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Text: 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.
With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer.
Chris will start by offering some thoughts on our very respectable fourth quarter.
He will also touch on our thoughts about the current economic environment and our outlook on fiscal year 2021 and finish with our focus on our key focus and investments in fiscal year 2021 as we move toward the completion of our transformation plan.
Aaron will then discuss our fourth quarter and full-year financial results, touch on our cash liquidity and also provide some perspective on fiscal year 2021.
Your efforts have turned us into an agile operator with real strength in both digital and physical retail.
And you have set us up well for the future.
I could not be more proud of our team and what they accomplished in spite of the countless challenges we experienced in fiscal year 2020.
During our last earnings call, we discussed the nimbleness and agility displayed by our teams and associates during the third quarter.
As our business responded to store closures and consumer uncertainty, our our teams quickly pivoted to launch new e-commerce capabilities and service models.
In June, we saw strong sales as a majority of our stores reopened.
As we moved into July and the fourth quarter, we continued to see strong sales with the business normalizing.
Of course, the environment continued to evolve around us as exemplified by California shutting down salons in many counties for parts of July and August.
All in, we delivered enterprise positive same-store sales of 1.3% with strength in retail, helping to compensate for soft, but still positive same-store sales in the wholesale business.
Here are some of the key highlights regarding our fourth quarter.
Our Sally Beauty retail business in the U.S. and Canada delivered same-store sales growth of 3.7% for the quarter.
We saw continued strength in our core category of hair color, where we continue to gain share in the retail and pro channels.
For the fourth quarter, hair color was up over 22% in Sally Beauty's U.S. and Canadian retail business, with unit growth and increased AUR.
We also saw strength in the nail category for Sally Beauty's U.S. and Canadian retail business, which was up 11%.
We continue to see solid stream and growth in our global e-commerce business.
We delivered the highest gross margin in SBH history, driven primarily by the U.S. and Canadian retail business and our strategy of Fewer, Deeper, Bigger promotions.
We grew adjusted earnings per share over the prior year by 9%.
We ended the quarter with less debt and a strong balance sheet.
And we continued our focus on cost controls, cash management and liquidity, and generated over $131 million in free cash flow.
Operationally, we also continue to invest in our business and launch new programs.
Following our fast launch of Ship-From-Store and Same-Day Delivery in Q3, we launched 'Buy Online / Pickup In-Store' at Sally Beauty and it will reach all U.S. stores nationwide within a few weeks.
We completed the national rollout of our new Private Label Rewards Credit Card Program to both Sally and BSG customers in the U.S. In just the first month, we had approvals for over 80,000 new card members with a slight weighting to the professional stylists over the retail consumer.
We launched the second addition of Cultivate, which offers financial support, product distribution and mentorship for female-owned beauty brands.
We executed a number of small acquisitions on the BSG side, gaining brand distribution rights, a small number of stores and new customers.
We expanded our Ship-From-Store capabilities to 2,400 stores in the U.S. and nine provinces in Canada.
And we successfully placed our new North Texas distribution center into service in August.
Now, let's turn to our thoughts on the current economic environment and our outlook for next year.
Looking ahead to fiscal 2021, we will have to remain agile as our consumers continue to deal with the impacts of COVID-19.
While our business is certainly defensive and more resilient than many retail peers, we expect an increased level of volatility, particularly in the first half of the year.
Regardless of COVID-19, we remain confident in the direction we are headed, the investments we have made in our transformation plan over the past few years, and the resiliency of our categories.
As we stated on our last earnings call, we feel we are well-positioned to handle the uncertainty of the near term due to three key factors.
First, our businesses are on trend.
The Sally Beauty business is the industry leader of professional color for home use, and is perfectly aligned with the increasing DIY trends.
Our customers can find all of their needed solutions or products for hair, nail and skin either online or in our stores.
Additionally, they can find How-To content on our digital sites, starting with Hair Color 101 all the way through more complex application techniques.
Alternatively a consumer can talk to a Sally associate at a store, who has been trained in hair color.
We plan to retain and build on the new customers who have discovered us as they experiment with DIY hair and nails and try out new exciting colors.
And we are ready to serve our traditional customers with more convenient service options as they become increasingly comfortable with returning to stores over time.
On the BSG side, while the salon business seems to be recovering more slowly, we are the industry leader in stylists' safety with our largest assortment of PPE including hand sanitizer, barbicide, gloves, masks and case.
In addition, we have added more convenience -- we have more convenient store locations, more DSC's that are now digitally enabled and many of which are now trained and certified in salon safety protocols.
And now we offer improved delivery service options to ensure we are convenient and safe for our professional customers.
We will continue to build on this leadership position.
Second, we have the ability to operate effectively in an environment that will continue to be impacted by COVID-19.
Customers and team members can feel confident in our stores, which have instituted the protocols required to operate safely.
We have proven that we can rapidly evolve our service model to provide our customers with more choice on how they interact with us and more access to our inventory chainwide.
Third, we are sitting in an excellent liquidity position, with strong cash flow and cash on the balance sheet.
Aaron will discuss this more during his remarks.
Finally, I will spend a few minutes talking about the key projects and investments that we will focus on in fiscal year 2021.
First, we will continue our digital transformation by optimizing the guest experience and service offerings such as 'Buy Online / Pickup In-Store', which is rolling out across all Sally stores in the U.S. in November, and optimizing the impact of digital to the income statement by addressing operating changes, which will lead to cost savings.
We will also replatform the BSG digital experience focused firmly on the pro and add further fulfillment options for BSG in the second half of fiscal year 2021.
Second, now that we have completed the rollout of our Private Label Rewards Credit Card Program in the U.S., we will be intensely focused on growing and optimizing the portfolio and program.
On the Sally side, the program will enhance the existing Sally Beauty Rewards loyalty program by adding additional reward points to the customer spend.
Additionally, the Sally e-commerce site is already set up to provide instant credit for online applications and accessibility to shop with their card online.
On the BSG side, card benefits include an additional 3% discount on purchases and adds better flexibility for stylists and pros to manage their cash flow and business.
Through benchmark data, we know that private label credit card holders typically spend more per transaction, as well as having better retention rates.
Therefore, our focus will be on driving activations while increasing basket size and share of wallet.
This also translates to the P&L benefits related to interchange relief from traditional bank cards, as well as adding royalties from new account openings.
Third, as a significant part of our company's history, growth, and current assortment, our Sally Beauty division is partnered with over 25 black-owned brands in our current textured hair category.
In fiscal year 2021, we have committed to growing these successful partnerships and expanding our offering to additional black-owned brands across both the Sally Beauty and BSG businesses.
Fourth, now that we have JDA, our new merchandising and supply chain platform, and our new North Texas distribution center, both up and live on a limited scale, our focus will be on expanding both of these initiatives.
Once fully rolled out, JDA will improve product assortment by store location, improve out-of-stocks and greatly improve visibility and forecasting of inventory.
Once fully functional, the North Texas DC will be our first distribution center that services all channels for both business segments and will deliver the benefits of increased speed to market, lower operating costs and will reduce the demand on our other DCs in our network.
In summary, while we continue to operate in an uncertain environment, at Sally Beauty Holdings, we believe we are a stronger company with even greater ability to deliver long term sustainable growth, driven by our enhanced capabilities and how we connect with our customers digitally, through our loyalty and credit card programs and expanded differentiated offerings, our enhanced infrastructure and omnichannel capabilities, and increased talent base, all of which are supported by a strong balance sheet and cash flow.
The bottom line, the challenges we faced in 2020 has simply made us better.
They pushed us to accelerate our digital transformation to simplify and focus our business strategy and build a team that is prepared to win in a transformed retail environment.
I am delighted to be here to talk about the great work that the Sally Beauty Pro-Duo and Beauty Systems Group teams accomplished during the fourth quarter.
Consolidated same-store sales went up.
They increased by 1.3%.
Consolidated revenue was $958 million for the quarter, a decrease of less than 1% from the prior year.
The increase in same-store sales, led by our Sally Beauty U.S. and Canadian retail business was offset by COVID-19's modest impact on parts of our Beauty Systems Group business during the quarter, and a smaller store base with 23 fewer stores compared to the prior year.
Finally, we saw a favorable impact from foreign currency translation of approximately 20 basis points on reported sales.
During the quarter, brick-and-mortar traffic was choppy and was down from the prior year due to the lingering impact of COVID-19, but average basket remained up due to an increase in units per transactions and an increase in average unit retail, which happened alongside an increase in units in our core differentiated category of hair color.
As expected, customers are generally making fewer trips but buying more when they do come in and shop.
In contrast, we did see increased traffic to our digital channels.
At the start of the quarter, even with the vast majority of our store network back open, our global e-commerce business grew rapidly.
For the fourth quarter, e-commerce sales were $63 million, representing growth of 69% over the prior year, led by our Sally U.S. and Canadian e-commerce platform which delivered growth of over 113%.
Last quarter, we mentioned that during the peak of the COVID crisis, we had new e-commerce customers in our online U.S. retail channel that had signed up for our Sally Beauty Rewards loyalty program.
Retaining these new customers was obviously a key focus for us and in the fourth quarter, we saw repeat purchases from approximately 60% of that new customer group.
Similarly, last quarter we saw opportunity from competitor disruptions in the pro-channel where BSG saw 40,000 new hair color customers walk into our stores during the quarter.
During the fourth quarter, we saw repeat purchases from approximately 50% of those new customers.
Let's turn now to gross margin, which is a simple story.
It went up dramatically.
Consolidated gross margin for the quarter was 51.1%, which is the highest gross margin rate in at least eight years.
This represented a 150 basis point increase as compared to the prior year.
The improvement was expected and is a signal of our increasing retail fundamental capabilities.
It was driven primarily by better coordination and execution of fewer promotions across all businesses and an intentional positive mix shift toward higher margin categories like hair color in the quarter, but partially offset by a reduction in vendor allowances from fewer promotions and reduced inventory purchases.
Consolidated gross profit for the fourth quarter was $489.1 million, an increase of approximately $10 million from the prior year.
As a percentage of sales, selling, general and administrative expenses were 38.3% compared to 37.7% in the prior year, driven primarily by higher e-commerce delivery expenses, which were expected and are something that we're working speedily upon, continued transformation investments and the deleveraging impact of lower sales volume compared to the prior year.
GAAP operating earnings and operating margin in the fourth quarter were $119.7 million and 12.5%, respectively, compared to $116.1 million and 12%, respectively in the prior year.
After excluding charges related to the company's previously announced restructuring efforts in both years and COVID-19-related income in the current year from a Canadian wage subsidy, adjusted operating earnings and adjusted operating margin were $120.3 million and 12.6%, respectively compared to $115.3 million and 11.9%, respectively in the prior year.
Both GAAP and adjusted diluted earnings per share in the fourth quarter went up.
GAAP diluted earnings were $0.62 per share and adjusted diluted earnings were $0.63 per share, both compared to $0.58 in the prior year, representing growth of approximately 7% and 9%, respectively as compared to the prior year.
Stronger gross margin rate, lower income tax expense and a lower average share count all contributed, partially offset by modestly higher selling, general and administrative expenses, and an increase in interest expense.
In the fourth quarter, the company had net earnings of $70.2 million compared to $69 million in the prior year, an increase of 1.7%.
Adjusted EBITDA was modestly higher at $146.6 million in the quarter compared to $144 million in the prior year.
Adjusted EBITDA margin also increased to 15.3%.
Now, turning to segment performance.
Global Sally Beauty segment same-store sales increased by 1.7% for the fourth quarter.
The Sally Beauty business in the U.S. and Canada, which represent 80% of the segment sales for the quarter had a same-store sales increase of 3.7% in Q4.
Europe had a decrease in same-store sales for the quarter, while Latin America had a significant decline in same-store sales, given approximately 15% of the stores were closed for more than half the quarter due to COVID-19.
Our global Sally Beauty segment generated revenue of $577 million in the quarter, an increase of about 1% compared to the prior year, driven primarily by the increase in same-store sales, a favorable foreign exchange impact of approximately 40 basis points, partially offset by 42 fewer stores compared to the prior year.
Our global Sally Beauty e-commerce business continued to show strength with growth of 86% in the quarter, led by our U.S. and Canadian e-commerce platforms, which delivered growth of 113%.
For the quarter, gross margin for the accounting segment landed at 57.6%, an increase of 180 basis points compared to the prior year.
We saw Sally Beauty business in the U.S. and Canada also hitting a record gross margin level of 61%.
Segment operating earnings were $103.9 million in the quarter, an increase of 10.6% compared to the prior year, for all the reasons that I've just discussed.
Segment operating margin increased to 18% compared to 16.4% in the prior year.
Now turning to our Beauty Systems Group segment.
Total segment same-store sales increased by 0.6% for the quarter.
While we had higher expectations for the quarter from Beauty Systems Group, there were a number of headwinds impacting comp sales.
First, the COVID-19-related shut-downs of California salons in many counties in July and August had an unfavorable impact of approximately 90 basis points on the segment's same-store sales.
We also tested a variety of techniques in stores, which will set us up for success in subsequent quarters.
Net sales for the segment were $381 million in the quarter, a decrease of 3.3% compared to the prior year.
The decline in non-comp sales was driven by COVID-19.
COVID-19 and the necessary social distancing guidelines forced the cancellation of a significant trade show at which BSG sells goods.
It also constrained the reopening and velocity of customer appointments at our national chain customers.
We also saw the creation of full service back orders during the quarter resulting from some inventory gaps.
Finally, we saw an unfavorable foreign exchange impact of approximately 10 basis points.
BSG's e-commerce platform grew by 55% for the fourth quarter driven by consistent demand throughout the quarter.
BSG's gross margin increased by 60 basis points to 41.2% in the quarter, driven primarily by fewer promotions, but partially offset by lower vendor allowances.
Segment operating earnings for BSG were $50.6 million, a decrease of 14.4% compared to the prior year, driven primarily by the decrease in net sales, but partly offset by the increased gross margin rate.
Segment operating margin declined to 13.3% compared to 15% in the prior year.
Let's talk about cash.
We generated a lot of it.
During the fourth quarter, the company delivered cash flow from operations of $153 million, an increase of 31% compared to the prior year.
Payments for capital expenditures in the quarter totaled $21 million as we continued to invest against our business transformation.
Investments in the quarter included further work on our digital capabilities and e-commerce platforms, and optimizing our supply chain through our JDA and North Texas distribution center efforts.
Free cash flow was $131 million in the quarter, which represented a 67% increase as compared to the prior year.
I should note that we saw a significant cash benefit from a reduction in inventory, which carried over from Q3 into Q4.
The combination of our efforts to manage cash, purposeful SKU rationalization as part of our merchandising transformation, and some soft supplier disruption put us in a position where our inventory levels came down too far, and we are acting during Q1 to fix that.
More on that to come.
During the fourth quarter, the company used a portion of its cash to reduce its debt levels by $445 million, including paying off its outstanding balance on its revolving line of credit by $375 million, the entire FILO loan balance of $20 million and $50 million of the fixed portion of its Term Loan B. The company did not repurchase any shares during the quarter.
In addition, the company also completed a small acquisition in Quebec, Canada, which added 10 stores, 17 direct sales consultants and exclusive distribution rights to premier professional hair color and hair care brands such as Wella Professional and Goldwell.
At the end of the fourth quarter, the company remains in a very strong liquidity position with $514 million cash on the balance sheet and a zero balance on its $600 million revolving line of credit.
Generally, the company ended the quarter with a leverage ratio of 2.88 times, reflecting our significant cash balance.
For comparison purposes, the leverage ratio that we often cite, as defined in our loan agreement, where the impact of cash on hand is capped at $100 million for net debt calculation purposes was 3.79 times.
Turning to our consolidated full year financial results.
For the full fiscal year, consolidated same-store sales decreased by 8.1% due almost entirely to COVID.
Consolidated net sales were $3.51 billion, a decrease of 9.3%, driven primarily by the impact of COVID-19 shut-downs, operating 23 fewer stores and an unfavorable impact from foreign currency translation of approximately 10 basis points.
Global e-commerce sales grew by 103% compared to the prior year, once again led by our U.S. and Canadian e-commerce platforms, which delivered growth of 184%.
GAAP diluted earnings per share for the full fiscal year were $0.99, a decline of 56.2% compared to the prior year, driven primarily by the disrupted operations caused by COVID-19.
Adjusted diluted earnings per share, excluding COVID-19 net expenses in the current year and charges related to the company's transformation efforts in both years, were $1.22, a decline of 46% compared to the prior year.
For the full fiscal year, cash flow from operations was $427 million, an increase of 33% compared to the prior year.
Net payments for capital expenditures totaled $111 million.
Operating free cash flow was $316 million, an increase of 39% compared to the prior year.
For the full fiscal year, the company repurchased 4.7 million shares at an aggregate cost of $61.4 million.
Let's turn now to observations on fiscal year 2021.
Whether it is lingering COVID-19 concerns or how long it will take the economy to fully recover or possible follow on from the November elections, fiscal year 2021 will certainly present its share of twists and turns.
We can already see this in the current operational status of the fleet.
All stores in the United States and Canada are currently operating.
However, stores in the few metropolitan areas, like El Paso, can only operate as curbside locations.
Additionally, we are seeing occupancy restrictions in parts of New Mexico and Colorado.
Europe has been more aggressive.
We have seen stores in Belgium, Northern Ireland and Wales closed due to local restrictions, only to reopen shortly afterwards.
Currently, of our 450 stores in Europe, approximately 180 stores are completely closed due to COVID-19 restrictions with the remaining stores either fully open or operating curbside, where permissible.
The majority of the closures currently are in England and France.
The result is we are seeing e-commerce accelerate again in Europe, similar to what we saw back in the third quarter.
Given all of this, we are not able to provide detailed financial guidance for fiscal 2021.
However, the company can offer a couple of broad observations.
Without adjusting for the impact of COVID restrictions, which are impossible to predict, the company would expect that sales in 2021 should be higher than 2019, even with the fewer stores in the fleet.
While we can't predict COVID, we are far better prepared than we were in fiscal '19 or even in March of fiscal 2020.
Regarding our store fleet, the company has revised its short-term plans with respect to new stores.
The company now expects that net store count will be approximately flat for the year, with a small number of new stores being added to the footprint, which will be offset by a similar number of store closures as we optimize core locations.
The company will, however, take advantage of the current leasing environment and relocate approximately 70 stores.
Remodels were mostly put on hold for the time being.
We expect our digital business to continue to grow and are continuing to invest in that area.
The company expects continued strength in gross margins, particularly in the first three quarters compared to last year, and particularly in Sally Beauty U.S. and Canada.
The company expects SG&A investments will, on a full-year basis, rise to reflect our continued investments, particularly in labor and e-commerce distribution.
However, the company is working hard on offsets to those investments and use it as an area of opportunity with more work for us to do.
The company expects to continue to generate strong cash flow, so also expect to be back-end loaded, given the company's significant upfront investment in inventory that I referenced earlier.
Finally, let's address capital allocation.
Our priorities are relatively unchanged.
The company will invest in this business.
As I noted earlier in Q1, this will take a formidable investing in new inventory.
We will also continue our business transformation, though, with some efforts to scale back to reflect the uncertain environment until a vaccine is available.
We will continue to hold significant cash on our balance sheet while we monitor how COVID-19 plays out over the first and second quarters.
As we grow increasingly confident that the environment has stabilized to our satisfaction, we will consider deploying additional excess cash to reduce our debt levels in the direction of moving our leverage ratio to 2.5 times.
That all being said, as we look at the stock price versus our underlying business fundamentals, we may smartly consider share repurchases from time to time.
We have not repurchased any shares so far this fiscal year.

user
q4 gaap earnings per share $0.62.
q4 adjusted earnings per share $0.63.
will not be providing formal guidance at this time.
will provide perspective on outlook for coming quarters during earnings conference call.
qtrly positive same store sales growth of 1.3% for enterprise; up 3.7% for sally beauty u.s. and canada.
$445 million of debt reduction in quarter, with ample liquidity remaining.
to rollout 'buy online / pickup in-store' at all sally u.s. retail stores in november.
expanding 'buy online / pickup in-store' to beauty systems group stores in second half of fiscal year 2021.

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