Sally Beauty Holdings, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Pleased with 10% increase in adjusted operating earnings and 20% growth in adjusted earnings per share despite uneven top-line trends. Adjusted operating margin expanded 90 basis points supported by healthy gross margins and strict expense control. Generated strong free cash flow in Q2.
• Sally segment: Comparable sales dipped slightly negative, but delivered 130 basis points of gross margin expansion and increased profitability. Strong growth in color and robust performance from digital marketplaces strategy.
• BSG segment: Comparable sales declined due to flu season and macro environment, but saw pickup in trends post-flu. Expanded distribution and product innovation as ongoing momentum.
• Strategic initiatives: Digital marketplaces growth, licensed colorist on-demand with growing traction, product innovation across banners. Sally brand refresh with rollout of modernized expression, 8 Orlando stores refreshed with positive response. Happy Beauty initiatives with 20 stores open, focusing on product, in-store experience, and storytelling. Fuel for Growth program on track to generate cumulative gross margin and SG&A benefits of approximately $70 million by end of year.

Segment Performance

• Sally Beauty: Net sales decreased 2.5% to $501 million, including 150 basis points of unfavorable FX impact on 17 fewer stores versus a year ago. Comparable sales were roughly flat at a minus 0.3%. Gross margin increased 130 basis points to 61.2%. Segment operating margin was 15.4%, up 40 basis points. At constant currency, Sally eCommerce sales were $41 million, up 21% year-over-year, representing 8% of segment net sales. Color increased 4%, while care was down 8% compared to the prior year.
• BSG: Net sales decreased 3.2% to $383 million including 50 basis points of unfavorable FX impacts, while comparable sales were down 2.7%. Gross margin increased 40 basis points to 39.8%. Segment operating margin was 11.5%, up 60 basis points. On a constant currency basis, BSG ecommerce sales were $53 million, representing 14% of segment net sales for the quarter. Color was flat and care was down 5%.

Guidance

• Third quarter fiscal 2025 guidance: Comparable sales expected to be approximately flat to down 2% versus prior year. Consolidated net sales expected to be approximately 50 basis points lower than comparable sales due to unfavorable FX impact. Adjusted operating margin expected to be in the range of 8% to 8.5%.
• Full year fiscal 2025 guidance: Comparable sales expected to be in the range of flat to down 1% versus prior expectations of flat to up 2%. Consolidated net sales now expected to be approximately 75 basis points lower than comparable sales due to unfavorable FX impact. Adjusted operating margin expected to be in the range of 8% to 8.5%. Expect to repurchase approximately $20 million of stock and repay approximately $20 million of debt during third quarter. Extended share repurchase program by four years with approximately $500 million remaining under original $1 billion authorization.

Risks

• Macro economic uncertainty impacting consumer sentiment and spending.
• External factors like flu season and weather affecting purchasing behavior of Sally customers and BSG stylists.
• Dynamic tariff situation with limited exposure but uncertainty regarding its impact on cost of goods and consumer response.

Question and Answer

Q: Talk a bit about just kind of what you’ve seen heading into the back half. It sounds like you’re expecting maybe consumers to kind of pull back on spending, but just curious if you’ve seen any of that since Liberation Day and the decline in consumer sentiment. And then also, I’m curious just if you’re seeing any trade down to consumers kind of doing their own coloring.

A: First quarter had transitory factors like weather and flu, with March seeing more consumer anxiety due to tariff news. BSG had more transitory factors which are mitigating, expecting good performance in back half. Sally saw lighter transactions and price point conservatism. On trade-down, more pressure on lower middle income consumer, not seeing trade-down from pro to DIY unless full recession, but customers looking to extend services and seeking value.

Q: Talk about the current promotional environment. In the past, you’ve talked a bit about shifting your strategy. So just wondering if you anticipate having to change as consumer sentiment is weaker.

A: Feel good about overall strategy with key initiatives like license colors on-demand, CRM, marketplaces, and innovation. Watching consumer environment closely but think it's more about tactics rather than fundamental strategy change. Have seen three consecutive quarters of top-line and bottom-line growth, with Fuel for Growth helping bottom-line.