Good morning, everyone, and welcome to the Sally Beauty Holdings conference call to discuss the company's first quarter fiscal 2025 results. [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.

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'd like to remind everyone that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk 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 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 are pleased with the continued momentum we saw in the first quarter in both our Sally and BSG business segments. Our ongoing focus on advancing our strategic pillars enabled growth in net and comparable sales, gross margin expansion and year-over-year improvement in profitability. Additionally, our free cash flow provided us with the flexibility to invest for growth, further strengthen our balance sheet and return value to shareholders through share repurchases in the quarter. Fiscal Q1 was marked by a fifth consecutive quarter of positive comparable sales at BSG as well as a third consecutive quarter of positive comps at Sally. On a consolidated basis, we grew the top line despite 60 basis points of unfavorable impact from unexpected FX headwinds. For our Sally segment, comparable sales growth of 1.7% reflects continuing traction with our initiatives and includes notable performance in hair color as well as e-commerce, which benefited from our successful marketplace strategy. Our targeted marketing campaigns are driving results, including strong customer reactivation and new customer acquisition. As we anticipated, our Fuel for Growth program and strategic promotional tactics resulted in strong gross margin performance, which expanded by 100 basis points compared to the prior year. Looking at BSG, comparable sales growth of 1.4% was primarily driven by a robust innovation pipeline and expanded distribution. We saw broad-based category growth across color, care and styling tools. As expected, the shortened holiday shopping period meant fewer chair hours for stylists, yet underlying demand remains solid. We are pleased to see operating margin levels regain ground, coming in above 12% and reflecting 130 basis points of year-over-year expansion as sales leverage and our Fuel for Growth program delivered benefits. Looking at fiscal Q2, we started the quarter with a choppy January, which had…

Thank you, Denise, and good morning, everyone. We are pleased to be reporting a third consecutive quarter of positive top line performance in both business segments despite a $6 million headwind to sales coming from foreign currency translation. We also delivered healthy gross margins, operating margin expansion and strong free cash flow that allowed us to reduce our debt levels and return value to shareholders in the quarter. Q1 consolidated net sales of $938 million represented an increase of 0.7% and included 60 basis points of unfavorable foreign currency impact. Consolidated comparable sales grew 1.6%, reflecting continued momentum across both our Sally Beauty and BSG segments. Global e-commerce sales were $99 million. That's up 9% to last year and represented 11% of total net sales. First quarter gross margin expanded 60 basis points to 50.8%, primarily reflecting reduced shrink and lower distribution and freight costs from our continued supply chain efficiencies. Adjusted SG&A in the quarter totaled $398 million, up $5 million versus a year ago, which is in line with our expectations. The modest increase from the prior year primarily reflects higher labor costs as well as planned increases in advertising spend, partially offset by $6 million in savings from our Fuel for Growth program. In Q1, we captured approximately $11 million of pretax benefits to gross margin and SG&A, putting us on track to capture $40 million to $45 million of savings in full year fiscal 2025 and cumulative savings of approximately $70 million after achieving $28 million of benefit in fiscal 2024. The strength of our sales and margin performance in the quarter, coupled with savings from our Fuel for Growth program enabled us to deliver improved profitability versus a year ago. Adjusted operating margin of 8.4% increased 50 basis points. Adjusted EBITDA margin of 11.7% was…

Thank you. [Operator Instructions] Your first question comes from the line of Oliver Chen from TD Cowen. Please go ahead.

Thanks a lot. Hi Denise and Marlo. Great quarter. Regarding your second quarter guidance, what's happening by banner in terms of the dynamics of Sally relative to BSG? And then as we look towards the back half, what should we think about in terms of the comp trajectory implied by your guidance? Would also love your take about what the forecast embeds for traffic relative to ticket? Thank you very much.

Good morning, Oliver, and thank you for the congrats. We were excited about our first quarter. When I think about your question overall, I'll step back and start a bit with, we remain very focused to deliver on our full year comp sales plan, which is to be up 0% to 2% in comp sales, and our first quarter was squarely in line with delivering on that. As we look to Q2 and the guidance that there's for Q2, coming into the quarter. What we knew is that there are embedded in Q2, are two known headwinds for BSG from last year. So one is lapping the load-in of both Amika and Briogeo for our Armstrong McCall franchise businesses as well as an unfavorable calendar, in terms of ship days and numbers of Mondays of operation, which are big days for BSG. So those were kind of known pullbacks from what we would have seen in Q1. And then the guidance also reflects that the macro environment in January, and what's emerged in the quarter has been a little bit choppier and noisier than we had hoped for. But in all honesty, anticipated some of how we thought about our full year. And so within that, what are we really seeing, right? The noisiness that started in the new year, whether that was the flu, weather, new administration, wildfires. It distracted our consumer a bit and maybe created a little uncertainty. It's kind of manifested in two different ways. At BSG, our stylists have actually just seen disruption in their appointment books from illnesses, whether that be the customers, or themselves kind of taking time away from their chairs. And so, they are buying closer to need, and that's more focused on color that they need for their services, and…

Your next question comes from the line of Korinne Wolfmeyer from Piper Sandler. Please go ahead.

Hi, good morning. Thanks for taking the question. Maybe to build off of that prior question, just any color on kind of where you feel like you're sitting within your full year guidance range, after the Q1 and then the expectations for a softer Q2. You did reiterate that full year range. Just trying to figure out where we might stake out, and how much upside downside there is there. And then any color on kind of the operating margin cadence for the remainder of the year? You gave some Q2 color. But as we think about Q3 and Q4, any puts and takes that could alter that expansion cadence for the back half? Thank you.

Good morning, Korinne. I'll start on the point on comp and the range for the full year. I think the important part is we're four months into our fiscal year. And Q3 and Q4 are our largest two quarters of the year. So we've got a lot of the year to go. As we look at things today, we're squarely within the guidance range that we provided. I think there's nice potential for upside with the things that I just mentioned in the prior question on both the Sally and BSG side around innovation, performance marketing, things to come to pass. But I think as we said when we guided for the full year, we were also prudent that we haven't had a year yet that has not had some sense of newness, or uncertainty around the consumer behavior. So I feel good about where we are. I feel like we're squarely in that guidance range. Marlo, do you want to talk about operating margin?

Yes, the operating margin cadence in terms of how we're looking at the back half, it's really a continuation of what we've seen in Q1, and you'll see it in Q2, as well with our Fuel for Growth program, really bringing benefits on a quarterly basis. So we're looking at about $40 million of benefit. That was split between gross margin and SG&A. It's a fairly regular cadence, as you go throughout the quarters. And so, you'll see some gross margin expansion on the gross margin line, as well as SG&A. We'll contain those costs, you saw us leverage, are relatively flat in terms of dollars. That will continue as we go through the rest of the year as well. So the combination of the growth in the sales line as well as the Fuel for Growth benefits flowing through, we'll see some operating margin expansion continue, as we go to the back half of the year.

Your next question comes from the line of Susan Anderson from Canaccord Genuity. Please go ahead.

Hi, good morning. Alec Legg, on for Susan. Can you just talk about the promotional environment? What are you seeing year-over-year, and maybe even comparing it to pre-pandemic levels? And then just a follow-up on that. Are you able to talk a little more in detail about the puts and takes on gross margins in the quarter? I mean you mentioned lower shrink. Are you expecting that to last through the rest of the year? Thank you.

Good morning, Alec. On the promotional levels that we saw in Q1, what I'd start with saying is that value continues to be very important on both the Sally and the BSG side of the business. In terms of our promotional intensity, promotional levels were relatively flat and frequency was pretty consistent in both segments, compared to last year. Customers do continue to buy on those promotions. So we see nice uptake with that promotional activity. Given the way that we assort and we plan, we think we were at the right level of promotional activity in the quarter, and feel good about how we're working through that. And I think to that end, when we think about managing our promotions, we're really focused on delivering the value message to customers. So that they know that, that value is out there, but then doing it very strategically so that we're driving volume. So all of our promotions are really driven through the filter, of both creating that excitement for the customer, but achieving good unit volume when we do it.

On the cadence for the gross margin, again, we're very pleased with the expansion that we had in Q1, a 60 basis point expansion. Again, we expect that expansion to continue but moderate somewhat in the back half of the year. There are puts and takes in terms of our inventory levels, and purchases that will cause some fluctuation as you go. But in terms of the shrink improvement. That started in the middle part of last year with some actions that we put in place. So very pleased with that. That will continue, but it will start to moderate as we get to the back half of the year. Underlying too, is our promotional change. We made that about Q3 of last year as well, in terms of changing our strategic promo there that was adding to our gross margin and has continued. That will too moderate as we lap. But for the most part, our Fuel for Growth initiatives will continue, like I said, the pace at - consistent paces throughout the quarter and continue to add to that gross margin expansion.

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

Hi, thanks for taking our question and congrats on the nice quarter. So maybe to start, if you could just kind of share what innovation you're seeing in the market right now, and maybe how that compares to last year? And then, if you could talk maybe about how traffic was pacing throughout the quarter, and maybe how demand evolved? Thanks.

Sure. So on the innovation front, I think that the great news is within the hair space and the nail space overall, innovation has stayed very robust coming out of COVID, where there had been a bit of a pocket, or a lull in some of that innovation. On the Pro side, we continue to see in the care world, things such as K18 that have a lot of efficacy, and really help our stylists become more efficient in the services they provide. I think that's only going to continue. We've also seen great innovation around tools, and simplifying the way a stylist can use a dryer, or an iron and once again, make their lives a little bit easier, and we're seeing nice uptake from stylists as they're trading up to easier-to-use tools in the space as well. And on the retail side, those same trends persist and carry over. And I would also add that in the nail world, we continue to see strength around press ons and once again, people doing manicures at home with a lot better tools, and capabilities that you would normally find in a salon now becoming an at-home trend. So we're excited on all fronts about the innovation profile that we have coming through right now. You also had mentioned about traffic that we were seeing. Q1, what we saw, Q1 was quite benign. We saw great consistent behavior through most of the quarter outside of that natural period of time of that shortening of the holiday selling season, which just really compressed purchases a bit. So we saw transactions flat to up in both of our businesses, which was great to see. And as we come into the start of the second quarter, as I mentioned in some remarks earlier in my prepared remarks. We saw a little bit more noise come into the consumer patterns that are there. And we see that spike around flu season. We see that spike when we have some different weather patterns, or some big news cycles that come through. Underlying it, demand is healthy. We're particularly seeing that in the strength of our color business where that's a very sticky customer base. And a very loyal customer base in terms of what they come in. If anything, what we've seen is those customers who might not be color customers, and shop across other categories is where we see a little bit more hesitancy, or a little less traffic coming into the stores. But overall, pleased with the direction of the business.

Your next question comes from the line of Simeon Gutman from Morgan Stanley. Please go ahead.

Hi, good morning everyone and a nice job in the quarter. So my question is the margins of the business have been great. You've gotten good gross margin expansion, and you've really kept SG&A growth at a minimum, as you reinvigorate the top line. It looks like some of these things could be peaking. You mentioned gross margin could taper a little bit in the back half. I don't know does Fuel for Growth allow you to keep SG&A within a very low single-digit band. I guess the question is that you see the top line inflecting further, by the back half of the year as some of these margin levers taper, to be able to keep this kind of mid-single-digit rate of EBIT growth, which is impressive. That's the big question. How does this all play out? Do you have more initiatives that can help gross margin keep going, so you don't have to be as reliant on the sales accelerating? Just trying to get a sense of how you're thinking about it?

Yes. So Simeon, it's Denise. Let me start, and I'll have Marlo to talk a little bit more about some of the efficiency work as well. Overall, we believe that we are on a pace to get that mid-single-digit operating margin growth, as we proceed through the full year. We feel great about the Fuel for Growth and other initiatives that Marlo can talk about a bit more. But our top line really is built to continue to weather the ups and downs of what might come with the consumer. But continue to have those strategic initiatives drive growth. But I think that the great news is the flexibility that we have built in with the strength of the margin, the strength of the portfolio and innovation, depending with some moderation of what sales could be, I still feel great about the bottom line.

Yes. I would just reiterate our Fuel for Growth program. We've already delivered over $20 million, $28 million in '24. We've got another $40 million to $45 million on target for this year in 2025, and we're well on the path to $120 million by 2026. I'd say the good thing about that program, is not only do we have a path to the dollars, we actually are building a muscle within our own organization in terms of new ways of working, new ways of thinking. Continually to add to the pipeline of opportunity with our Fuel for Growth. So while we've defined this program as a three-year program, this is an ongoing program for us. So we're looking to see results for this for the long-term. But clearly, I believe that we're going to deliver, or actually are on the path to deliver the numbers that we put in. And so from a margin expansion, I see this not only going in '25, but beyond '26.

And your final question today comes from the line of Olivia Tong from Raymond James. Please go ahead.

Great, thank you. You called out external disruptions and macros is driving the expectation for Q2 deceleration. Obviously, that makes sense. Have you started to see any improvement now that we're further away from some of the shocks in January? And then, of course, your customer skews a bit more towards value. So given the increased macro pressures, I'd love to hear a little bit more about what are - what's going to offset that allows for that second half improvement, or if it's just moving further away from some of those shocks in January? And then switching topics on the topic of tariffs, which I don't think we talked about so far today. I know - I don't think you directly source from any of the main regions of China, Canada and Mexico. But if you could talk about your conversations with some of your vendors, and their exposure and how you think that could potentially play out? Thank you.

Good morning. Let me just start a little bit with the quarter. I think everything that we've seen around the macro items, is reflected in the guidance that we have. I will tell you, January showed a brunt of the weather and flu season, is peaking now. So we'll just watch those trends as we work our way through, the rest of the quarter. But feel good about where we are. And as I said, I feel good about our ability, to pivot and navigate as we need to, with the tactics that we can exercise throughout the back half of the year. And we have a proven track record. So when we think about that equation, of value becoming more important to customers, or could become more important to customers, we've been able to think differently about our promotional tactics. And importantly, focus on what's new and different for us, to keep getting customers in our door, which is really around innovation. It's our service levels. It's our capabilities around licensed colors on demand to create experiences that we don't otherwise have. And within the Sally business itself, continuing to push kind of our new brand image, as we're going to roll out some of our marketing campaigns. All our fuel underneath what is the strength of the strategic pillars coming, through that we're excited about. So we'll continue to navigate the year, but feel it's all within our control, to deliver as we work through. Marlo, do you want to talk a bit about tariffs?

Yes. From a tariff point of view, we've been through this before. So similar to the last round of tariffs, I think it is important, as you called out, to understand that our exposure is not overly significant relative to some of our peers. We do receive about 10% of our product, or less than 10% of our product from Asia and China, really nothing material from Mexico or Canada. We would employ a similar playbook that we did in the previous go around, which included a combination of switching vendors, increasing volumes at other sites and, of course, some price increases. But we're monitoring it, is a very uncertain environment at this point, but keeping a very close eye on it.

I'll now turn the call back over to Jeff Harkins.

Hello, everyone. It's Denise. I just want to close today by saying thank you so much to our associates around the world. I know how hard all of you are working, to serve our customers, bring them the innovation and coaching and advice that they need to deliver on their beauty aspirations. So thank you again for all the work that you do. And to our shareholders, thank you again for your support, and we look forward to updating you again next quarter.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.