't really look at the data specifically in that way. I think we look at saying, here's the customer base we serve, 78% of our sales come from 16 million customers that we know and are part of our loyalty program. The more that we can continue to build that customer base and as I mentioned, we're seeing new and reactivated customers trending well in our portfolio. We'll take advantage of all of those opportunities where they exist. But we're really running our own play to be winning in these categories, a little more so than trying to think about specific closures that we might go target to pick-up any volume. But feel great about the customer trends that we're seeing.

Thank you.

And our next question comes from the line of Ashley Helgan with Jefferies. Please go ahead.

Hi, this is Sydney on for Ashley. Thank you for taking our question. You mentioned Studio by Sally informing this new brand refresh. I was just wondering if you can give a bit more color on what some of those key takeaways or findings have been that you'll be carrying over?

Absolutely. Studio by Sally was a wonderful test for us to understand how a customer could engage differently with both the thought of DIY kind of hands-on education as well as some changes in the store format. Starting with the store format piece, some of the things that we were doing in studio, we lowered the height of the gondolas and fixtures, so you could see across the entire end of the store. And we actually reduced our SKU count and put more education, navigation and information in the store as customers were shopping to understand brands, to understand how to get great results. We increased a bit the impulse fixture space in the stores and we oriented Nail in a little bit better way for the customer to really fully experience the category. All of those are things that we're carrying through into the new experience that we're looking at and excited about that. And what we learned from the service side of the studio store has really come to life in License Colorists OnDemand. So our ability to offer that consultation about how to get the right result. We have our store associate and our beauty advisor who can do some of that in-store real-time, but taking the opportunity to actually have licensed colorists on staff who we can engage -- who customers can engage with online really grew out a lot of how the services component of studio evolved as well. So fantastic learnings out of that, that we are carrying forward.

Thank you. That's really helpful.

And our next question comes from the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Hi, this is Zach on for Simeon. Thanks for taking my questions. Apologies if this was asked already. But with respect to pricing, can you give us a little color on what's happening at retail?

Yes, overall, for us, we're seeing modest increases in AUR on both sides of our business. And at this point, we do some tactical pricing activity, but we are not seeing significant price increases from our vendors and things like that. So pricing overall can stay at a moderate pace. And given that we are growing AUR in that environment, we're doing a great job containing promotions and making sure that the promotions we're offering are really value-added to both our retail customer and our stylist community. So good, healthy place to be. I expect that that will continue in fiscal '25 as we continue to grow the business.

That's helpful. Thank you. And then just as a quick follow-up, can you also talk about what's happening with product costs and some puts and takes there as well?

Yes, product costs are really quite in control. I think that we've seen inflation broadly start to moderate and that's happening with our product costs coming through as well. We do not see product cost decreases coming through in any meaningful way, right? We watch commodities and work against that. So we're in a pretty good environment. And I know there's one question out there that what could happen with tariffs? I think what I'd point out is less than 10% of our product comes from China. So our exposure is pretty limited and we think it's within the same set of actions that were taken a few years ago to manage if that comes through, which we can look at our vendor choices, we can look at sites where we source from, could take some modest pricing if it came to bear. But I think the most important part there is really limited exposure for us.

Got it. Thank you.

[Operator Instructions] And at this time, it does appear there are no further questions from the phone lines.

So to wrap up today, I thank you to all of our associates across the globe. Thank you to our shareholders. The fourth quarter for us really capped a successful year where we delivered financial results within our expectations, strengthened the balance sheet, returned value to shareholders and meaningfully advanced our strategic initiatives. And we think we have great momentum entering fiscal '25 to continue on this track. So once again, thank you to everyone, and we'll talk to you next quarter.

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