HELE - NASDAQ

Greetings, and welcome to the Helen of Troy Second Quarter Fiscal 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Sabrina McKee, Senior Vice President of Business Development and Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Helen of Troy's second quarter fiscal 2025 earnings conference call. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements. Ms. Noel Geoffroy, the company's CEO, will comment on business performance and then provide some perspective on current trends. Then, Mr. Brian Grass, the company's CFO, will review the financials in more detail and discuss our outlook. Following this, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on management's current expectations with respect to future events or financial performance. Generally, the words anticipate, believe, expect, and other similar words are worth identifying forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other parties. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Ms. Geoffroy, I would like to inform all interested parties that a copy of today's earnings release and related investment deck has been posted to the company's website at www.helenoftroy.com and can be found by navigating to the Investor Relations section of the site or by scrolling to the bottom of the homepage. The earnings release contains tables that reconcile non-GAAP financial measures to the corresponding GAAP-based measures. I will now turn the conference call over to Ms. Geoffroy.

Thank you, Sabrina. Hello, everyone, and thank you for joining us today. I am pleased to report second quarter results that were above expectations. During the quarter, we took decisive actions toward our long-term strategic initiatives, including strengthening the core and further shaping our growth portfolio. In addition, despite persistent macro headwinds, we are generating results on our efforts to reset and revitalize our business, which we believe indicates we are on the right path to improve our operating performance. Through our increasingly data-driven approach, we continue to see improvement in our brand fundamentals. Project Pegasus continues to be on track and is generating critical fuel for reinvestment in our brands. This fuel, combined with our sharper brand fundamentals, is leading to stronger marketing with new creative, new more agile media campaigns, better innovation, and better execution. We are also continuing to grow our distribution. Fiscal year-to-date, we meaningfully grew our U.S. weighted distribution by 9% year-over-year, making our brands increasingly available where our shoppers shop. All of these efforts contribute to improved market share performance, with eight of our key categories growing or maintaining share this fiscal year-to-date in our U.S. measured channels. Now to share an update on shaping our portfolio. We have previously shared that we were engaged in an active process to divest the business. Shortly after the end of the quarter, we opted to pause that process as the offers we received are not indicative of the value of the business or its potential. We will continue to consistently evaluate our brands to ensure we position the company for long-term success and growth. Our acquisition strategy remains to look for brands with strong global growth potential, are financially accretive, and meet our Better Together criteria. We will remain disciplined in our approach to both divestitures and acquisitions to ensure we are able to deliver on our commitment to increase shareholder value. Before I turn to the results for the quarter, I will provide an update on the Curlsmith and Tennessee distribution center operational issues. As previously discussed, we resolved the Curlsmith ERP integration issues. In the second quarter, we successfully integrated Curlsmith into our distribution network ahead of plan. With respect to our Tennessee distribution center, I'm pleased to share that we consistently improved our shipping execution and operating efficiency throughout the quarter and have now addressed the root causes of the technology issues we experienced. We are now servicing customers and consumers in line with our expectations and anticipate reaching our productivity goals by the end of the fiscal year with a continued eye on best-in-class service. Now let's turn to performance across our portfolio. Overall, we see our Home & Outdoor performance strengthening, our Wellness performance ahead of our expectations, and our International performance remains a bright spot. Our Beauty performance was below our expectations for the quarter, but we are taking focused actions to improve the fundamentals of the business and its brands. Starting with Home & Outdoor. OXO grew share fiscal year-to-date in core kitchen utensils, a category that we see as largely normalized post-pandemic. The brand achieved strong sell-through at Walmart following the June expansion into 3,200 stores and over five times increase versus the test with additional distribution coming soon. OXO is also gaining momentum in dry food storage with share growth fiscal year-to-date. OXO also continued strong momentum in coffee. Shortly after the end of the quarter, OXO launched our new portable Rapid Brewer coffee maker, which makes hot coffee or cold brew in five minutes or less. It has already earned positive reviews from Food & Wine and Consumer Reports. As I will discuss in more detail later, International performance, especially in EMEA, is also strong for OXO. Hydro Flask outperformed our expectations and is a key example of brand revitalization across innovation, distribution, and marketing. We still have many areas of opportunity, but are encouraged by our meaningful progress across all key focus areas. The new Travel Bottle was launched in the second quarter and provides consumers with the best of both worlds, the utility of fitting in most car cupholders or backpack pockets, and it is leak-proof. The new bottle comes with your choice of a Hydro Flask flip straw or chest cap along with a convenient carrying strap. Hydro Flask also successfully launched into Costco, a key retailer for expanded target consumer. The brand also benefited from strong distribution internationally with sales up in all key markets. Hydro Flask also launched a new brand campaign called, We Make It, You Own It. The campaign celebrates the individuality of the Hydro Flask consumer and highlights the broad array of products, configurations, and colors we offer for a wide range of consumer preferences and occasions. The brand also showed great consumer obsession and marketing agility this quarter by being a part of two relevant cultural moments, Brat Summer and the MTV Video Music Awards. Music artist Charli XCX launched her Brat Album in June with an iconic lime green album cover, leading Gen-

Thank you, Noel. Good morning, everyone. I'm pleased to report second quarter results that were slightly above the high end of our expectations for net sales, adjusted EPS, and adjusted EBITDA. As Noel mentioned, we substantially completed the remediation efforts related to the automation system at our Tennessee distribution facility with minimal impact to sales in the quarter. We believe that we are now in a position to achieve targeted efficiency levels by the end of fiscal '25. We also rightsized our cost structure in line with our fiscal '25 net sales expectations, while maintaining our planned incremental growth investment, an increase of approximately 165 basis points year-over-year in the second quarter. While we know we have more work to do to achieve our long-term goals, we believe these results represent solid progress considering the executional challenges we overcame in the quarter. I'll now move on to a more detailed discussion of our second quarter results. Consolidated net sales declined 3.5%, slightly ahead of our expectations as the second quarter sales impact from automation challenges at our Tennessee distribution facility were less than originally expected. The sales decrease was primarily due to a decline in Beauty & Wellness, reflecting lower sales of hair appliances, air purifiers, and humidifiers, primarily driven by softer consumer demand, reduced replenishment from retail customers, and a strong competitive environment in hair appliances and air purification. Home & Outdoor grew almost 1% year-over-year, primarily due to improving trends in OXO and Hydro Flask, partially offset by a slight decline in Osprey. Our International business continues to perform well with sales growth of almost 5%. Consolidated gross profit margin was 45.6%. The 110 basis point decrease was primarily due to a less favorable product and customer mix within Home & Outdoor and unfavorable inventory obsolescence expense year-over-year. These factors were partially offset by lower commodity and product costs, partly driven by Project Pegasus. GAAP operating margin for the quarter was 7.3% compared to 9.5% in the same period last year. On an adjusted basis, operating margin decreased 290 basis points to 9.8%. The decrease was primarily driven by the planned incremental growth investment of 165 basis points I referred to earlier, and an estimated 85 basis point impact from additional costs associated with automation start-up issues in our new distribution facility. Decline also reflects the lower gross profit margin and the impact of unfavorable operating leverage. These factors were partially offset by lower overall personnel expense and the lower commodity and product costs I referred to earlier. On a segment basis, Home & Outdoor adjusted operating margin decreased 270 basis points to 15%, primarily due to unfavorable distribution center expense, a less favorable product and customer mix, and planned incremental growth investment. Adjusted operating margin for Beauty & Wellness decreased 350 basis points to 4.4%, primarily due to planned incremental growth investment, unfavorable inventory obsolescence expense year-over-year, and the impact of unfavorable operating leverage. Our tax rate in the second quarter was 22% compared to 17.9% last year. The year-over-year increase was primarily due to the impact of our Barbados tax legislation enacted during the first quarter of fiscal '25, shifts in the mix of income in our various tax jurisdictions and an increase in tax expense for discrete items. Net income was $17 million or $0.74 per diluted share. Non-GAAP adjusted diluted EPS was $1.21 per share, reflecting lower adjusted operating income and an increase in the adjusted effective tax rate, partially offset by lower weighted average diluted shares outstanding and a decrease in interest expense. Free cash flow was $39.7 million, an increase of $11.7 million year-over-year, but slightly below our expectations for the quarter due to higher working capital needs. We ended the second quarter with total debt of $713 million, a sequential decrease of $35 million compared to the first quarter. Our net leverage ratio was 2.34 times compared to 2.37 times at the end of the first quarter. At the end of the second quarter, our Board authorized the repurchase of $500 million of our outstanding stock in keeping with our intention to return capital to shareholders, not otherwise deployed for core business growth or strategic acquisitions. The authorization was approved as part of the Board's regular process of reviewing our capital allocation and existing authorization. Turning now to our outlook for fiscal '25, we are maintaining our expectations for consolidated net sales, adjusted EPS, and adjusted EBITDA, and have updated our expectations for sales by segment, free cash flow, and ending net leverage ratio. We remain cautious as external headwinds of increased promotional activity, softer and more variable retail replenishment, and macro pressure and uncertainty remain. While the Federal Reserve's move to begin lowering interest rates will likely provide relief for some, we believe that the benefit will take some time to cycle through to many consumers. We also expect a year-over-year headwind from a shorter holiday shopping season between Thanksgiving and Christmas this year. We continue to expect net sales between $1.885 billion and $1.935 billion, which implies a decline of 6% to 3.5%. This includes the unfavorable impact to net sales of approximately $8 million due to the shipping disruption from the automation startup issues at our distribution facility and the Curlsmith ERP integration challenges in the first quarter. In terms of our net sales outlook by segment, we now expect a Home & Outdoor decline of 2.3% to growth of 1.4%, which includes the impact of shipping disruption in our Tennessee distribution facility during the first quarter, and a Beauty & Wellness decline of 9% to 7.5%, which continues to include a year-over-year headwind of approximately 1% related to the expiration of an out-license relationship with respect to one of our Wellness brands. We continue to expect GAAP diluted EPS of $4.69 to $5.45 for the full year and non-GAAP adjusted diluted EPS in the range of $7 to $7.50, which implies an adjusted diluted EPS decline of 21.4% to 15.8%. We continue to expect full-year adjusted EBITDA of $287 million to $297 million, which implies margin compression of approximately 150 basis points to 160 basis points year-over-year with approximately 50 basis points coming from the automation start-up issues at our distribution facility. We continue to incrementally invest back into product innovation and marketing for the long-term health of our business and our brands and continue to plan for a year-over-year increase in growth investment spending of roughly 100 basis points. We continue to expect some gross margin compression given our expectation of a more promotional environment and a less favorable sales mix. However, we still expect to expand gross margin year-over-year due to Project Pegasus. Finally, we anticipate lower operating leverage from the decline in revenue, which we expect to be offset by the rightsizing of our cost structure that we began to implement in the second quarter. Our first quarter interest expense outlook included the expectation of 225 basis point reductions for the remainder of fiscal '25, which now largely aligns with the Fed's 50 basis point reduction in September, and we have assumed no further rate reductions for the remainder of fiscal '25. As such, our full-year interest expense expectations remain unchanged. We expect a GAAP effective tax rate range of 27.3% to 29.5% for the full fiscal year and a non-GAAP adjusted effective tax rate range of 20.7% to 21.3%. We now expect capital and intangible asset expenditures of between $32 million and $37 million for fiscal '25, which includes remaining equipment and technology of $11 million to $12 million associated with our Tennessee distribution facility. We now expect free cash flow in the range of $180 million to $200 million, which implies a free cash flow yield of 12.7% to 14.1% using Monday's closing share price. Our lower free cash flow expectations for fiscal '25 reflect a slower start to the year and revised estimates for working capital and CapEx needs to support the continued improvement in our operating trends and opportunities we see for the remainder of the year. We now expect net leverage ratio as defined in our credit agreement to be between 1.9 times and 1.8 times by the end of fiscal '25. In terms of cadence, for the third quarter of fiscal '25, we expect net sales decline in the range of 4.5% to 1% year-over-year and adjusted diluted EPS decline in the range of 10% to 3% year-over-year. As we look towards fiscal '26, we thought it beneficial to provide an update on our efforts to diversify our production outside of China and mitigate the impact of potential incremental tariffs in the future. With the first step of this strategy, we have reduced our exposure to incremental tariffs to a range of 25% to 30% of consolidated cost of goods sold. We are now launching the second step of our strategy, which targets a further reduction to our exposure by the end of fiscal '26. We plan to share more on this important initiative when we provide our fiscal '26 outlook this coming April. Finally, I'd like to update you on the process to divest one of our businesses. After a thorough and rigorous process that included both strategic and private equity bidders, we have decided to put the process on hold until further notice. We feel the valuation and structure of the offers we received were not reflective of the current health of the brand and future potential of the business. Year-to-date, the business has performed largely in line with expectations. We believe there is potential to further improve its performance. We intend to continue to consistently evaluate our portfolio to ensure our assets position us for long-term success. In closing, I am pleased with the progress we are making to reset and revitalize our business in fiscal '25 and believe this will position us well to improve our core and achieve our long-term objectives. Our Project Pegasus initiatives are on track and are fueling a step-level increase in brand and innovation investment, and we have invested more in data-driven decision making and capabilities to leverage that investment more efficiently. We will continue to use our free cash flow to deploy capital using a balanced approach, which we believe can drive significant accretion, whether we pay down debt, repurchase our shares, or make strategic acquisition. And with that, I'll turn it back to the operator.

[Operator Instructions] Our first question comes from the line of Peter Grom with UBS. Please proceed with your question.

Thanks, operator, and good morning, everyone. Hope you're doing well. Maybe my first question was just -- I wanted to ask about kind of the quarter and the path from here. Maybe just to start, you both outlined a lot of great things that are going on across the portfolio, but when you think about the upside in the quarter, is there a way to parse out how much of that was the category coming in better versus maybe some of the actions in innovation you outlined? And then as we look ahead, what's really embedded from a category perspective? Last quarter, I think it was -- or it seemed you more or less were anticipating what you saw in May was going to hold. Can you maybe share what you -- what's kind of embedded in the outlook today from a category standpoint?

Yes. Thanks, Peter. Great to hear from you. So I would say, overall, as we look at kind of the balance of the year and the impact of our performance versus the categories, there's a little bit of both, but I would say, as I highlighted in my remarks, I'm really pleased with some of the performance that we're seeing on some of our brands. We've been hard at work, putting brand-building frameworks in place, really understanding our target consumer, putting the incremental investment behind the brands, you're seeing a lot of new products come out that I touched on today from the Hydro Flask, Travel Bottle, the Rapid Brewer from OXO, Big Brew extensions that are performing well, Curlsmith's new products that are coming out, so really across the portfolio, we've got a lot of new products and they're making an impact. Distribution gains or another, I talked about Hydro Flask performing and doing well in Costco. We continue to be really pleased with the performance of OXO in Walmart. And so I'm pleased that we're seeing the results start to come through from the work we've been doing across all of our portfolio. Category-wise, I would say, it's a mixed bag, we play across a lot of categories. So we've got some categories where we still see a little bit of softness, like a dry food storage, for example, some have flattened out, like kitchen utensils. Thermometers, as I mentioned in my remarks, has flattened out. A little bit of softness still in technical packs. I would say, the outdoor -- kind of the core outdoor category is still a little bit soft, but we're holding share there, our leadership share in technical packs. So if I was going to attribute it to anything, I'd say, our performance is improving.

And I'd just add, Peter, that in terms of assumptions for the remainder of the year, we do attempt to update our category view every quarter, and we did do that, but I would say, it was very similar to the view that we had last quarter. So, no -- I'd say no major change being driven from category assumptions.

Okay. That's super helpful. And then just on the buyback, and I apologize if I missed this, but just any thoughts on how you're thinking about timing? Is this something you're looking to complete in a relatively short timeframe here, or is this more of a longer-term program?

No, I'd say there's no views on it really. This was really just good housekeeping of the Board, refreshing our authorization, because it had -- it was expiring at the end of August. And so it was really a refresh of our authorization and I'm getting it back to the level that we kind of historically set them at and then we'll look to execute those as we see opportunities going forward. So no burning views and really just good housekeeping.

Got it. Thanks so much. I'll pass it on.

Thanks, Peter.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company. Please proceed with your question.

Good morning and thanks for taking my question. So I just wanted to go back to the implied outlook for the back half of the year. Given the Q2 be -- it would imply that maybe the back half is slightly softer on sales and EPS, so I just want to get a sense of whether -- what's driving that or maybe if it's just embedding more conservatism.

Yes, Rupesh. Good to hear from you. So, look, when we looked at quarter two, we saw less of a revenue impact from the Tennessee Distribution Center than we anticipated as Brian called out in his remarks. And so that helped us in the quarter and then we didn't feel it was enough to flow through from there. That's really the difference. Brian, anything you want to add?

Yes. I would say, we really exceeded our -- the high-end of our expectations by about $4 million and we had planned for approximately $5 million of disruption from the distribution center. So I would say, all in, we kind of felt like it was more of a met expectations in that regard and really not enough for us to consider raising our guidance for the second half.

Great. And then maybe just my follow-up question. Just as we look at the Beauty category, clearly, it's gotten more competitive out there, maybe some -- there's also some macro headwinds with the consumer there. What would you say are the key efforts to drive that category back to growth? And how do you guys think about timing, like is this something that could take a few quarters to drive improvements or just any more color there in terms of efforts and potential timing of a turn in the Beauty category?

Yes. I would say, in Beauty, a few things. One, it started for me with really doing the foundational brand-building framework work that we did, including that detailed quantitative category segmentation of consumers. So we really understand who the consumers are, what our segments are and how do we position our portfolio of brands against those different consumer segments. And so that foundation -- we completed kind of at the start of the year and now the brands are using those frameworks and using all of that insights to build their plans and kind of continue to move forward. We did bring in some new leadership in Beauty & Wellness for some fresh perspective. We've had a lot of meetings with some of our key retailers. So we're getting customer and buyer input on what they're seeing, what they're looking for. And I think you're already seeing some of the fruits of all that labor come into the market that I talked about today. Curlsmith, a real bright spot, really pleased with how that's performing growing share, in a growing -- a high growing category, lot of new products that are really hitting the marketing award, getting a lot of positive consumer feedback. On Drybar, the liquids are -- some of the liquid extensions are a bright spot like Big Brew that I commented on, really hitting on that consumer insight of thinning hair, with the power claim of 150% volume producing with Big Brew, so that's standing out. The Revlon Volumizer, we just launched some value reframing, which came directly from that brand-building framework, understanding that there's a group of consumers out there who are value-seeking right now, right? They want that great strong quality performance, but they don't want it to break the bank. So they're looking for a product like our Revlon One-Step. It's still the -- Revlon is the share leader in hot air stylers and that particular item still sells more -- three times more than the next largest competitor. So it's really putting our marketing out there, so the consumer can choose us more often. So those will be the things that we continue to do. We've got some more innovation in the pipeline. I think there's something we're excited about towards the end of the year that will come out from a new product standpoint, but those are going to be the steps, right? It's the marketing, it's the new products, it's positioning our brands in the marketplace with our retail partners effectively.

Great. Thank you for all the color and best of luck.

Thanks, Rupesh.

Thank you. Our next question comes from the line of Bob Labick with CJS Securities. Please proceed with your question.

Good morning. Thanks for taking our questions. I wanted to kind of follow up on what you were just saying there. You've increased brand investment, but you've also increased investment in data and analytics capabilities. Can you like tell us what are the key learnings from this increased data and analytics so far? And what have you done and what have you changed in your processes or your outlook, investment, et cetera, as a result of the learnings from the data and analytics capabilities you now have?

Yes. Thanks, Bob. That's been a really big focus for me. I really felt that we will be better by using data and analytics to inform everything we do, and so it started with the foundational consumer segmentation and understanding in the brand-building framework so that we're really clear going into our planning who were looking to reach and who is sort of that high-growth prospect consumer segment by brand. And then as we're allocating the incremental media that Project Pegasus helped generate, it's using that insight to go after the right target audience, and then we did a very robust first-time-ever marketing mix model that allows us to understand our return on ad spend across all the brands in our portfolio, but also importantly, every single tactic that we use. So we're able to optimize our spend across the brand portfolio, but also importantly across the tactics. So we can look across upper and lower funnel and really optimize against that return on investment and the reach that we're looking to get. So it's really a completely new way of going to market for Helen of Troy, who we're talking to and then how we're measuring the impact of that spend.

Okay. Great. And then, Brian, I think you touched on the shorter holiday season, I guess, with later Thanksgiving and stuff. Could you give us a sense of how the retail environment is setting up right now versus, I guess, expectations and versus prior years?

Yes. I mean, there is an expectation of a softer environment, which I would say we kind of had for the remainder of the year before we really got to the holiday season. So I would say the expectations are more value-oriented and maybe a little bit softer, but I feel like we had that embedded in our expectations already.

Okay. Great. Thank you.

Thanks, Bob.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Great. Thanks. Good morning. You had mentioned that several categories have been normalizing now, for example, OXO. So can you talk about how do you expect that to manifest? Are you advertising more behind them? Is there more shelf space either in brick-and-mortar or more focus online on those categories? And how do we think about that in light of the more challenging macros, particularly as it relates to promotional levels in your key categories and whether retailers are going to be tighter on inventory near term?

Yes. Thanks, Olivia. So I would say, when it comes to the normalizing categories, those are really the ones that were impacted by COVID. So if you think about kitchen utensils, we were still kind of continuing to see that category decline as we were coming off of the COVID -- kind of the COVID surge of that particular product line. Now, I would say, it's acting more normally. On a go-forward basis, a category like kitchen utensils and really a lot of OXO gets driven by new home formation, back-to-school meal prep, holiday meal preps, things like that. It becomes more of those normal activities. I will say right now, we're also impacted on OXO by eating in or dining out how consumers choose to kind of spend their money that way. So as consumers are being a little bit more diligent about how they're spending if they choose to eat out a bit less in the home more, that's a positive for a brand like OXO. Thermometer was another one that had a big normalization. Air purifier is a big normalization post-COVID. So I think, those -- a couple of them are still normalizing. I would say, air is still a little bit normalization, hasn't fully occurred yet, similar on dry food storage, that's another one from a category standpoint that's still normalizing. I think in terms of retail inventory, I mean, look, we don't see anything hugely unusual right now from a retail inventory standpoint. The thing that we see is the retailers who are maybe performing a little bit less well in the marketplace are using different techniques to manage their inventory quarter-to-quarter, so we've got a little bit less visibility than maybe we have in the past. They tend to manage it at a total store level versus category-by-category. And so those are things that we see from time to time that impact us that can be a little bit surprising, but that -- otherwise, I don't see a huge inventory issue in the retail marketplace right now.

Got it. That's helpful. And then just thinking about the guide and maybe you can help us understand sort of the building blocks to get from one end of the range to the other now that you are at the halfway point of the year. Likely, you have some fairly reasonable visibility into holidays, recognizing, of course, a shortened holiday period this year versus last year, but just any sort of building blocks around one end to the other? Thanks.

So you're talking about what would change between the high end and the low end of our guidance, Olivia?

Basically just trying to understand what the parameters are to get to the high end of the outlook versus the lower end of your outlook given that...

Okay.

Presumably we know what holiday looks like already and a couple of other things.

Okay, that helps. Yes, I would say that the building blocks on the high end of our guidance would be, what we have clear line of sight to, and as we've said before, we've taken a hard look at POS trends and tried to assume that the current trends, not try -- assume that current trends would remain consistent throughout the remainder of the year. I would really say the big thing that would change from there would be POS trends declining. So if POS trends were to decline from where they were, then that would be a factor that would put us more towards the lower end of the range, but that's really it. I would say, we've not leaned forward on opportunities that we didn't have line of sight on with respect to our high end of our outlook, so that's there. In the POS, we've assumed -- current POS trends, if they were slightly lower or lower, that could pull us down closer towards the lower end of the range. But that's really it, because we haven't really made leaning forward assumptions with respect to the incremental building blocks such as distribution gains or new product innovation or even our return on investment from our marketing spend. We feel good about the data we have to support that. And so we think that's a tangible building block. So I think it really have to be a major change in trend or a major change in the macro environment. Noel, do you want to add anything?

No, I think that's right. And as we've said before, the biggest tangible building block in the back half is distribution, followed by, I would say, some incremental innovation and then the marketing spend.

Got it. Thank you so much.

Thank you. Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Yes. Hi, thank you. So I think originally, if we go back to this original expectations about the cadence of growth or decline or whatever, the original, I guess, idea was that you had gained a lot of distribution in the second half of 2024, and that benefit would carry on into the first half. Is there any way to quantify -- despite all this other noise that occurred from the DC implementation, is there any way to quantify that distribution benefit in the first half of your fiscal? And then is the distribution benefit in the second half kind of going to be bigger or smaller than what you've already had, if you can understand what I'm asking? Thank you.

Yes. Just to answer the second question first, the distribution gains we are getting in the second half of this year should be bigger than the carry-forward gains from the prior year that impacted the first half of this year. So we are -- we have secured incrementally more distribution, I would say, that we'll apply new distribution, that we will apply to fiscal year '25 than we had secured in fiscal year '24. And we haven't really sized it. So I would not be comfortable giving that right now. We haven't really sized it publicly. And so we have talked about the dimensionality of the new distribution that we have for fiscal year '25. But with respect to '24 and its carryover impact on fiscal '25, we haven't really disclosed that. But I will tell you that the fiscal '25 gains are bigger than fiscal '24.

Okay. Thank you. That's helpful. And then, I was just curious about -- in our store checks, when we checked at the Ulta within Target, it's sort of a limited selection of brands. It's not a huge array like a regular Ulta store, but we did notice that your Drybar and your Curlsmith had very nice shelf space there. So can you talk about that? And is that like a benefit to the whole growth rate? I mean, does it move the needle at all, or just can you talk about sort of that positioning within Ulta in Target? Thanks.

Yes. Thanks, Linda. I would say, look, physical availability, so having our brands is widely available in front of as many shoppers as possible, is a benefit in my view, so I think the Ulta in Target helps to do that. It brings some of our premium prestige liquids like Curlsmith and Drybar. Even in the limited assortment that's there, as you mentioned, I see this as a positive thing. There's just -- there's a lot of people -- a lot of footfall going through Target, and so having that store within a store there and being part of that assortment is a positive. Whether or not it's a needle mover, I don't know that we break it out in a way to be able to see specifically what's coming from one versus the other, it's all Ulta for us. But I just subjectively would say, I think it's a great thing for our brands and it allows a brand like Curlsmith to be in front of shoppers at Target within that store within store. So all positive from my perspective. And similarly, the Sephora within Kohl's, it's a similar idea.

Okay. Thank you.

Thank you. Our final question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Hi. Thanks for taking my question. I was wondering if maybe you can give some thoughts just kind of going into the holiday season how you're expecting consumer spending? Do you expect them to -- do you expect it to be similar to what we saw all year on spend on discretionary items? And then also maybe if you could just talk about the promotional cadence year-over-year that you're expecting and just how you're planning for the season? Thanks.

Yes. Thanks, Susan. I would say, in general, on holidays, we talked about there's one last week. I think prime days are happening kind of right now, so I think that's going to give us some indication. It's a little bit of a run-up to the holidays to see where consumers are leaning in and what they're looking at. I continue to think everything we hear is, the consumer balance sheet continues to be challenged. And so I think consumers are spending, but they're being choosy on where and how they spend their money. And I think it will be similar in the holiday season. They're going to look for items that really meet a specific need or items that they really think will bring delight to who they're giving the gifts to. And so that's -- I think that kind of macro sentiment is going to carry-over into the holiday. I think promotion-wise, again, consumers are looking for value. What I really see is where consumers are shopping. So you're seeing customers and retailers like Walmart, Costco doing really well and those are the retailers that consumers think of when they think, I'm getting a good value when I'm shopping in those places or they're interested in events like Prime Day and things like that. When it comes to our promotional planning, we have promotional plans for all of our brands across the year kind of coming into the year. And to those key tentpole events and those key windows are things that we'll continue to support. I don't see us doing anything dramatically different in terms of depth of discount. I would say, for example, in the Prime Days right now, our breadth of assortment is a little bit broader than what we've done in the past. So Osprey is participating for the first time. But a lot of that is more because Osprey is diversifying into adjacent categories like the daypacks, the everyday lifestyle packs. And so we've got items that make sense to participate there and it's an important tentpole event. So I see us continuing to look at -- as our brands expand into these categories, where are these opportunities to participate in tentpole events, but I don't see us doing major depth discounts in light of where the consumer is right now.

Okay, great. That was very helpful. Maybe if I could just add one more. If you could talk about the cadence of gross margin, I guess, between the third and fourth quarter in the back half. Are you expecting any differences there? Maybe you could just talk about the puts and takes also versus the first half? Thanks.

Yes, I would say just if you compare Q2, our gross margin was below our expectations and there were a couple things going on there that we wouldn't necessarily expect to repeat like year-over-year inventory obsolescence and then a little bit of margin compression that we did see in Q2 because we launched at Costco. We had lower DTC, which I think is going to normalize, and then we had a little bit higher closeouts. So those all weighed on the margin, but I expect that to normalize and get back more towards a prior year and maybe slightly above prior year in the second half. And sorry, what was the second question?

That was it. Well, I guess just the difference between the first half and then the third and fourth quarter as well.

Okay. Yes, I'd say third and fourth quarter are very similar, and both pretty consistent with prior year, maybe slightly above.

Okay, great. Thanks so much. Good luck for the rest of the year.

Thank you.

Thanks, Susan.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Thank you all for joining us today as we share the significant progress we are making to reset and revitalize our business this fiscal year. We believe we're taking the right steps on the path to sustainable long-term top line growth, and we really look forward to updating you all on our progress on future calls. Thanks so much.