U.S. markets closed

Edited Transcript of SBH earnings conference call or presentation 6-May-20 12:30pm GMT

Q2 2020 Sally Beauty Holdings Inc Earnings Call

DENTON Jun 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Sally Beauty Holdings Inc earnings conference call or presentation Wednesday, May 6, 2020 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Aaron E. Alt

Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply

* Christian A. Brickman

Sally Beauty Holdings, Inc. - President, CEO & Director

* Jeff Harkins

Sally Beauty Holdings, Inc. - VP of IR & Strategic Planning

================================================================================

Conference Call Participants

================================================================================

* Mark R. Altschwager

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Olivia Tong

BofA Merrill Lynch, Research Division - Director

* Rupesh Dhinoj Parikh

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst and MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty Holdings Second Quarter Fiscal Year 2020 Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.

--------------------------------------------------------------------------------

Jeff Harkins, Sally Beauty Holdings, Inc. - VP of IR & Strategic Planning [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone, and welcome to the Sally Beauty Holdings Second Quarter earnings conference call. Before we begin, I'll point out that we have made a supplemental slide presentation available for today's call that can be viewed from the link provided on our investor site at sallybeautyholdings.com/investorrelations. In addition, given the timing of COVID-19, we will be providing limited supplemental disclosure for some operating and financial metrics for the month of April, which is outside of our second quarter financial results.

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 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 can cause 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; 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 thoughts and our progress against our transformation initiatives and on how our second quarter played out. And he will, in particular, focus on the dramatic growth of our e-commerce business as well as our already in-progress store network restart. Aaron will then discuss our second quarter consolidated and segment financial results, touch on our liquidity and then discuss how we are thinking about the rest of fiscal year 2020. Finally, Chris, Aaron, Marlo and I will be available for your questions.

Now I'd like to turn the call over to Chris.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Jeff, and good morning, everyone. What an incredible couple of months it has been. In early March, our team was reflecting on the significant progress we had made on our transformation agenda. We have launched the national brand campaign for Sally with good success. We had hired and we're onboarding new leaders for our digital product and e-commerce businesses. We had fixed the technology issues that we experienced in the first quarter. We had just launched sallybeauty.ca and a test of new ship-from-store capabilities in Sally Canada. We had just launched same-day delivery for Beauty Systems Group in one territory, and our sales metrics were flashing green, with same-store sales in the quarter prior to March 12 of positive 4.7%; and global Sally same-store sales, up 4.8%; Beauty Systems Group, up 4.5%; and Europe also showing positive progress. Then we recognized the massive change that was coming, and we executed a fast pivot to the future. Because of that pivot, we are a different company today than we were just 60 days ago. That change will continue. And we are going to spend the rest of this call highlighting for you what has changed in our situation, how we have responded and why I am so excited about our future.

First, let me set the stage with some observations about our business and our categories in times of financial turmoil. During earnings calls, over the last couple of years, we have gone out of our way to point out that history has shown that our business has been particularly stable in times of financial distress. We saw it in 2008, and we are seeing it again today. When it comes right down to it, our customers want to feel good about themselves, and they're willing to sacrifice other things before they sacrifice their investment in themselves and how they look. Of course, this may mean that some consumers will be value-conscious and some business may shift to Sally Beauty from BSG. However, keep in mind that Sally is the higher profit margin business for us. So we are comfortable with the natural hedge that may result from a consumer channel shift from professional service to DIY.

That being said, the BSG segment was basically flat over the 2007 to 2009 time period, and that should serve as further evidence of the resiliency of our business. Of course, COVID-19 is not your typical financial disruption. In some respects, it has created a growth opportunity for both our retail and our wholesale businesses. Just as we have been selling gloves to salons, doctors' offices, police departments and even the postal service during the shutdown, we also expect personal protective equipment will be a must-have for salons, individual stylists, consumers and other industries going forward. And we are investing in inventory accordingly. We expect this to be a growth opportunity for both Sally Beauty and Beauty Systems Group.

Let me give you some competitive context. During early March, what was remarkable to us was how our business was responding differently from specialty retail and differently from apparel specialty retail, in particular. Our traffic was relatively flat. While other specialty retailers were experiencing traffic declines of 30%, 40%, even 50% in the weeks leading up to the COVID-19 shutdown orders. While other specialty retailers were considering closing their stores for safety reasons and because no one was shopping, we had steady traffic and good conversion. It was only as we approached the last 10 days of March when news reports grew increasingly grim that we started to see greater impact to our sales and shortly thereafter, local authorities asked retailers to close operations. I want to repeat this point. We did not close our stores because of low traffic, like many other retailers. As the COVID situation developed, we closed our stores due to our overall concern for the safety of our employees and customers and in compliance with the mandates of local and regional authorities.

On March 24, we closed all customer-facing operations in stores across the United States and Canada. All stores in Continental Europe were already closed by that date, except for the 30 stores in the Netherlands, which continued to operate throughout the COVID interruption and the stores in the U.K. and Ireland, which closed on March 26.

So let's talk about how consumer behavior changed. The direction will not surprise you, but the magnitude of the change might. Within Sally Beauty U.S. and Canada, e-commerce demand spiked to unprecedented levels. For the period from March 12, until April 30, online demand for the Sally Beauty U.S. and Canada business spiked by approximately 8x the prior year, not 8%, not 80%, 800% and approximately 5x the prior 50-day period. In April alone, Sally Beauty U.S. and Canada had e-commerce sales of approximately $33 million.

We also discovered that our customer base changed. In the retail business, approximately 1/3 of the huge e-commerce demand was driven by new customers to Sally Beauty, 1/3 was conversion of Sally Beauty store customers who were not known to have previously shopped online with us, and 1/3 was pre-existing e-commerce customers.

In the same period, notwithstanding the widespread closures of salons across the country, e-commerce demand at Beauty Systems Group also increased by approximately 190% versus the prior year, and by approximately 100% versus the prior 50-day period. Because of our scale, we also saw new customers coming to us in Beauty Systems Group.

Now some of you that know our story well might be thinking, hold on a minute. Sally Beauty Holdings has a relatively modest e-commerce operation, even though they have been focused on building digital capabilities. And you would not be wrong. At the end of Q1, our digital penetration was 4.5%, and our scale was modest as we were still building capabilities. However, when I referred to the fact that we executed a fast pivot to the future, I was talking about digital.

As we planned, on March 1, prior to the onset of the COVID-19 impact, the company had launched a limited test of its new ship-from-store technology in 16 of its Sally Beauty Canadian stores and a one city test of same-day delivery with Postmates for Beauty Systems Group.

In early March, as we understood what was coming our way, we quickly moved to stop everything we had underway that wasn't focused on digital growth. And we pivoted to the dramatic acceleration and rollout of ship-from-store across the United States and Canadian store fleet. As of this week, 1,100 Sally Beauty stores are operating daily as flexible e-commerce fulfillment nodes. This makes the vast majority of our inventory accessible to our customers, provides the company with incremental e-commerce shipping capacity and increases the operational impact of 1,100 of our stores. The Sally store fleet e-commerce shipping capacity is now twice the capacity of the company's entire traditional e-commerce distribution network and additional stores are being added daily. That happened in 60 days.

Last week, the stores, even when they were not open to the public, fulfilled approximately 45% of our e-commerce sales and some weeks that has gotten as high as 60%. The company also accelerated its rollout of same-day delivery to additional Beauty Systems Group stores. As of this week, 300 Beauty Systems Group stores are now offering this service, and another 400 are awaiting launch.

I'd like to give you a sense of the magnitude of what this means. In the month of April, the first full month of our stores being closed to the public. The company had approximate sales of $94 million, more than half of it from our newly robust e-commerce operations. For comparison purposes, this implied e-commerce penetration would have equaled 16% of sales in the same period in the prior year, a significant change from the 4.5% penetration we were at in Q1. This was our e-commerce business without marketing and without promotion.

This is the pivot to the future, I want to focus your attention on. Our continued expansion of our digital capabilities, our continued expansion of our fulfillment capabilities, our continued focus on customer marketing and giving her what she wants, where she wants it and at a price that makes sense for both of us regardless of channel.

Now shifting to our store and network restart. While we have made great progress on digital, the practical reality remains that we have a multibillion-dollar business run through our stores that we want to bring back online as quickly as possible. We are closely monitoring developments on a county-by-county and a country-by-country basis, while actively planning the phased restart of customer-facing operations of the store fleet. The timing of specific store restarts has been and will continue to be driven by the return to work conditions set by local authorities, the return from furlough of store staff, the implementation of new safety protocols, social distancing programs in stores and inventory replenishment. As of this week, more than 1,500 stores are now open to the public globally, with additional stores being added to the open door roster on a weekly basis for the foreseeable future, consistent with evolving government orders.

Sally Beauty supply U.S. and Canada opened its first 2 stores in the United States on April 16. As of this week, 1,100 Sally Beauty supply stores are open to the public. We also have 1,500 stores operating as curbside pickup locations, and we have adopted rigorous social distancing and safety procedures. Some of these curbside stores are also open to the public. However, many are in jurisdictions that do not allow us to serve customers in the stores as of yet. We expect that additional Sally Beauty stores in the United States and Canada will come online in the coming weeks and months.

We also started reopening stores in Europe. First, in Germany, our Dutch stores never closed, France and other countries will follow as government regulations are lifted on retail operations. Beauty Systems Group reopened its first small tranche of U.S. stores to the public on April 21, with an emphasis on selling sanitation and personal care products, while implementing supplemental social distancing, and safety procedures.

As of this week, 375 Beauty Systems Group stores were open to the public and more than 800 stores were operating curbside -- offering curbside pickup. All employees will be required to wear mask and gloves for the foreseeable future. Additional Beauty Systems Group stores will come online in the coming weeks and months.

In closing, let me offer a few initial thoughts on why we believe Sally Beauty Holdings has a great opportunity to do well as the world emerges from the COVID-19 shutdown. Our categories are in high demand, and our customer will sacrifice other things before she sacrifices her hair and beauty regimen. We can see this in our March traffic and in our April e-com results.

As I mentioned earlier, our business has been relatively recession-proof, and we have a built-in hedge between Sally Beauty and Beauty Systems Group. As DIY moves to the forefront, Sally may benefit over Beauty Systems Group, but we see opportunities within Beauty Systems Group as well with PPE growth and the potential failure or downsizing of smaller distributors. We do not face the overhang of mall stores and the fear that consumers may have of mall crowds going forward.

In addition, our store footprints are relatively small, and social distancing is relatively easy to enforce. We are building strong digital platforms at an accelerated pace that should position us for further growth as the consumer establishes a new normal in retail.

Finally, our team is aggressively pursuing the restart of our continent spanning store networks with an emphasis on safety for our customers and for our team. Significant work remains, but I am immensely proud of the creativity and the passion with which our teams have reacted to COVID 19.

Now I will turn it over to Aaron to discuss our financials and our liquidity in more detail.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [4]

--------------------------------------------------------------------------------

Thank you, Chris. Good morning. It was an incredible quarter to work through, both because of the things that were challenging and because of the things that allowed us to leap forward. As Chris noted earlier, our second quarter was off to a terrific start prior to the impact of COVID-19.

In our last earnings call, we observed that customer traffic had been choppy throughout the holiday season but had normalized after Christmas. Both traffic and sales continue to show progress in Q2. Prior to March 12, we delivered positive same-store sales growth in January, February and the first part of March for both accounting segments. We also did not face the same technology issues that we reported in the first quarter.

Given that background, let's discuss our financial results. Consolidated revenue was $871 million for the quarter, down 7.9% to the prior year driven by an initial increase in same-store sales followed by the impact of the rolling shutdown of customer-facing operations at almost all stores starting in the middle of March, a smaller store base with 31 fewer stores versus the prior year, and an unfavorable impact from foreign currency translation of approximately 30 basis points on reported sales. At the enterprise level, our final same-store sales results were down 7.1%.

Our global e-commerce business grew by 28% for the second quarter. For the month of March, our global e-commerce business grew by 52% as customers shifted to online shopping as the impact of COVID-19 started to settle in and in-store operations came to a halt. For the month of April, our global e-commerce business grew by approximately 353%.

Consolidated gross margin for the quarter was 49.3%, which was a mere 20 basis point decrease compared to the prior year. Decreases in the Beauty Systems Group segment were partially offset by the stability in the larger Sally Beauty supply business.

For the second quarter, selling, general and administrative expenses increased by $21.7 million or 6% versus the prior year, with $14.7 million of the increase driven by COVID-19-related personnel expenses as part of the company's furloughs of 60% of our HQ staff and 70% of our field staff. This includes the 2 weeks of disaster pay we paid to all furloughed employees as well as up to 2 weeks of vacation that many associates elected to take. The remaining increase was related to increased marketing expenses earlier in the quarter as part of the Sally Beauty brand relaunch and professional fees, although I should point out that we dramatically and aggressively cut back our normal course SG&A spending as well as key investments in marketing as the potential for disruption from COVID became more apparent.

As a percentage of sales, selling, general and administration expenses were 44% compared to 38.2% in the prior year mainly due to the deleveraging impact of lost sales due to the impact of COVID-19 and the personnel expenses related to the company's furloughs.

GAAP operating earnings and operating margin in the second quarter were $43.3 million and 5%, respectively compared to $112.5 million and 11.9%, respectively, in the prior year. After excluding charges related to the company's COVID-19 furlough expenses and transformation efforts in prior years, adjusted operating earnings and adjusted operating margin were $61.2 million and 7%, respectively compared to $106.7 million and 11.3%, respectively, in the prior year.

GAAP diluted earnings per share in the second quarter were $0.12 as compared to $0.54 in the prior year, a decrease of 77.8%, largely due to lost sales from the shutdown of public-facing operations in stores across the globe, also due to a modest gross margin dilution from the loss of vendor allowances on lower inventory purchases and due to incremental COVID-19 expenses related to the company's furloughs. These headwinds were partially offset by an aggressive cost-cutting in March in anticipation of COVID-19.

Adjusted diluted earnings per share were $0.23 in the second quarter compared to $0.51 in the prior year, a decrease of 54.9%. During the second quarter, the company generated cash flow from operations of $13.8 million, a decrease of 76.9% versus the prior year. Payments for capital expenditures in the quarter totaled $31.1 million. Free cash flow was a negative $17.3 million in the quarter, which was down $66.5 million or 135.1% as compared to the prior year.

Prior to the impact of COVID-19, the company repurchased and retired $30 million in debt and also repurchased 3.9 million shares at an aggregate cost of $50 million. Since the beginning of the fiscal year 2019 and prior to COVID-19, the company had reduced its debt levels by over $230 million. However, during March, we drew approximately $340 million on our revolver to hold cash on the balance sheet out of abundance of caution. The outstanding balance on the revolver was $395.5 million of our then capacity of $500 million at the end of the second quarter, and the company's leverage was 3.54x, reflecting that incremental ABL drawdown. I will discuss liquidity more broadly later.

Turning to segment performance. For the Sally Beauty segment, prior to March 12, segment same-store sales grew by 4.8%, including Europe, which delivered positive same-store sales as a result of continued progress against Project Surge. However, all in for the second quarter, Global Sally Beauty segment same-store sales decreased by 7%. The Sally Beauty business in the U.S. and Canada represented 79% of the segment sales for the quarter.

The Sally segment generated consolidated revenue of $519.5 million in the quarter, a decrease of 8.1% compared to the prior year, driven primarily by the impact of COVID-19, 17 fewer stores and an unfavorable foreign exchange impact of approximately 50 basis points.

We continue to make meaningful progress with Sally's U.S. and Canadian e-commerce business, which helped drive e-commerce revenue growth of 56% for the entire second quarter. E-commerce growth accelerated in the month of March, with a growth rate of 117.8%. And after the second quarter ended, the growth rate was approximately 872% in April.

Gross margin for the segment was flat in the quarter at 55.6%, with expansion in the U.S. and Canada territories of 30 basis points, offset by contraction in Latin America, while Europe was flat.

Segment operating earnings were $56.4 million in the quarter, a decrease of 35% versus the prior year driven primarily by lost sales from the impact of COVID-19 and higher SG&A expenses related to marketing earlier in the quarter in support of the Sally Beauty brand relaunch. Segment operating margin declined by 440 basis points to 10.9% compared to the prior year.

Now turning to the Beauty Systems Group segment. Prior to March 12, segment same-store sales grew by 4.5%. However, same-store sales decreased by 7.4% in the entire second quarter. Net sales for the segment were $351.5 million in the quarter, a decrease of 7.6% compared to the prior year driven primarily by the impact of COVID-19 and 14 fewer stores. Foreign currency translation had no impact on the quarter. Additionally, BSG's e-commerce platform grew by 9.7% for the second quarter. For the month of March, e-commerce grew by 12%. And following the end of the second quarter, the month of April grew by 129%. BSG's gross margin was 40% in the quarter, a decrease of 40 basis points from the prior year.

Segment operating earnings for BSG were $41 million, a decrease of 27.4% versus the prior year driven primarily by lost sales from the impact of COVID-19, lower gross margin and an increase in SG&A expenses related to higher distribution costs. Segment operating margin declined by 320 basis points to 11.7%.

With that, I'm sure our stakeholders are interested in how we're managing liquidity. It is good news that the quick pivot that Chris described earlier also certainly applied to our pursuit of cash and liquidity. We are a company which historically has generated a lot of cash. In response to COVID, we were aggressive, we acted quickly, and we left no stone unturned.

Let's start with the outflow of cash. We immediately launched negotiations with our landlords on near-term shared paying rent abatements to get us through the drop in sales. We are pleased with the results to date and continue those discussions.

We closed our receiving doors March 17 and worked aggressively with our merchandise vendor parts to lower inventory and extend payment terms. We are pleased with the results to date and with the partnership from some of our vendors.

We moved quickly to review capital investments for the remainder of the year and cut the investments back to only support capital spend related to the continued growth of our digital business, whether it was e-commerce, ship-from-store or same-day delivery.

We furloughed approximately 70% of our field staff, but continue to pay their health benefits. We furloughed approximately 60% of our corporate office staff and reduced executive compensation across the team. Finally, we aggressively cut back on marketing spend, non-personnel field spend and shared services back office expenses. Of course, we also focused on additional sources of cash to weather the storm.

Since none of us know exactly how COVID-19 will play out, out of an abundance of caution, we did the following. We borrowed approximately $340 million on a revolving line of credit in March to hold this cash on our balance sheet. We started the work in the second half of March to amend our revolving line of credit and increased the capacity from $500 million to $620 million, which included the funding of a $20 million final loan, first-in last-out, by increasing the advance rate on our collateral. The upsize was completed in early April, further enhancing our liquidity under this credit facility. As we sit here today, we do not intend to draw up on the remaining availability in enhanced ABL facility and view it as contingency.

Also in April, as the high-yield market began to show some activity, we sold $300 million of senior secured notes as an additional insurance policy against the uncertainty surrounding COVID-19. The notes were issued at par and their interest at 8.75% per annum. The 5-year notes mature in April of 2025 and have a 2-year no-call provision. The cash from these notes will sit on our balance sheet for the foreseeable future as we assess the ongoing impact of COVID-19, execute the upswing of our business as stores open, but plan for the unexpected given learnings over the last 60 days. The high-yield bond was an insurance policy against the unknown, nothing more.

Now I know I'm going to get the question on burn rate. And while I will not disclose a dollar figure or time period, I will offer a couple of observations. As Chris called out, we are aggressively reopening our stores and have aggressively offered curbside and e-commerce options in a new safety-first operating model, which a large number of states are adopting.

So so long as we do not face a prolonged total network shutdown in the future, we have sufficient liquidity for the medium-term without drawing on the ABL or using the bond cash. Alternatively, in a different fact pattern, if our stores were to remain shut or be closed for the foreseeable future, and even if we did not take additional management actions to address cash burn, which, of course, we would, then we have sufficient liquidity to survive well into the next fiscal year. So overall, we believe we have sufficient liquidity to weather COVID and continue to invest against our business.

Now I'm sure that many of you are also looking for guidance on the rest of fiscal '20, and I'm likely to get several questions on it. Let me start by saying this, we will not be providing full year fiscal 2020 guidance at this time. There are too many unknowns around COVID-19 for us to be able to do that. However, I am happy to offer you some perspective. We intend to rapidly return our store fleet to operation and move quickly on the way down. We'll move quickly on the way up. Of course, our efforts will be consistent with state and local regulation will lead the safety first.

With the exception of the West Coast and the Northeast, while we have no guarantees, we expect our stores to be largely operational by the end of the second week of June. For the West Coast and the Northeast, we will lead with curbside and supplement with ship-from-store as soon as we are allowed by local regulation to have associates in the stores, even if they cannot open to the public.

I will observe that for those stores that we have opened to the public recently, demand has been robust. While it is too early to say with any certainty how demand will play out over the next couple of months, we are quite pleased with what we're seeing in the newly reopened sores in key states such as Texas.

We will continue to invest in our business, but we will redirect that investment somewhat consistent with our updated priorities. Store openings and remodels have been largely, but not entirely delayed or canceled. To that end, we are also assessing further cuts to our real estate portfolio, optimization of our geographic presence, further efficiencies within our shared services functions and clearing inventory using our newly-enabled ship-from-store capabilities. We will have more to say on these topics during our Q3 earnings call.

Digital demand continues to be robust and having doubled capacity and then doubled again, we believe that we have sufficient runway to maintain much of our progress. We will continue to invest aggressively in this area.

Finally, let me address capital allocation. As I have just alluded to, we will continue to invest against our business. But our priorities have changed, we are optimizing our business for cash. As a result, we have canceled and reprioritized elements of our capital investment. Most of our capital spend was in the first half of the year. Nevertheless, we will be smart with any remaining investments we make in the back half.

With respect to debt, our long-term goal remains the reduction of our indebtedness. However, for the foreseeable future, we intend to hold cash on the balance sheet in excess of our historical practice. We will not be using the cash from the bond to repay the ABL at this time. As we see how COVID-19 plays out at the end of this calendar year, we will consider our options. So for the moment, expect to see us hold cash and to see increased interest expense -- and to see the increased interest expense that comes with it.

I want to close my remarks with the following observation. Sally Beauty Holdings was in transformational long before COVID-19. It is a direct result of the changes that were already put in place and several of the work streams that are still underway that this company was able to pivot as fast as it did and to do it in a way, which carries us forward versus holding us back.

I want to express my appreciation to the leaders and the teams that have worked tirelessly over the last couple of months to put us in a place where we can be putting our teams back to work and servicing our customers in old and new ways.

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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question is going to come from the line of Mark Altschwager.

--------------------------------------------------------------------------------

Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

(technical difficulty) and on the other side of this, where do you think you're going to be in terms of normalized digital penetration? And how has your thinking on the size of the store base changed as a result of everything that's happened over the last few weeks?

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Mark, I think we missed the first 10 or 15 seconds of that. I heard the on the other side of this, where do you want to end, but I don't know what you started with.

--------------------------------------------------------------------------------

Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

I was just commenting. I was saying, congrats on the progress with all the digital infrastructure.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Well, let us jump in. So I think it's very hard for us to predict. What we're seeing is that a significant number of these customers are new to Sally. And of course, some are store customers who are new to e-com. And that's true on the BSG side, a significant number of the BSG customers are new to BSG as well. I do expect it to be a much larger piece of our business. And obviously, we're going to be extending service models to focus in the near future as well. And that's what we want to be able to do is to be able to serve the customer how they want to be served in the future. Clearly, behavior is going to change here. Some people will not want to go into a store, and they prefer to either do buy online, pick up in-store or they prefer to do ship-from-store or some other type of delivery model. So we think it will be sizably larger. I don't want to try and predict where it will settle out at. But I do think what we've been working towards and the infrastructure we've put over the last 18 months, is really now paying out for us the fact that we can now commercialize these service models so quickly and be able to serve the customer in the way they're going to want to be served in this new normal.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [6]

--------------------------------------------------------------------------------

I think I would add to that when you combine the change in consumer behavior to the fact that the spike we saw me in e-commerce -- in the e-commerce business was driven without really any marketing and without really any promotion and an increase in our free shipping threshold. We believe that now that we're turning the marketing back on and focused on the strategy around driving the business with the new capabilities that we have a great opportunity to further leverage this part of the portfolio.

--------------------------------------------------------------------------------

Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

--------------------------------------------------------------------------------

And then I guess the second part of that question, just on the size of the store fleet. Any changes to your thinking there?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [8]

--------------------------------------------------------------------------------

We'll talk more about it at the end of the current quarter. What I would observe is, we went out very quickly for conversations with the landlords around a short-term shared pain, rent abatement experience. We're now assessing how consumer demand has changed by metro area and doing an overall portfolio review. So the combination of how we look at the diagnostics around consumer behavior shift as well as where were the landlords that were willing to work with us as well as the medium-term view of each store, that will create a list of opportunities for us.

--------------------------------------------------------------------------------

Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

--------------------------------------------------------------------------------

That's helpful. And then understanding it's almost impossible to guide at this stage. I'll ask the question anyway. But any help you can provide in terms of how you're thinking about revenue ranges in the fiscal third quarter based on the results in April? And what you've seen with the stores that have reopened? And then similarly, any guideposts regarding the magnitude of SG&A cuts you've been able to achieve in order to offset the revenue pressure?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [10]

--------------------------------------------------------------------------------

Unfortunately, I can't give you a lot of satisfaction with the details, but we'll offer a couple guides. We were purposeful on providing the total revenue number for April. And the context I would give you there is April is really the month where e-commerce was spiking and no stores were operating, not really of any scale. And so I would view April as the nadir, right, from a sales perspective. You will have noticed that we are ramping the stores up rapidly every day, adds more. We intend to get the network back up and running plus adding the digital piece to it as fast as possible. And so we're hopeful that most of the impact here is a Q3 event and not a Q4 event.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

And Mark, what I'd say is that, in general, as Aaron mentioned, we're seeing good strong response to store openings. And customers are finding us pretty quickly and demand is rebounding. And I think as I mentioned in my comments, that it is -- we do serve resilient categories, as well as there's some pent-up demand here for people who haven't been able to do some of the care they would normally have done in the last 6 weeks.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [12]

--------------------------------------------------------------------------------

It's also been quite interesting to us. The professional demand on BSG. So even with the number of states across the country where stylists are still not allowed to operate, we are seeing advanced orders coming in. And Mark Spinks and the team are pleased with what we're seeing even with most of our stores closed in that segment still at this point. And so while the ramp down was painful, the ramp-up will be fast. We're hopeful that the combination of the tax we took will get us there.

With respect to your question on SG&A, I guess what I would say is, keep in mind, from a personnel expense perspective, the vast majority of the fleet is still on furlough. And the vast majority of our corporate staff is still on furlough. So we will absolutely continue to have personnel savings in Q3. We did cancel all marketing, right? We are putting our toes back into that now, particularly with respect to our e-commerce business with the capability we have, that will be an SG&A upside for us as we carry forward. As you would have heard from my comments on liquidity, we canceled every -- or we changed everything from the executive compensation schedule down to canceling the folks that cut the grass at all of our facilities, right? And so it's the full range there. And so we are looking to offset as much of the expense burn as we can until we have the fleet completely back up and running. But that's just details that I can get for you.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And next we will go to the line of Rupesh Parikh with Oppenheimer.

--------------------------------------------------------------------------------

Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [14]

--------------------------------------------------------------------------------

So I guess just going back to your comment that the demand for reopened stores, you're seeing very robust demand at this point. Is there any way to help us frame like the productivity you're seeing in some of these reopened stores versus where you were historically on both the Sally Beauty and BSG side?

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

Rupesh, it's really too early. As Aaron mentioned, a lot of these stores have opened in the last 10 days. And in many cases, we have a couple of days of revenue. And so we're excited about how strong demand has been in those first couple of days, but we don't know whether that's pent-up demand, and we need to let that settle out before we'll have knowledge. But in my mind, what it suggests is that there is ample demand for these categories and that we're well positioned to win. But we're not in a position to give you like details of exactly sales relative to historical trends in each store.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [16]

--------------------------------------------------------------------------------

But from a productivity model perspective, one thing that I think is important to call out is because so many of our stores are now e-commerce nodes as well, that isn't with incremental labor, right? And so the productivity of the 1,100 stores that are now servicing the e-commerce business as well will actually go up dramatically. We'll better leverage the inventory. We'll better leverage the investment in SG&A in the form of store hours. And we'll give the consumer more options as far as how to interact with us.

--------------------------------------------------------------------------------

Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [17]

--------------------------------------------------------------------------------

Okay. Great. And then I guess switching gears to e-commerce. Two questions, Aaron. Where are you in your backlog of filling all the demand out there? And then given some of the changes within your e-commerce business, how should we think about the margin impact related to the growth in your e-commerce penetration?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [18]

--------------------------------------------------------------------------------

We have a backlog of a couple of days. It goes up or down depending on how close we are to the weekend as well as how much marketing we are doing. We have been exploring the limits of our capabilities by turning various marketing on or off in the last couple of days in particular.

Like a lot of retailers, we have suffered a backlog. It's taken longer to get the shipments out than we would like. So we are like Amazon, Ulta and others in that respect. But we're pleased with the progress we're making there. Of course, it's been complicated by the fact that most of our corporate staff, including the call center has been furloughed, right? And so we have some conversations to have with some customers as we carry forward to make the experience better in that respect.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [19]

--------------------------------------------------------------------------------

In terms of the economics, Rupesh, we did raise our shipping limit. As you may have seen, we raised it to $40. In addition, over time, ship from store will allow us to ship from locations that are much closer to the customer as well, which will improve our distribution -- our e-com distribution economics significantly. That's still a work-in-progress, and we'll continue to optimize across the network-based on where stores are open and how can we distribute orders based on where inventory is in place, but it will get better, and we'll dial that in over time.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [20]

--------------------------------------------------------------------------------

Yes. We are working towards a world where, at worst, the economics are the same from a shipment store in the stores and the supply chain. We're not there yet, but that's not far off.

--------------------------------------------------------------------------------

Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [21]

--------------------------------------------------------------------------------

Okay. And my last question, just in terms of some of the new customers that you're acquiring, let's say, on the Sally Beauty supply, are they signing up to your Sally Beauty rewards program?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [22]

--------------------------------------------------------------------------------

Yes, many are.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes. And again, they may find this because of PPE; or cleaning or sanitation or they may find us because they're testing out DIY nails or DIY color for a long time or they may find us because other capacity is leaving the industry. And as a result, we will probably increase our share to some extent as other retailers struggle. And so all of those are good reasons for us to be, obviously, upping our penetration of our loyalty card and building a relationship with these customers over time.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [24]

--------------------------------------------------------------------------------

Given the technology issues we had in Q1, we had actually gone light on the communication on the loyalty program over the first part of Q2. And now that we have this capability behind us now we've been collecting the contact details, the e-mail addresses of all the new customers as well. One thing you can expect to see is we will heavy that up as well over the course of the rest of Q3.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question will come from the line of Oliver Chen with Cowen.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [26]

--------------------------------------------------------------------------------

Christian, the growth were encouraging. What are your thoughts for what will happen with the gross margins going forward and the nature of the promotional environment? We also were curious about the state of the inventories being down 1% relative to sales down 8%. How are your inventories positioned? And what should we know in terms of you thinking about working capital management and your relationship with vendors and ensuring...

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [27]

--------------------------------------------------------------------------------

I'll take the promotional environment question. I'll let Aaron take the inventory question because I think we are making progress on both. So listen, we see this as a great opportunity for us, actually, to move away from a more promotional-driven approach to attracting business to both businesses, not just Sally, but both businesses. We want to focus on our expertise, whether it's the expertise of helping the DIY enthusiasts or whether it's the expertise of helping a stylist as she operates in a new world. And so I think you're going to see us really push to fewer, deeper, bigger, much lower promotional intensity, which will be focused on key categories where we can drive traffic. And then a lot of our marketing, social media, other things, will focus much more on our expertise and empowerment, empowering the DIY enthusiast or empowering the stylists to be successful in this new environment. And so I expect that the promotional intensity will go down over time. And that's also consistent with what we're seeing in the marketplace, honestly, as people focus on just the challenges of supplying customers as opposed to focusing on promotional intensity.

Aaron, I don't know if you want to take a shot at the inventory question.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [28]

--------------------------------------------------------------------------------

Sure So some like tongue in cheek all over, we were blessed with the strong inventory position going into the crisis. The -- what I would tell you, though, is the -- then that we didn't have gaps going into it. The team led by our Chief Merchant, Pam Kohn took aggressive action late March, early April and canceled virtually all inbounds over the course of April and first part of May. And so we did not pile on, so to speak, with us having shut our receiving doors 17th of March. And so we felt good about that. The team is also, over the course of the last couple of months, put in place a new order to buy process with very specific targets around by category, by business around how do we ensure that we are getting the biggest bang for the buck for the orders that we are bringing in. And so while our -- you will not see a spike in inventory. You will see us continue to make progress over the course of this year and beyond in that way. But there will be some areas where we will be investing. Obviously, PP&E, as Chris called out, and of course, the core categories of color here.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [29]

--------------------------------------------------------------------------------

And last question (technical difficulty).

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

Oliver, it's unfortunately, it's impossible to understand the question, okay? Maybe we'll try one more time if we can.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [31]

--------------------------------------------------------------------------------

(technical difficulty)

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

What I'm hearing is social distancing and the need and how that affects our store operations. I'll answer that, hopefully, it's what you're getting at. We are going to impose social distancing requirements, specifically around the number of people in the store at one time. So the vast majority of the stores that will not affect our customers because we typically don't have more than the 10 that is recommended, but there will be some stores where we will have to ask customers to wait outside as other customers finish their shop. And we are going to do that and implement that. We're obviously implementing gloves and masks as well as increased cleaning practices. At this point in time, we feel that our store footprint is much better suited to operate in this new environment than other stores that have large mass traffic, and it's very difficult to control customer entry and exit from the store. That being said, we need to get our fleet open before we fully understand the implications. But right now, we feel pretty good about implementing the practice.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [33]

--------------------------------------------------------------------------------

And I would say as well from the operations side that the stores teams have been struck with how enthusiastic the customers have been that we're open for them. And as a result, we haven't had any notable issues around asking people to comply with our social distancing. And we've seen appreciation for the safety protocols we have put in place. Just to emphasize, our team members are required to wear masks. They are required to wear gloves. We're doing extensive cleaning, and we are monitoring at the front door of the store, how many people are in the store at any given time.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question will come from the line of Olivia Tong with Bank of America.

--------------------------------------------------------------------------------

Olivia Tong, BofA Merrill Lynch, Research Division - Director [35]

--------------------------------------------------------------------------------

I guess the first question, just why do you think you were able to keep traffic steady for so much longer versus your peers? You talked about sort of through mid-March it was still pretty good. Clearly, some of the numbers you gave in terms of the pre-COVID same-store sales numbers were pretty impressive. Was it -- were consumers still buying in sort of the usual categories, particularly hair color, hair styling? Was there any pivot? Obviously, gloves, marks, clearly, became a big topic later in the quarter. How much of that helped you out? And as you look at what people were buying on e-commerce, how does that compare to what you had seen prior to the COVID breakout in the stores?

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Well, it's a bit of a journey in every couple of weeks, the band patterns change again. So listen, I think in early March, what we saw was the resiliency of our categories, right? People were still interested in coloring their hair, doing their nails, doing all the things they would come before. And stylists were still obviously cutting hair. As the stores began to shut down and the crisis became more front and center, you're correct, PPE did spike, and there was a lot more demand for gloves, cleaning products, sanitation. We still are selling color and nails and other categories. Interestingly though, nails really picked up kind of in the -- as we got into April. And I think nails is a long-term opportunity for us. I think nail salons are going to be a problematic place for customers to go back to. And I think DIY nails will be a nice opportunity for our Sally business and our BSG business over time. We do see PPE demand continuing, and we expect that will be ongoing for some time.

Later in April, we saw a spike in clippers. Mid- to late April, we saw a big spike in clippers as perhaps as men's hair began to grow out to a certain level, and they were forced to do their own haircuts. We've continued to see that demand. We think that will normalize as we get into May. And so it's going to continue to evolve. But listen, we believe the core is going to be strong. I think color will be strong. We think nails will pick up -- continue to be strong. And obviously, we think PPE is going to be a new category for us as well as the extent of our cleaning supplies, where we have some really excellent disinfecting products that have always sold to salons, but now are selling to retail consumers as well.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [37]

--------------------------------------------------------------------------------

And just maybe 2 adds to that. First is, we've seen incredible growth in color, right? And so it's the core to who we are and we've seen incredible growth in color, as you would expect. The second add is there was a bit of a treasure hunt going on for things like hand sanitizer. And you may have noticed that over the course of the crisis, we were a couple of times called out in the national media where the 3 places you could buy hand sanitizer were Target, Walmart and Sally Beauty. That goes to our sourcing there. By the way, I completely agree that everything Chris said.

--------------------------------------------------------------------------------

Olivia Tong, BofA Merrill Lynch, Research Division - Director [38]

--------------------------------------------------------------------------------

Great. And then can you just talk through sort of how your strategy around how you'll be opening stores? Are you going region by region, all stores? Or is there a consideration in terms of opportunities when it comes to efficiencies, like if you have storage in close proximity? Are you opening all of that at the same time? Or is there some consideration in terms of generating enough sales to sort of cover the cost? And as you bring back the -- as you bring the stores back, how are you thinking about costs overall? Because you've obviously -- with that, you're going to have to bring back for load employees. There will be a rent expense associated with that as well. And given that there will be a limited number of people that are allowed in at a time, there will be some challenges. So if you could just talk through that, that would be useful.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [39]

--------------------------------------------------------------------------------

Let me take it high level, and then I'm going to ask Aaron to jump in. I think you've got a lot of hypothesis here. There are some retailers who as they open stores, are looking at very weak demand. And as a result, they really have to focus on the cost model and worry about whether they can amortize that cross across the demand. We are not experiencing that demand as we open up either CosmoProf or Sally stores. We are experiencing high levels of demand that, honestly, are more than justify the labor we would put into those stores. So I don't think we're going to have this slow ramp-up of demand. At least, we're not experiencing that, that obviously, some retailers may experience in categories that are, call it, more discretionary from a consumer standpoint. And so I think you have to look at us in a different lens than that. Aaron, any thoughts on the specifics of opening the network?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [40]

--------------------------------------------------------------------------------

A couple of thoughts. The first is in many local municipalities, counties and some states, we are often leading with curbside and ship-from-store before we open the store to the public. And we do that only where we have the inventory and the demand is appropriate. So we effectively have a first step back into activity, if you will. We opened the full store to the public where local regulations allow us to do so, where we have trained and brought in place the new safety protocols that I alluded to earlier with gloves, masks, cleaning and social distancing. And then we start with voluntary recalls of the store managers of the stores as well. But there's another element here, which I want to make sure you're aware of, which is we have been opening our stores with more limited hours than we first went out with. And this goes to the efficiency point, really. You have to keep in mind, these -- many of these stores are now operating not just the business they had before, which was someone walking in the front door, they have the incremental business of being significant e-commerce shipping nodes for us as well. And so that is a optimization play for us where we're getting productivity out of the team members that we might not otherwise have received.

--------------------------------------------------------------------------------

Olivia Tong, BofA Merrill Lynch, Research Division - Director [41]

--------------------------------------------------------------------------------

Great. Just last question. If you can provide any color on, where you think your store count might be by year-end?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [42]

--------------------------------------------------------------------------------

By fiscal year-end?

--------------------------------------------------------------------------------

Olivia Tong, BofA Merrill Lynch, Research Division - Director [43]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [44]

--------------------------------------------------------------------------------

100% open.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

I think she means store count.

--------------------------------------------------------------------------------

Olivia Tong, BofA Merrill Lynch, Research Division - Director [46]

--------------------------------------------------------------------------------

No. No, I mean, your store count, sorry.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [47]

--------------------------------------------------------------------------------

I like my answer better.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [48]

--------------------------------------------------------------------------------

Again, we're not prepared to comment on store count, but we are doing a review of the network and understand, obviously, as the shift to online occurs and how demand materializes, we'll relook at the network and to make decisions that for efficiency purposes that we should make.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [49]

--------------------------------------------------------------------------------

Right. We had previously guided to door growth. We stepped away from our guidance. Part of that, we want to be clear. Part of it is, our numbers will be down, right? We aren't giving guidance as to how far it will be down, but we will be down not up.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Our next question comes from the line of Steph Wissink with Jefferies.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst and MD [51]

--------------------------------------------------------------------------------

We just have a couple of housekeeping questions. The first is just on your e-commerce comments. Can you remind us, do you report sales based on where they originate via e-com or digital or where they're fulfilled? How should we think about the accounting?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [52]

--------------------------------------------------------------------------------

Where they originate.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst and MD [53]

--------------------------------------------------------------------------------

Okay. Easy one. And then the second one is just on the capacity takeout. I think Chris, you mentioned this a couple of times. And I want to just give you a chance to extrapolate. Is there a view that you could see some consolidation among distributors across your key markets? And then also maybe talk a little bit about the salon industry and the health of the industry, and what you've seen in past periods of crisis? Is there a shakeout period in terms of those salons that are able to survive in those stylists either renting booths or renting chairs that may be able to continue their business or may have to change their business outcome?

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [54]

--------------------------------------------------------------------------------

Let me take them in order. So listen, first and foremost, I do think, whether it'd be on the wholesale side or the retail side, there's going to be competitors -- exiting competitors who are going to be smaller than they were before, our competitors who were loaded up with debt. And so there's going to be a change in the competitive landscape. It would not surprise me if there were some competitors who either downsized or exited, especially in wholesale, they'll be smaller because there aren't a lot of big ones. But there may be some opportunities for us to increase our territory or brand, right.

And on the Sally side, I would expect that there will be some retail stores that sell Beauty in a material way who either have less stores or exit the business. And so our job, though, is to serve our customers in the categories where we see the greatest opportunity and to make sure we're capturing share where we can.

In terms of the next point, I'm sorry, I forget, what was the next question?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [55]

--------------------------------------------------------------------------------

About survival of salon.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [56]

--------------------------------------------------------------------------------

Survival of salons. And I'll come back to that. A great example, by the way, of retail is who -- let's see what happens with Pennies and Sephoras and competitors like that. I don't know what will happen, and we'll see whether that creates opportunities for us. In terms of salons, there's been a long-term trend in the salon business shifting away from salons to independent booth renters and suite renters. If you think about the network or the layout, there are some very, very large salons, call them A salons, who typically buy direct from the brand manufacturers. They tend to be in the biggest cities like New York City. Obviously, those markets are going to be affected for a while. That doesn't have as much of an impact on our business because they buy direct. Then you've got these middle size salons. I certainly think there's some potential that some salons may struggle coming out of this or may not come back. What happens when that tends to happen is the stylist find a new home. They either go to booth renting or suite renting or they get engaged in opening a small salon with their friends. So we'll see. I don't think you'll see a lot of stylists leave the industry. You may see some salon leave the industry. And that's exactly what we're seeing is, we're seeing -- they're scrappy. They're going to find a way to make this work, whether that means working longer hours if they can't have as much density in their salon. Or whether that -- we also think that during the crisis, there was many stylists, independents stylists, who are probably cutting hair in people's houses or their own home. And so we're going to see a lot of resourcefulness from the stylist community because this is their bread and butter. Is how they make a living, and they're going to want to sustain their income. We expect there'll be a lot of pent-up demand to be served right after markets open, and they're going to work hard to serve that demand. And then we'll see where it levels out. But again, the good side is we've got some opportunities with PPE and sanitation products to sell them more as well as we think there's opportunities to gain share in the business.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst and MD [57]

--------------------------------------------------------------------------------

That's great. And final one is just on PP&E -- PPE. Can you talk a little bit about your access to supply? Any sort of backlog in your order book in terms of access to the key ingredients or key supply that you need to really put together those kits for your salon?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [58]

--------------------------------------------------------------------------------

Yes. We have a robust supply of sanitizer, masks, gloves and other elements coming into our network. Of course, we don't know the absolute demand as we carry forward. We expect it to be significant. But we're feeling good about the work the sourcing teams and the merchant teams have done globally on finding new sources of those supplies for us.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [59]

--------------------------------------------------------------------------------

And we actually think this will be a long-term practice change in the industry where this is a category where we're going to want to build out both online and in-store and put better visual merchandising around it. And actually, we think our customers are going to want to be buying these categories a year from now, not just in the next 3 months.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Our next question will come from the line of Simeon Gutman.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [61]

--------------------------------------------------------------------------------

I know we're not getting too much detail on the couple of days of opening. Chris, was the volume across the store, was it broad-based? Was it confined to? Or it was just a breakout sales days you've opened, the whole store did well?

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [62]

--------------------------------------------------------------------------------

No. Listen, I think it's broad-based, even for the stores that have been open a few weeks. Again, we just don't see the kind of -- we don't -- I don't think people treat this as a discretionary category like a high-end apparel purchase or just an accessory or something like that. And of course, our stores are not in malls. They're in strip malls. Many of them are close to Walmarts and Targets and grocery stores, where customers are going anyways. So I think for us, it's just -- what we're trying to communicate is we'll let demand settle out, but it looks pretty much like normal demand and maybe a little bit of pent-up demand on top of it.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [63]

--------------------------------------------------------------------------------

Fair enough. And on the gross margin, this is pre-COVID, it may be moot, but it looked pretty solid in SBS. How do you think about -- I know you're not giving guidance, but how do you think about gross margin? It feels like consumers are more price taking at this point. I don't know if that changes when the economy opens up. You're in a pretty defensive category. You -- a lot of merchandise is unique to you. So what's driving it? And can you have a little more visibility on the gross margin of SBS as we go forward?

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [64]

--------------------------------------------------------------------------------

Broadly, I would say we are already a value play within SBS. Our promotional cadence will change, as Chris has talked about before, as we take it -- as we take stock of the assets we have and the value we bring to the customer as we carry forward. And we're working, as you would expect, every element of gross margin that's otherwise available to us. The only one that will have a short-term negative impact that I can think of is, of course, because we did turn off our inventory buying aggressively, right? We will have to have conversations with vendors about allowances, but I believe that will be offset by the opportunity we have on the promotions.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [65]

--------------------------------------------------------------------------------

Yes. And Simeon, it's hard to predict the long term. Obviously, as I mentioned, I want us to be focusing on expertise first and empowering the DIY enthusiast and empowering the stylists. And that will mean a lower promotional cadence over time. I also think that there will be some benefits from retailers who are exiting the business and not reopening their stores, creating greater demand for us. So there's some opportunity there, not to be as promotional. And as we ramp up our purchases, you'll see allowances get back to a normalized level. But we'll have to wait and see what happens in the environment 3, 4 months from now. Overall, I think we're pretty well positioned.

--------------------------------------------------------------------------------

Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [66]

--------------------------------------------------------------------------------

Okay. One more, I'll make it 2 parts, and then I'll jump off. The 4.8% pre-COVID SBS, again, it may be moot because the world is completely different. Do you think -- I forget the timing with your marketing campaign, I wonder if that was a boost? I know Aaron mentioned we've shut marketing off. Will that come back on if it was a meaningful driver? And the second part, completely unrelated, rent leases, is there any magnitude you could share as we look forward? Hey, we think we're going to be in a position paying 10% less than what we were paying before. I don't know if you're comfortable talking about like that on the call.

--------------------------------------------------------------------------------

Aaron E. Alt, Sally Beauty Holdings, Inc. - Senior VP, CFO & President of Sally Beauty Supply [67]

--------------------------------------------------------------------------------

A couple of thoughts. Let me start. Let me go in reverse order. With respect to the rent abatements, our initial approach was to go out seeking a couple of months' rent abatement, shared pain experience with the landlords, and we've been quite pleased with the results that have happened. As you would expect, given that we have a lease portfolio where the leases are generally 5 years, we have some options in those conversations relative to the length of our partnership with landlords that do work with us or don't, and we are exploring all of our options on the portfolio overall. I can't give you a dollar number. The work is still underway, but we're quite pleased with the abatements we received so far from a cash and expense perspective.

With respect to marketing. Absolutely, the brand campaign was doing well for us. So while we can't tell you how many basis points of same-store sale positivity were tied just to the brand, we believe -- to the brand campaign, we believe in the campaign, we believe in the effort, and it will have a continuing role for us. We're still figuring out that role more focused on digital than more traditional as well as -- as we bring the stores up, what does the marketing even look like in stores as we carry forward. And so more work to do there. We are going to be very careful about ramping up SG&A in any area over Q3, as we continue to watch COVID. And that's all I can say.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

And due to time constraints, Chris, I'd like to turn it back over to you for closing comments.

--------------------------------------------------------------------------------

Christian A. Brickman, Sally Beauty Holdings, Inc. - President, CEO & Director [69]

--------------------------------------------------------------------------------

Thank you, and thank you all for your questions today. To summarize, the company was on track for an excellent quarter, having achieved important milestones in our digital and retail transformation and delivering excellent same-store sales results prior to the COVID impact.

When COVID-19 struck, the team accomplished an incredibly adept pivot by dramatically reducing our cost structure and managing cash, aggressively reinforcing liquidity, accelerating the rollout of in-demand delivery service models and managing through a massive increase in online demand. Our teams, led by our stores, distribution and commerce teams are the real stars of this story. And because of them, we expect to emerge as a transformed enterprise with a much larger digital footprint and an even stronger competitive position in professional hair color and hair care.

Additionally, with our recent capital markets transactions, we believe we have enhanced our financial flexibility and are well positioned to survive a prolonged downturn and emerge a stronger company. Thank you again for joining us today.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.