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Text: With me on the call today are Chris Brickman, President and Chief Executive Officer; and Marlo Cormier, Chief Financial Officer.
I want to start by commending our teams for their commitment to the business during these remarkable times.
We're all pleased to see store closures and restrictions, easing in certain markets, but the global environment remains dynamic and requires that we continue to operate with added discipline, and agility.
Our teams continue to perform at a high level in Q2, and most importantly, they remain focused on serving our customers.
Due to their hard work and dedication, we achieve net sales growth of 6% despite store closures in many of our international territories, and the shutdown of California salons in January.
Traffic and sales trends, started picking up in the latter part of February, and accelerated more substantially in the final month of the quarter, resulting in stronger than expected performance across the P&L.
There are a few key factors that drove the topline.
First, we saw increased demand and Sally US from Improving consumer confidence, and government stimulus actions.
Next, reopenings in Canada, and easing restrictions in the US, drove stronger than expected pent up demand, as both Sally and BSG.
As you may have seen the Province of Ontario subsequently shut down again in early April, but this is a Q3 dynamic.
Lastly, in the final month of the quarter, we saw a significant shift in trend at BSG as salons were permitted to operate at higher capacity levels.
At the same time, we continue to see a trend toward more independent stylists, as they are displaced from their salons and moved to booth or sweet rental, these stylists are increasingly likely to become BSG store customers.
The combination of strong consumer demand and the effectiveness of our promotional strategy, allowed us to maintain solid gross margins above our target level of 50% in the quarter.
Additionally, expense favorability also helped drive strong earnings and cash flow.
We ended Q2 with a strong liquidity position, including $408 million of cash on the balance sheet, and zero balance outstanding our $600 million ABL credit facility.
Subsequent to the close of the quarter, we fully repaid the outstanding balance on our 5.5% senior notes due 2023, making further progress toward our goal of bringing our leverage ratio close to 2.5 times by the end of fiscal 2021.
Looking at the business by category.
During the quarter, we saw ongoing strength in hair color, including vivid.
Color increased 27% and vivid colors grew by 53% at Sally US and Canada versus the prior year.
Then it continued to be an important driver and represented 27% of our total color sales for Sally US and Canada in the quarter.
In addition, BSG also saw strengthen in the color category, which was up 17% versus the prior year.
Other categories also performed well, with nails up 20% and hair care up 9% at Sally US and Canada, and hair care up 16% at BSG.
Notably, as the quarter progressed, we saw a pickup at Sally in going out core categories such as styling and tools, which really speaks to the improving consumer confidence and vaccine optimism that was building.
Our e-commerce business was also an important growth driver, delivering of sales increase up 56% versus a year ago.
Looking at our expanded digital capabilities, we're really starting to see our investments bear fruit this year.
We're currently offering multiple fulfillment options, including buy online pickup in store, ship from store and curbside pickup at Sally Beauty and same day delivery and curbside pickup at our BSG stores.
For the second quarter, approximately 40% of our e-commerce sales for Sally US and Canada were fulfilled by our stores, which speaks to the value of our large store portfolio when combined with our enhanced digital capabilities.
To that end, we are closely monitoring customer behavior and evaluating key learnings across all of our fulfillment options.
At the same time, we are mindful of macro factors such as wage inflation and balancing that with the need to maintain highly productive store economics.
In the coming months, we will be testing a small number of store closures to analyze sales transfer and purchasing patterns, which will help inform our future plans for the portfolio.
The initial test will consist of approximately 90 stores, roughly 70 Sally Beauty and 20 BSG locations, and will be spread across the country to provide us with a range of learnings in various markets.
Our teams remain focused on the three major priorities for fiscal 2021 that we outlined on our last earnings call.
As a reminder, those include the following.
We expect to substantially complete the remaining elements of our transformation.
We expect to be leveraging all of our new capabilities and tools in service of our core mission to recruit and retain color customers, and we expect to bring our debt leverage ratio closer to our target of 2.5 times.
In support of these priorities, we are working on four key initiatives.
First, I'll talk about our expanded delivery service model.
We are pleased to see adoption rates rising on our most profitable fulfillment option, focus, which accounted for 20% of Sally US and Canada's total e-commerce sales during Q2, up from 11% in the prior quarter.
Ship from store represented an additional 20% of Sally US and Canada's total e-commerce sales for the quarter.
Next month we will begin offering highly competitive same-day delivery times for both our Sally and BSG customers.
Our Sally customers will be able to get product to their front-door in as little as three hours, and our Salon Pros will have the ability to receive product within two hours.
We believe that BSG has a unique competitive advantage and its ability to provide this high value options to its pro customers based on its nationwide store footprint.
In the second half, we'll be adding another convenience option for our BSG customers with the rollout of BOPIS, which is currently slated to commence in the June timeframe.
A second initiative we've been focused on is the replatforming of the BSG digital storefront, which I'm pleased to tell you is on schedule to be completed this month.
This new more robust platform will be a game changer in terms of how we recruit and engage with our stylists.
Equally important, we are now able to offer our stylists new value-added features like product reorders, bulk orders and navigation enhancements that ultimately improve efficiency and strengthen the profitability of their businesses.
A third and important area of focus is loyalty and CRM.
As you may recall, we relaunched our Sally Beauty rewards loyalty program just over two years ago, and BSG just launched its first loyalty program last fall with our private label rewards credit card.
As we've layered on the private label reward card, and added CRM capabilities and tools we are really poised to increase customer interaction along the entire purchasing journey, and ultimately drive incremental sales.
In Q2 purchases from our loyalty members at Sally US and Canada exceeded 72% of sales total sales and BSG US surpassed 7% of total sales.
The fourth key initiative for fiscal 2021 is continuing the rollout of JDA, which represents an important step in our multi-year transformation journey.
We continue to expand the operations and functionality of our North Texas distribution center, and remain on track to bring JDA to the majority of our remaining VCs, by the end of the calendar year.
At the core of all of our strategic initiatives is our mission to be the leader in color with an underlying focus on customer centricity.
To that end, we are currently executing a full reset of our color offerings in all Sally US stores that will be completed in May.
This initiative, which really puts color at the heart of every Sally location, included the relocation of all hair color, including visits to the front of the stores.
We also brought a new brands and skews added eight feet to the color aisle, and dedicated four feet specifically to lightning and blonding, which has become a high volume category over the past year.
We designed the new layout to create a better experience for our color customers.
Looking at the second half of fiscal 2021, we believe the business is well-positioned, especially within the context of an improving external environment.
Consumer demand for our core categories is robust, both the Sally Beauty and BSG segments are strengthening as consumer confidence improves, our gross margins remain strong and our teams are executing well against our key initiatives.
That said, our expectations are somewhat tempered by ongoing store closures in international markets and Salon capacity restrictions in the US.
Notwithstanding any incremental disruptions from the pandemic, we are expecting Q3 net sales growth in the high double digits, primarily reflecting the easy comparisons to last year when we experienced broad based store in salon closures, more specifics on this shortly from Marlo.
Before turning the call to Marlo, I would like to briefly touch on our ESG initiatives.
First and foremost, we recognize the importance of our social and corporate responsibilities, ESG issues, and the essential role they play in our long term performance and value creation.
Our strategy is focused on five key areas, where we believe we can have a meaningful impact, our employees, diversity and inclusion, energy in the environment, product development and sourcing and data protection and security.
We're pleased to deliver strong results across the P&L during our second quarter.
The outperformance on the topline primarily reflects the combination of improving consumer optimism, easing restrictions in the US, including California salon reopenings during the latter half of the quarter, and US government stimulus actions.
Net sales were up 6.3% versus prior year.
And same store sales increased 6.5%.
Similar to last quarter, in our open locations, traffic decreased versus prior year, while other key measures increased, including units per transaction, average unit retail and average ticket.
Our global e-commerce business remains strong with consolidated sales up 56% on a year over year basis.
We're pleased to see the investments we've made our digital capabilities continue to bear fruit, particularly as our team work to deploy and scale our new fulfillment options and enhance tools.
From a gross profit perspective, we continue to deliver margins in line with our 50% plus target levels.
Second quarter gross margin came in at 50.4%, up 110 basis points to last year.
Adjusted Gross margin was 51.2% and excludes a $7 million, writedown of PPE inventory.
For perspective, when the pandemic hit in early 2020, w took immediate steps to build a position in PP inventory to ensure we could protect our associates, assist our salon professionals to help them safely open their businesses and serve our retail customers and communities who came to us for in demand items like masks, gloves, and sanitizers.
As pandemic headwinds began to abate, we are taking steps to bring our PPE levels in line with anticipated demand.
In addition to the $7 million writedown, we also made the decision to donate approximately $31 million of PPE inventory that will be disseminated to organizations in need during the second half of fiscal 2021.
This portion has been expensed in SG&A, and accrued as a liability on the balance sheet.
Turning to Q2 expenses.
SG&A expense totaled $391 million.
That includes the PPE donation of $31.2 million, partially offset by $2.2 million of Canadian wage and rent subsidy credits.
On an adjusted basis, SG&A decreased by approximately $6 million, reflecting lower advertising and field labor costs, and our focus on expense control while pandemic headwinds persist.
As a percentage of sales, adjusted SG&A improved by 320 basis points, coming in at 39.1%.
In the second half of the year, we expect SG&A dollars to increase versus prior year, reflecting a combination of wage inflation and incremental spend on marketing and IT, as well as the test compares to last year's furloughs and rent abatement.
Turning to earnings are strong performance on the top line flowed through to the bottom line.
In Q2, adjusted operating margin expanded by 510 basis points to 12.1%.
Adjusted EBITDA increased 55% to $141 million, and adjusted diluted earnings per share more than doubled to $0.57.
Moving to segment results at Sally Beauty same store sales increased 4.9%.
Consumer optimism strengthened and government stimulus took effect in the US, we saw pickup and sales during the latter part of the quarter.
The combination of strong sales and gross margin expansion drove a significant increase in segment operating margin, which expanded 750 basis points to 18.4%.
We also delivered strong e-commerce sales at Sally, up 46% versus a year ago.
In our BSG segment, same store sales increased 9.9%, reflecting a strong rebound as restrictions ease coupled with higher operating capacity in salon and the reopening of California salons in February.
E-commerce remained strong posting growth at 68% on a year-over-year basis.
Excluding the write down of PPE inventory, gross margin was approximately flat to last year, and operating margin expanded 80 basis points to 12.5%.
Looking at the balance sheet and cash flow.
We ended the quarter with $408 million of cash on the balance sheet and a zero balance on our $600 million revolving line of credit.
Inventory at quarter in totaled $950 million, essentially flat to last year, inclusive of the $31 million in PPE inventory that we expect to donate by fiscal year end.
Looking at the balance of the year, we expect to close this fiscal year with inventory in the low 900.
As a reminder, we exited fiscal 2020 with inventory at sub-optimal levels and successfully rebuilt our position in the first half of this year.
We generated strong cash flow from operations of $93 million in Q2 and capital expenditures totaled $12 million, putting free cash flow at $81 million.
At the end of the quarter, our net debt leverage ratio stood at 2.34.
For comparison purposes, the leverage ratio that we often say, as defined in our loan agreements, where the impact of cash on hand is capped at $100 million for net debt calculation purposes was 2.95.
Given our strong liquidity position, subsequent to the end of the quarter we fully repaid the outstanding balance of $197 million on our 5.5% unsecured notes.
We expect to continue utilizing excess cash to deleverage the balance sheet, with the goal of bringing our leverage ratio closer to 2.5 times this year.
We expect the business to generate strong cash flow from operations of more than $100 million in the second half of this fiscal year.
Based on the timing of working capital requirements around inventory receipts, we anticipate the Q3 operating cash flow will approximately -- be approximately flat the prior year.
We are maintaining our focus on liquidity and will continue to balance that with strategic growth investments in debt pay down in the near term.
Importantly, as the macro environment stabilizes, we will evaluate optimal paths for returning value to shareholders.
Looking at the second half of the year, we expect the environment to remain dynamic with restrictions and closures continuing to be fluid.
In the third quarter, we are up again, particularly, easy comparison.
Keep in mind that net sales were down 28% in Q3 of last year, which reflected significant pandemic impacts in store closures globally.
Against that comparison and as Chris previously stated, assuming no incremental pandemic disruptions.
We expect net sales growth of 35% to 40% in Q3 of this year, reflecting strengthening consumer demand in the US, partially offset by ongoing choppiness from pandemic headwinds in international markets.
Looking at the fourth quarter comparisons normalized substantially.
For perspective in Q4 of 2020, net sales were down less than 1%, as restrictions lifted in store and salon reopenings took hold.
In Q4 of this year, we anticipate that net sales will be approximately flat compared to the prior year.
For context, we view net sales as the best measure of our performance in the pandemic environment, and anticipate that we'll return to providing same-store sales guidance when macro conditions stabilize.
We feel good about our positioning and our ability to continue navigating from both an operational and financial perspective.

user
compname reports q2 adjusted earnings per share $0.57.
q2 adjusted earnings per share $0.57.
q2 same store sales rose 6.5 percent.
qtrly consolidated same store sales increased 6.5%.

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