Thank you, good morning everyone and welcome to the Sally Beauty Holdings First Quarter Earnings Conference Call. Before we begin, I want to point out to you that we have made a supplemental slide presentation available for today's call that can be viewed from the link provided at our investor site at sallybeautyholdings.com/investorrelations.
In addition, I'd like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and similar words or phrases.
These statements are subject to a number of factors that could cause our actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K.
The company does not undertake any obligation to publicly update or revise its forward-looking statements. 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.
With me on the call today are Chris Brickman, President and Chief Executive Officer; and Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Heather Plutino, Group Vice President of Finance. Chris will start by offering some thoughts on our first quarter and give an update on our key transformation efforts.
Aaron will then discuss our first quarter consolidated and segment financial results, touch on our supply chain modernization and then discuss our views on our full-year financial guidance for fiscal 2020. Now I'd like to turn the call over to Chris..
Thank you, Jeff and good morning everyone. During our first quarter, we continue to make significant progress against our transformation plan. We saw Beauty Systems Group and our European operations deliver positive comp growth and improve their gross margins. Beauty Systems Group achieved its highest sales revenue in a quarter ever.
More significantly, we took important steps towards our goal of becoming a mobile first digital retailer enabled by a differentiated category position, a national store network and consumer centric fulfillment options. We did all of this while dealing with a retail calendar with six fewer shopping days.
A retail consumer, who waited until the last minute to shop around both Thanksgiving and Christmas, and a series of significant technology implementation distractions, which impacted our retail top line, same store sales and gross margins. The good news is that we have a natural hedge between our retail and our professional businesses.
We saw strength in Beauty Systems Group that offset the traffic challenges at Sally Beauty. For the core, we delivered only modestly negative same store sales down only 0.3% at the enterprise level, but with a 1.2% up at BSG and a positive comp in Europe as well.
We largely held our gross margin despite headwinds, but as expected and predicted during last quarter's earnings call, we did see higher SG&A expenses as we invested in the business and responded to wage inflation. We recognize that short term challenges have created a gap with respect to earnings expectations.
We've been working over the last six weeks to fill the gap. Aaron will bridge our results, our responsive actions and our view of the remainder of the year for you later in the call.
While the decline in overall sales and the SG&A increase did results into the client operating earnings and operating margin and ultimately a decrease in both GAAP and adjusted diluted EPS. I want to emphasize that these are one quarter's results in the face of a significant transformation that is taking place over multiple course.
Unlike many retailers Sally Beauty holdings is in the advanced stages of a detailed transformation plan and remains both highly profitable and highly liquid. If you take one message away from us today, I wanted to be this.
Our first priority is to complete the transformation and put in place the right retail and digital capabilities to set the company up for long term success. We are focused on unlocking the full potential of our highly differentiated business.
And we will invest additional resources as appropriate over the year if that is required to deliver our objectives. Let's spend some time talking about the specifics of Q1. As we have discussed in prior earnings calls. In recent quarters, we have seen stabilizing traffic trends versus comparable periods in prior years. That changed in Q1.
The first quarter calendar was unique and the Thanksgiving was late, with six fewer traditional holiday shopping days than last year. Retailers generally responded by making Black Friday into Black November. With high discount offers beginning as early as the first week of November this year.
We did not play that game and held most of our Black Friday oriented offers to the weekend before Thanksgiving. Our retail traffic was stable in October, then dropped noticeably in the first three weeks of November as the consumer took their time starting their shopping.
Traffic recovered the week of Thanksgiving and Cyber Monday, but dropped again until the week of Christmas when it again recovered. While we no doubt felt some pain. The retail especially retail traffic index data shows that other specialty retailer traffic trends suffered at the same times and to similar degrees.
The consumer also shifted some of their purchases to digital channels. We were quite pleased with our digital performance over the period.
As a reminder, we have a methodical but fast process of moving from being an unsophisticated brick and mortar retailer to being a mobile first digital retailer that leverages its differentiated category position with a national store network and a full set of fulfillment options.
In our Sally Beauty business, our goal of course is to grab the consumer's attention with our expertise, and to help her unleash her potential by filling her needs for hair color, hair care and related products where she wants it, when she wants it at a cost and price that makes sense for both of us. We know we are playing catch up.
So we are moving fast and learning and adapting in real time. The digital path we're on is the right one and does not change as a result of Q1. Five quarters ago, we launched our new CRM platform. Four quarters ago, we launched our new Sally loyalty program and tied it into our new POS systems and our digital platforms.
And it now has More than 16 million active members. Three quarters ago we watched an updated sallybeauty.com, mobile first website and also tied it to our loyalty program. Two quarters ago, we launched the new Sally Beauty mobile app, which now has been downloaded over 900,000 times.
We further refine the website and began development of our order management system so that we can access all of our inventory and where appropriate split shipments.
During the most recent quarter, we started to knit all of this together by deploying our new order management system across the Sally Beauty and Beauty Systems Group network to allow us to better access our inventory and split shipments, test delivery capabilities such as same day delivery for BSG, launched the new color new technology in 600 stores and on the Sally app and expanded our Sally Beauty digital marketplace efforts with eBay, Google and Amazon.
Following the end of Q1, we also executed the consolidation of our digital teams into one team to lead digital efforts for both Sally Beauty and Beauty Systems Group. We have hired two new digital expert leaders, Kevin Metz, VP of E-commerce and Vanathy Lakshmi VP of Digital Product.
Together they bring real life been there done that retail and wholesale digital categories from the likes of Ultra, Wal-Mart, Seller and Cachet.
Looking ahead, by the end of the current quarter, we expect to launch sallybeauty.ca along with our first iteration of ship from store capabilities and important evolution since we do not have or intend to build a traditional distribution building network for our Sally Canada business.
All e-commerce shipments to consumers will come from inventory in Canadian stores. We will test, we will learn and we will expand for both shipment store and BSG same day delivery. We're making significant digital progress.
In the most recent quarter, our global digital business grew 27.6% with the Sally USA and Canada business, growing the most at 37.8%. As with many of our initiatives, Sally US and Canada is leaving leading the charge.
And we are now turning to leverage our learning's and capabilities elsewhere, first with BSG and then more broadly in Europe as a further part of Project Search. Our US and Canadian digital retail penetration increased 100 basis points to 3.7% for the quarter, while our overall penetration rate stands at 4.5%.
Meaning it is still all upside for us as we continue to drive digital capabilities and penetration. We have a massive amount of change underway. Much of it tied to technology and we are operating on aggressive timelines with significant interdependencies.
Anytime you combine transformation and technology, you have to be ready to enable to learn and adapt. In the first quarter, we experienced technology integration roadblocks, which together had a significant impact on our first quarter revenue, same store sales and gross margin.
We are approximately 60% of the way through our X store POS implementation across the US and Canada, meaning we have reached critical mass. During the quarter, we discovered design issues within our X store system, which resulted in incorrect pricing data flow into some of our Sally stores, particularly in Canada on a significant number of items.
Technology issues also resulted in some customers receiving elevated promotional discounts, which resulted in a degradation of sales and gross margin. Finally, our new loyalty program is tied into our new X store systems, interacts with our promotional cadence and calculation.
As a result of the system implementations, we experienced higher redemptions than expected from our early testing on legacy systems. These redemptions also stacked in ways that we were not expecting, having an unplanned and negative impact on revenue, same store sales and gross margin in the Sally Beauty business.
Aaron will quantify the impact of these challenges in his remarks. The good news is that these integration issues were discovered before we implemented POS chain wide. And we were able to pause the extra rollout quickly at Sally Beauty to mitigate the impacts.
While there is still work to do, we believe that we have addressed the majority of the underlying issues, making these issues largely a first quarter learning experience that should not impact the rest of our year. That said, we will remain watchful given the ongoing transformation and our continued agenda of significant technology change.
We've restarted the POS rollout, and expect to complete the point of sale effort across the beauty system group by the end of the second quarter, and Sally Beauty by the end of May. As I mentioned earlier, our strategy and our priorities remain unchanged.
Play to win with our customers, based on our differentiated core, improve our retail fundamentals whether through people process or technology. Advanced our digital commerce capabilities, and fund our transformation by relentlessly looking for cost savings measures.
To close my remarks, I will highlight a few key progress points and plans in the business. For Sally Beauty segment. During the first quarter, the business executed a soft launch of the single largest brand investment since I have been with at the company. Through the relaunch of the Sally Beauty brand with unleash your potential.
The effort went live and national on January 6 and you will find our brand building efforts in digital, TV, radio and out of home channels across the country. Examples of the marketing are available on our website. As part of this effort, the business also launched our Sally crew influencer development programs to further expand our digital reach.
We have received more than 1000 influencer applications for Sally crew. Newness and innovation continue to be a focus area.
We launched key professional color, key appliances, Maybelline cosmetics, and waterless dry shampoos during the quarter and tested a number of pro haircare options, such as TG, big sexy American crew, and it's a test that do not have exclusive distribution elsewhere.
We will continue these efforts and introduce exciting line extensions from texture ID, Shea Moisture, Carol's Daughter, Miley and other brands during the Q2. In addition, vivid colors continue to grow and are now 20% of color sales at Sally.
We continue to make progress our stores have been remodeled most of the Charlotte market launched the Manhattan concept store that will become a dense urban ship from store location and tested store durations in North Texas, all in anticipation of our net North Texas remodels cycle and building out a number of new stores in a variety of markets during Q2.
Now turning to Europe. At the start of Q1, we launched Project search to turn around our European operations. That effort has five key plants, customer and customer marketing, store operations, country specific focus, product assortment and technology integration.
While we are still in early days of the effort, we are pleased with the results so far, particularly with respect to the store operations work in the UK. Europe was a positive contributed to our same store sales for Q1 with improvements driven in the UK and Ireland and parts of continental Europe.
We're also excited to announce that we have reached agreement to launch the Redken color brand in our European stores in late Q3 of this year. Further evidence that our team remains focused on driving this turnaround, and we are looking forward to talking about additional wins at the end of next quarter. Now Beauty Systems Group.
As I commented at the start, we are very happy with the progress to be as she made this quarter. The combination of our innovation pipeline and a new emphasis on retail fundamentals within our stores all help to deliver a positive comp, as well as better execution within the full service channel and led to the highest quarterly revenue ever at BSG.
In addition, we recently renewed our exclusive three year contract with the Cody organization, giving them and us certainty on our relationship going forward. During the quarter Beauty Systems Group launched Maria kneelers expanded care and styling line, further supporting our emphasis on clean, natural and vegan products.
We also expanded distribution of Olaplex No 6 and No 7, critical hair treatment lines and expanded our men's barbering assortment. We will continue this innovation push with EQ launching later in this in the year as well a new natural line from Europe.
BSG will also be rolling out its new store concept model two additional territories based on learning's from the successful Las Vegas test in 2019. The rollout will start in the second quarter in Cincinnati, followed by Charlotte and then the rest of Ohio in the back half of the year.
We continue to work down our path to launch a new loyalty program at BDG. We are in partnership with Alliance data to launch a private label credit card program. Even our X store efforts, testing will now begin in select stores during the third quarter with a national rollout to follow in the fourth quarter.
Finally, BSG will also look for acquisition opportunities that could expand its distribution rights and add additional brands to its portfolio. Now, I will turn it over to Aaron to discuss a couple of topics in more detail..
Thank you, Chris. Good morning. I want to start my comments today by providing some color on our transformation efforts. We have a detailed transformation plan that is tied to our fiscal '20 strategies and to our operating plan. We are seeing significant progress versus where we were in fiscal '19.
We've been quite open with the scale of the transformation agenda. Our fast paced stretch become an omni channel retailer, leveraging both our stores and our digital capabilities requires significant work.
The first quarter and indeed the second and third quarters are the fulcrum point so much of our transformation, as multiple interdependencies across stores supply chain, technology, and retail fundamentals come together, and we turn dials to optimize our efforts. Notwithstanding the first quarter, we've got this, stick with us.
There is no doubt that the first quarter was a tough quarter and below our expectations, the impact of the challenges we faced unquantifiable. On the top line sales decline $9.2 million versus the same quarter prior year and its simplest this is driven by fewer net stores a modestly lower combo same store sales and the impact of FX.
However, the Sally US and Canada business and the BSG business, we're driving positive comp coming out of Q4. So at a high level, if you ask me what impacted sales from the trend you were on, I would offer the following directional context.
The primary drivers of the change to trend were A, the impact of our technology disruptions on pricing and promotion and rewards.
B, the traffic issues that the retail business encountered, and C, the impact of non-recurring benefits that we left from prior years that were expected to be offset by marketing and other initiatives that we dial back in the face with technology issues.
Each of these issues had a similar financial impact, with all of them partially offset by continued improvement at BSG and a turnaround in Europe's trend. On the bottom line, our myth to prior year was driven by four factors.
First, the technology impact on pricing and promotional rewards, second by the resulting profit impact from lower traffic, third by increased investments against wages and marketing across the portfolio.
And lastly, by combination of factors such as increased digital shipping costs, and lack and prior your benefits, each of these four factors had approximately the same effect. With all of them partially offset by increased volume of BSG positive pricing at both Sally and BSG and aggressive actions that we took from a quarter.
We have already taken aggressive steps to fix the underlying issues which will make us better and the medium and long term. We have centralized our technology and key product efforts under the leadership of our new Chief Transformation Officer Mary Beth Edwards.
Cross functional teams are revisiting every interdependency and we've added new expert support around key initiatives such as JTA. Our technology teams are working around the clock to advance the ball and key implementations.
We have been quite aggressive as a management team and taking steps to shore up our profit plans for the year with no stone unturned. Notwithstanding the quarter we've got this stick with us. Finally, one month this one month does not make a trend.
We have seen continued improvement in traffic trends and sales to both the retail business and the wholesale business in the US and Canada since Christmas. With all those contacts let's discuss their financial results. First Quarter consolidated same store sales decreased by point 3%.
Consolidated revenue was $980.2 million, down $9.2 million for the prior year driven by the fact that I just described, we are pleased to report that our global e-commerce business grew by 27.6% versus the prior year.
On the top line broadly, our Beauty Systems Group delivered positive comps and positive revenue growth reaching its highest revenue Mark ever in a quarter. And Europe delivered positive same store sales as elements of our transformation started take effect.
Over in contrast to transformation cores, we experienced headwinds in the quarter from Sally US and Canada. Consolidated gross margin for the quarter was 48.4%, which was a 20 basis point decrease compared to the prior year.
Beauty Systems Group and our European operations both saw increases in gross margins, offset by mass declining Sally Beauty US and Canada and our Latin American businesses.
After excluding charges related the company's transformation efforts in both years selling, general and administration expenses, including depreciation and amortization expense were $377.9 million in the quarter, an increase of $10.9 million or 3% from the prior year.
As a percentage of sales reported selling, general and administrative expenses increased 150 basis points to 38.6% compared to the prior year. The increase in SG&A expenses mostly the expected and plan increase in salaries and hourly wage costs, plus a modest increase in marketing spending.
We did dial back our investments as a challenge in the core became visible to us. GAAP operating earnings and operating margins in the first quarter were $94.4 million and 9.6% respectively, compared to $109.7 million and 11.1% respectively in the prior year.
Adjusted operating earnings and operating margin were $96.9 million and 9.9% respectively, compared to $113.7 million and 11.5% respectively in the prior year.
GAAP diluted earnings per share in the first quarter were $0.45 compared to $0.54 cents in the prior year, a decrease of 17% driven primarily by lower revenue, increased operating expenses, the lower interest expense.
Adjusted diluted earnings per share excluding charges related to the company's transformation efforts in both years were $0.47 in the fourth quarter compared to $0.57 in the prior year, a decrease of 17.5%. Our company continues to generate good cash flow from operations which was $62.3 million in the quarter and increase of 24% to prior year.
Net payments for capital expenditures in the quarter total $40.9 million. The capital spend was primarily driven by Information Technology projects related to the Oracle based point of sale system, the JTA merchandise and supply chain platforms and our e-commerce platforms as well as store remodels and maintenance.
Free cash flow was $21.4 million and a quarter down $5.1 million or 19% as compared to the prior year, largely due to higher CapEx investments versus prior year. We used free cash flow in the first quarter to reduce our debt levels by $16.2 million. The ABL credit facility has a zero balance at the end of the quarter.
Importantly, in total, we have reduced our debt levels by over $200 million since the beginning of fiscal year 2019. The company's leverage ratio was defined by our credit agreement was 2.68 times with incremental debt reduction offset by a modest decline EBITDA.
In addition, we repurchase 766,000 shares at a total cost of $11.4 million early in the quarter. Turning to segment performance. For the first quarter global Sally Beauty same store sales decreased by 1.1% driven by decreasing same source sales in the US and Canada of 1.4%.
Europe delivered positive same store sales, the result of progress against project serge. The Sally Beauty businesses in the US and Canada represented 77% of the segment sales for the quarter.
The Sally segment generated consolidated revenue of $569.1 million in the quarter, a decrease of 2% compared to the prior year, with 36 fewer stores, six fewer holiday selling days in the US and Canadian retail calendar in the quarter.
The unfavorable impact of foreign currency translation of approximately 20 basis points and the technology and consumer traffic issues in Sally US and Canada highlighted earlier. We continue to make meaningful progress with Sally US and Canadian commerce business in the quarter which helps drive e-commerce revenue growth of 31.8% for the segment.
Gross margin for the segment declined by 30 basis points in the quarter to 54.3% with contraction in the US and Canada territory this point, basis points and contraction in LATAM partially offset by more margin improvement in Europe. Segment operating earnings were $74.2 million in the quarter, a decrease of 17.5% versus prior year.
Driven by lower sales and declines the gross margin as well as expected SG&A increases. Segment operating margin deteriorated by 250 basis points to 13% compared to the prior year. Now turning to the Beauty Systems Group segments. Same-store sales increased by 1.2% in the first quarter.
Net sales for the segment were $411.1 million in the quarter and increase of 0.5% compared to the prior year. Foreign currency translation had no impact on the segment’s revenue growth in the quarter. Additionally, BSG e-commerce platform grew 23.7% in the quarter.
BSG's gross margin was 40.3% in the quarter an increase of 30 basis points in the prior year. This represents continued progress for BSG with more work to do. Our efforts will continue in coming quarters.
Segment operating earnings for BSG were $62.4 million approximately flat for the prior year, driven by an increase in same store sales, gross margin expansion, but higher SG&A expenses driven primarily by personnel inflation. Segment operating margin was flat to prior year at 15.2%. Now a quick update on our supply chain monetization.
In a small part of BSG business in the West we are in testing by JDA demand for its casting purchase order install replenish modules. Recall that we've said that we will very carefully manage this project with full testing of JDA slowly rolling out to other territories and parts of the business only when we are ready.
We are not yet satisfied that the JDA demand and store replacement algorithms are responding appropriately to our business. We are going to take further time before rolling this effort to its next locations, our new North Texas Alliance distribution center.
While the facility will be ready for operation early in the third quarter, we anticipate startup toward the end of the fourth quarter given the need to test JDA before deploying systems to our new facility. Our start of the facility will be focused on Beauty Systems Group e-commerce, full service and Armstrong recall businesses.
Eventually this distribution center will also service both Sally and cost [ph] across stores and Sally's e-commerce platform. That expansion will come in future quarters. Separately, we are on track with respect to the European supply chain changes that we call that last quarter. Now trying to our full year financial guidance for fiscal year 2020.
We are holding our top line guidance of revenue up 1.2% and same store sales up 0.5% to 1.5%. Out of abundance of caution, notwithstanding many steps we're taking to offset the Q1 impact. We think it's prudent and transparent to modify our guidance on adjusted operating earnings to be approximately flat to prior years.
We are taking the steps to ensure that if we need to invest further during the year and support the transformation we have in the room. However, even with that step when combined with the benefits of the debt reduction and share repurchases to date, we are holding our EPS guidance for the year though at the lower end of our guidance.
Thank you for your time this morning. Now, I would like to turn the call back over to the operator for Chris and I to take your questions..
Thank you. [Operator Instructions] Our first question we will go to line of Karru Martinson with Jeffries. Please go ahead with your question..
I'm just wondering if we could dig into the Charlotte market remodels and kind of look at what has been different in those stores where you have put the money and put a lot of learnings into it versus the rest of it? How can we take those learnings and move them out to the national chain?.
Great question. We're quite excited by the remodel cycles that we have underway both in Las Vegas and in Charlotte and now in each store that we remodel or the new stores that we have popping up across the country. We have been quite focused on the assortment.
Really leading with our differentiated core with color and care with color and vivid color particularly being in front of the store.
With the technology integration whether it's on the app or on the kiosks relative to color view, and then just better retail fundamentals around sidelines, guidance through the store wayfinding if you will, and focusing more on other elements portfolio like nail and men's etc.
The Charlotte market is an iteration off of what we're doing in Las Vegas as we continue to improve and while we have all but 3 or 4 of the stores in that market now remodeled, we, of course, are going to continue to learn and evolve as we carry forward..
Then how are those stores comping relative to the national chain? Are they seeing greater e-commerce penetration? Where do they stand today?.
I'll answer the question in connection with the Las Vegas market because it's too soon on Charlotte for me to have a statistically significant answer for you. They are comping positives to the control group that we're measuring it against. And we are seeing good lift relative to other parts of the portfolio e-commerce etc.
That said we still have things we need to improve around some of the cosmetic categories as well as some of our inventory positions but we're quite pleased with the results so far..
Okay, just on professional brands.
The three-year contract with Cody, have you thought about M&A on your own side? Are there brands that you would like to add to your portfolio of own brands or exclusives?.
We always look at brands as they come available but in general, we've been mostly focused on acquiring regional distribution rights. And we have some more of those that we're working on now but the reality is they tend to be smaller acquisitions of distributors who have exclusive rights.
We acquire those rights and add those to our existing stores which drive same-store sales. I would add one of the benefits of the organization we have is a robust pipeline of own brand technology and own-brand products for the Sally part of the portfolio.
We're very careful how that translates to BSG given our partnerships, but we have significant capabilities from own brand development in-house..
Thank you very much, guys. Appreciate it..
Thank you. Our next question will come from the line of Oliver Chen with Cowen & Company. Please go ahead with your question..
Good morning. This is Ross on for Oliver. I just had a question on the firm guidance. First is the first quarter results.
Could you speak a bit to the investment plans how they might evolve through the balance of the year just versus your original plan? You mentioned in the first quarter, you kind of tempered on the marketing spend given the top line so I just wanted to hear your thoughts and how you're thinking about the rest of the year. Thanks..
Happy to. I think if you go back to our last earnings call, while we don't issue quarterly guidance, I went out of my way to talk about the fact that the investment profile for us whether on the supply chain side or on the marketing investment side was particularly heavy in Q2, but also heavier in Q1.
And so with much of our brand investment in Sally launching January 6, and with much of our capability investment spread Q1, Q2 and a little bit into Q3, our expectations for growth were more back and loaded. I think I was clear on that both from a sales perspective and from a profit perspective.
No escaping the fact that we had some challenges in Q1 but we were able to reaffirm the guidance based on what we believe the impact of those investments to be..
Right, thank you.
And then Chris, just following up on your remarks on the BSG looking to add either capabilities or brands, could you just elaborate a bit more on what you might be looking for there, the timing around that potentially, and then how this ties into the broader capital allocation strategy moving forward with the debt and the repurchases? Thanks so much..
As I said, I think the reality is, and you've seen this in past years, we have consistently found 1 or 2 acquisitions a year within BSG that are good regional fits, where we acquire distribution rights to brands, perhaps some stores and then we layer that brand distribution rights onto our existing footprint. So we continue to look for that.
We have opportunities in the pipeline. I can't give timing on those at this point in time but we'll continue to work on those. And I expect they'll be some this year..
I believe the last acquisition we did for BSG was late 2017, early 2018. And like I said, we're back in the hunt. And this has been part of the business model for BSG. As it relates to capital allocation, our view has not changed.
Again, if you go back to what I said last quarter, and I assume the quarters before that as well, the first priority is invest in the business. Our practical reality is we have plenty on our plate and investing further dollars against that we will land the year where we expected to from a capital perspective and where we have predicted.
We are going to get our debt down to 2.5. I've been clear that that's our target as well and we'll only look at share repurchase after we've taken advantage of investing in the business where we need to, where we've found opportunities to bring our debt down and if the market presents us with an opportunity..
Great, thank you..
Thank you. Next, we will go to the line of Simeon Goodman with Morgan Stanley. Your line is open..
Hi, this is Josh [ph] on to Simeon Goodman. Thanks for taking our questions. There are a lot of positive things going on in the transformation but the initiatives are on a range of different timelines.
Can you maybe talk about when you expect to see positive comps in both segments at the same time and what needs to occur for that to happen?.
We guided into positive comps for this year and we continue to maintain that guidance. So we expect that to happen pretty quickly as you can imagine. I'm not going to give specific times and quarters and numbers. But listen, we're disappointed with what happened in Q1. There were a lot of things that contributed to that.
We feel obviously with our revised guidance that we still feel positive about the year overall. We do feel like we've fixed a number of the issues that contributed to the Q1 performance and now we've got to go deliver..
I think it's important to add on that. One of the benefits we have we are increasingly getting at SBH is the combination of the work that Pam Cohn is doing across our merchandising organization in support of the greater whole. The work that Mark Spencer is doing with the BSG team. The work that the Sally team is driving as well.
It's additive to each other versus being in silos. And while there's more work to do, part of what gives me confidence in the guidance that we've reissued today is that you're right, the time is a little different in different places, but will all come together and it'll be in service of the greater portfolio..
Thank you. And then just as a quick follow up, we've seen some other POS transition issues as recently as 2018. I know some of the headwinds in this quarter were a little bit for different reasons.
But can you maybe talk about how you re-evaluated technology investments and the timelines following the issue, and whether you identified any other risks around the transformation to 2020?.
Well, let me start by saying I think there's always risks around technology transformations, especially when you're touching as many pieces of the platform as we are at the same time. We experienced that to a large degree in Q1. And again, I believe we've fixed the majority of those.
We are working very hard to try and consolidate to make sure that we're looking at all interdependencies.
And that's very much the reason why we put together a chief transformation office, and that we're putting the resources against it and creating headroom in our P&L to make sure we have the resources against addressing issues as they come up and avoiding issues wherever we can. So I think we're well-positioned to execute the projects.
That being said, I won't claim that there's no risk, but at the same time, I think we're putting the appropriate level of resources in it to make sure that we're looking for interdependencies and addressing them proactively. Obviously, Q1 was a wake-up call that we're working hard on..
All right. Thank you..
Thank you. Next, we'll go to the line of Olivia Tong with Bank of America. Please go ahead..
If you could provide a little bit more color on the disruption because your gross margin actually, while it came in light of our expectations, the decline was more pronounced or the delta was more pronounced in SGA. It sounds like the big surprise here was incorrectly price promotions, which presumably would have had a bigger impact in gross margin.
So just would appreciate your help on if I'm missing something there. Then specifically to Sally Beauty, I know that traffic was down because of the shortened holiday but how about ticket? Because I always thought of Sally Beauty as sort of a little bit less exposed to holiday given this staple like nature of hair maintenance.
So was the weakness disproportionately tied to like appliances? And do you now have a lot of like durables inventory to work down? Thank you..
That was a lot. Let me attempt to unpack and Chris will keep me honest as far as what pieces of the question that I may have missed as we carry forward. As it relates to your question gross margin SG&A, the answer is the following. Let me start from the reverse. Our SG&A was up versus prior year, but we had expected it to be up.
We had expected to be up in connection with the wage and personnel inflation that we knew was coming our way, given the position within our team portfolio. We had expected to be up with more modest investments in marketing as well as some of the OpEx components of the implementations we have underway.
The fact of reality is that while it was up it wasn't as up as much as we had planned for it to be because as we got into November, we realized we had a problem and we started optimizing to attempt to mitigate the impact. On the gross margin line, you're right. The impact versus last year was lower than SG&A versus the prior year.
But what's important to understand is from what we were targeting or what we were after perspective. We were expecting higher same-store sales growth as well as increased gross margins, which was what was impacted by the factors that I called out.
The POS issues, the integration issues, we had pricing dropping unexpectedly which was a direct hit to our top line. Similarly with some of the elements of the promotional strategy and the reward that was a direct impact to the top line and to the gross margin as well..
Let me just step in for a moment. I'm going kick it back to Aaron. As Aaron articulates we'd expected gross margin to be up more. As part of it then we were planning on investing more in the business at which we did do.
The reality is it's a testament to the durability of our business that despite all these disruption issues and pricing issues, gross margin actually held up. It just didn't increase as much as we expected it to. And so I think the reality is now we've got most of those issues fixed and we are expecting gross margin to expand.
And we continue to expect to need to invest in the business, which we articulated at the beginning of the year. I'm going to let Aaron answer the issue around our traffic issues route to the quarter and how that affected specific categories and ticket..
I think what I would say is this. We have a lot of inventory. It's one of our key issues internally of how are we going to bring our inventory down. We've seen more progress there at Sally in the U.S. and Canada than we have in Europe and in the industry. Those businesses are well aware and are working hard on their plans.
I wouldn't call our inventory position to be tied directly to the traffic issues. I think we did a better job than prior years of managing our inventory and frankly, the businesses were better prepared for the calendar fourth quarter than they've ever been. We just ran into a couple of things along the way which were distracting as we carry forward.
In the context of our portfolio, in the context of our business, we will work on resolving the inventory- dealing with the inventory that we have..
Did we see a decline in ticket quarter?.
Not really, no..
Thank you, that's really helpful. And then just lastly, any sense in whether price promo issues may have driven some potential pantry loading by consumers? And could that potentially impact future quarters as a kind of capitalized on lower than expected prices? And then I'm sorry, one other thing.
Does the leap year provide any benefit to specifically to next quarter? Sorry, that's it for me..
Let me start with the first one. I think it's unlikely it did much pantry loading. In many cases, the customer received the benefit as they got to the register, and we're checking out and ended up paying less than they expected. So I don't think we're going to see much in the way of pantry loading and we haven't seen it affect our sales post-Christmas.
So I don't think we're going to see much from that. As for leap year, I don't know Aaron, if you have any thoughts on that..
Not much. It won't have a material impact..
Thank you so much..
Thank you. Next, we'll go to the line of Lauren Frasch with Wells Fargo. Your line is open..
Morning, everyone. Thanks for taking my question. I want to dig a little deeper and say your upset region has been a painful drag on Sally results last year, but it seemed like there was a pretty solid inflection in the first quarter.
Can you detail some of the initiatives of your strategy out there and how confident are you that performance has reached more of a stable level now? Thank you..
Well, listen, I think we would say we have more work to do but we're pleased with the progress thus far. As I mentioned in my opening remarks, this project surge cuts around multiple platforms. A lot of progress is being made, especially in the U.K. on store and store apps. We're excited about that.
The team is obviously working on some of their customer marketing and direct marketing activities and getting crisper in terms of how we communicate with our customers. They're working on product assortment. They've made good progress on adding to their product assortment issues, which I think that will help.
We've got more innovation coming as I mentioned with the launch of red color coming in the latter half of the year. And obviously we've had some disruption there with technologies they've been working on and made a lot of progress stabilizing their IP platform. So I think the team feels good about where they're at. They've got lots of work left.
But it was nice to see the progress in the quarter and we expect to see more as we move through the year..
I want to go back to a point that I made earlier. One of the reasons why I have confidence in where we're going, where this is taking us is the teams the leaders are working better together than they ever have before. With Olivier's leadership in Europe and with the benefit of some of the learnings we've already had in the U.S.
on the retail side, particularly around store operations, first in the U.K. and increasingly on the continent as well. We're really starting to get back to the- to get the expertise in retail fundamentals that we need to succeed as we carry forward. So good progress but more work to do..
Great. Thank you so much..
Thank you. Next, we'll go to the line of Carla Casella with JP Morgan. Your line is open..
Hi.
I'm wondering, you talked about the Cody agreement, which brands is that related to and was it similar to your past agreement?.
It was and it covers all of the professional brands that sell through BSG. So all of the Wella [ph] color line, I believe, [indiscernible] as well as their other lightning lines, and Sebastian products. It's of all the professional products that flow through BSG..
Okay, would that preclude you from buying those brands if they are for sale or could that change if the buyer buys them?.
It does not nor does it preclude us from buying them either..
Well, I guess the further layer I put it on that. Of course, we don't comment on any M&A. Anyone who does buy that business will inherit the contract with us and so that's- our comment on our script was it provides us with certainty as we carry forward. It gives them the certainty that one of their largest customers is in hand.
It gives us the certainty that we don't have to worry about key brands like that in our portfolio for a three-year period..
Okay, great. That's really helpful. And then you mentioned the inventory being a little heavy post-holiday.
How long do you think it will take to bring that down? And is there any inventory in there that you have risk of aging that you need to mark down and move more quickly?.
Here's how I've answered the question. The team here is very clear that inventory has an impact on cash. The team here is increasingly clear that we need to ensure that we are managing the business both through the income statement and the cash flow.
We are going to do everything we can to bring the inventory down without impacting our business to maximize our cash and without having to take a hit to the gross margin line that we want to avoid. And so I am not here today to call out and impact the guidance of our inventory. I don't want to overstate the concern based on our earlier answer.
We view it as something we just have to manage through every day as a retailer..
Okay. And then just one last one. Amazon earlier had announced they want to go into that beauty business. It seems to have faded and not heard much about it lately.
Is there any update from what you're seeing from a competitive standpoint, any changes in that professional beauty competitive landscape?.
I haven't seen much. I mean, we watch it constant, as you can imagine, as we look at the website it looks the same as it did when it originally launched. Most of the brands that are carried on there actually sold through resellers.
And you know, our view is, obviously we're continue to sign agreements such as the Cody agreements that are exclusive agreements with our vendors. So in our mind, it continues to be about the same. And our view is we're going to continue to execute.
Again, I would go back to the point, which is from our vendors perspective, it doesn't bring anything incremental to the business in terms of helping them recruit new stylist to a color line, they need personal contact and training to accomplish that.
So all Amazon would do would be transfer a customer from an existing channel to another channel as opposed to help them recruit new customers. So our job is to add the right digital and service capabilities to our existing business and help them build their brands. And obviously, we continue to do that.
And I think that's why you're seeing our customers renew their contracts..
That's great. Okay, thank you so much..
Thank you. Next, we will go to the line of William Reuter with Bank of America. Your line is open..
Hi, just a couple. With regard to your exclusive brands or private label however you described them.
Are there any that have grown to the point where you started to distribute them and in other channels or do you just view those as I guess ways to drive traffic to your own retail stores?.
We view the own brands at Sally which is about 45% of our portfolio and our exclusive brands at BSG, which is about 53% of our portfolio as being key points of differentiation to us why they need to come to Sally or to BSG.
In connection with the digital business, there are places as we're participating in marketplaces leading with our own brands, because they stay within our control in that way.
As we sit here today, our focus has been on taking advantage of the technology, the brand in house that we have across our businesses, and so leveraging Europe in the US and US in the Europe, for instance, and not on driving sales of those own brands through other channels beyond our own digital efforts.
I would just comment and Aaron has it exactly right, that we will continue to use these as a way to drive traffic to our existing stores and businesses. The Ion brand in Sally has become a major and significant brand as a global brand. And we sell it only through our outlets, but it is of a scale that that is quite large.
And I think it's an underappreciated part of Sally..
Would you ever consider acquisitions of brands that would be so large that it would probably not make sense to have them be largely exclusive to a brick and mortar to your brick and mortar stores as opposed to being another brick and mortar stores?.
I think that's hard. I'm not saying we would never consider it but it's hard to do. Because most cases those brands have global footprints that are extended well, but hot beyond our footprint, and it would be very hard for us to sustain the brand. So I think that would be tough to do. But we will always look at them as they come available..
Okay, and then just lastly, you talked about the traffic challenges in the first three weeks of November as well as December.
Do you view those as being somewhat unique to the holiday period and that will be a continued challenge during that period of the year, or do you think this is something which could be a challenge and the other kind of timing quarters of the year as well?.
Well, I guess I would answer it this way. I observed earlier my remarks that following Christmas, we saw traffic revert to the more positive trends that we had been calling out on early earnings calls.
And so it is our hope without being a certainty that with everything we have going on with the impact on marketing, with the impact on better operations, retail fundamentals that, indeed, traffic that Q4 or rather Q1 financially for us was a unique set of circumstances and that we aren't repeating that..
Right. That makes sense. Thanks a lot..
Thank you. And we will go to the line of Gina Gemelli [ph] with Goldman Sachs. Your line is open..
Thanks so much. I appreciate you squeezing me in. I just wanted to follow up a little bit more on the technology and the PMS implementation issues. Is there any way you could maybe quantify the specifically the sales and the gross margin impact? And I guess where the comps have been positive.
If we didn't have these issues, the gross margin has expanded, I guess, you know, you called out a number of times that these results are below your expectations. I guess excluding the tech issues, would they really have been more in line with your expectations? Thanks..
You know, I'm not going to put dollar figure on each of the impacts for the quarter although if you review my comments pretty carefully, you may be able to do the math around where we landed versus where we expected to be.
The three or four factors I called were roughly equaled in significant, I believe it was three in the top line and four at the bottom line. And you can get some good assumptions around that..
Okay, that's helpful.
And then I just I know you reaffirmed or mentioned the 2.5 times leverage target but was you're thinking about acquisitions, I guess how high would you be willing to take the leverage in the interim, really for such an acquisition, just to kind of give us a sense of the size and scale that you're thinking about or will to do?.
I think I will leave you with this. We are not here today to announce an acquisition. We're not. And our operating plans put us in a place where we get back to the 2.5 right and so someday if we have something to announce, which has a material impact on our leverage plans, of course we'll talk about that.
But as we sit here today, we are focused on investing in our business, bring our debt down, and then an organic the markets presents as an opportunity, you know, buying back some shares.
The good news is we have plenty to do from an investment or business perspective, the teams are head down focused on getting us through a transformation with everything underway.
Okay?.
Thanks so much..
Thank you. I'm showing no further questions at this time. Please continue..
Well, then thank you for your questions today. So summarize. While a challenging quarter, we continue to make progress against our transformation efforts. And we are focused on landing the year consistent with the revised guidance we have provided. I want to leave you with this.
Notwithstanding the first quarter, we got this and we will deliver on our transformation objectives. Thank you for joining us today..
Thank you and ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation. If you're using AT&T Executive Teleconference Service you may now disconnect..