Sally Beauty Holdings Inc (SBH) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty Holdings Second Quarter 2021 Earnings 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.

Thank you. Good morning, everyone. Thank you for joining us. With us on the call today, are Chris Brickman, President and Chief Executive Officer; and Marlo Cormier, Chief Financial Officer. Before we start, I want to remind everyone that we have made a presentation available for today's call that can be viewed from the link provided on our investor site at sallybeautyholdings.com/investorrelations.

I would also like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation reform act of 1995. Actual results may differ materially from those indicated by the forward looking statements as a result of various supporting factors, including those discussed in the risk factors section of our most recent annual report on form 10K and other filings with the SEC. Any forward-looking statements made in this call represent our views only as of today, and we undertake no obligation to update them.

The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures on its earnings press release and on its website.

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

Thank you, Jeff, and good morning, everyone. I want to start by commending our teams for their commitment to the business during these remarkable times. We're all pleased to see store closures and restrictions easing in certain markets, but the global environment remains dynamic and requires that we continue to operate with added discipline and agility.

Our teams continued to perform at a high level in Q2, and most importantly, they remained focused on serving our customers. Due to their hard work and dedication, we achieved net sales growth of 6% despite store closures in many of our international territories and the shutdown of California salons in January. Traffic and sales trends started picking up in the latter part of February and accelerated more substantially in the final month of the quarter, resulting in stronger-than-expected performance across the P&L.

There are a few key factors that drove the top line. First, we saw increased demand at Sally U.S. from improving consumer confidence and government stimulus actions. Next, reopenings in Canada and easing restrictions in the U.S. drove stronger than expected, pent up demand at both Sally and BSG. As you may have seen, the province of Ontario subsequently shut down again in early April, but this is a Q3 dynamic. Lastly, in the final month of the quarter, we saw a significant shift in trend at BSG as salons were permitted to operate at higher capacity levels. At the same time, we continue to see a trend towards more independent stylists. As they are displaced from their salons and moved to booth or suite rental, these stylists are increasingly likely to become BSG store customers.

The combination of strong consumer demand and the effectiveness of our promotional strategy allowed us to maintain solid gross margins above our target level of 50% in the quarter. Additionally, expense favorability also helped drive strong earnings and cash flow. We ended Q2 with a strong liquidity position, including $408 million of cash on the balance sheet and a 0 balance outstanding on our $600 million ABL credit facility. Subsequent to the close of the quarter, we fully repaid the outstanding balance on our 5.5% senior notes due 2023, making further progress towards our goal of bringing our leverage ratio closer to 2.5x by the end of fiscal 2021.

Looking at the business by category, during the quarter we saw ongoing strength in hair color, including vivids. Color increased 27%, and vivid colors grew by 53% at Sally U.S. and Canada versus the prior year. Vivids continue to be an important driver and represented 27% of our total color sales for Sally U.S. and Canada in the quarter. In addition, the BSG also saw strengthen in the color category, which was up 17% versus the prior year. Other categories also performed well with nails up 20% and hair care up 9% at Sally U.S. and Canada and hair care up 16% at BSG.

Notably, as the quarter progressed, we saw a pickup at Sally in going out categories, such as styling and tools, which really speaks to the improving consumer confidence and vaccine optimism that was building. Our e-commerce business was also an important growth driver, delivering a sales increase of 56% versus a year ago. Looking at our expanded digital capabilities, we're really starting to see our investments bear fruit this year. We're currently offering multiple fulfillment options, including buy online pickup in store, ship from store and curbside pickup at Sally Beauty and same-day delivery and curbside pickup at our BSG stores. For the second quarter, approximately 40% of our e-commerce sales for Sally U.S. and Canada were fulfilled by our stores, which speaks to the value of our large store portfolio when combined with our enhanced digital capabilities.

To that end, we are closely monitoring customer behavior and evaluating key learnings across all of our fulfillment options. At the same time, we are mindful of macro factors such as wage inflation and balancing that with the need to maintain highly productive store economics. In the coming months, we will be testing a small number of store closures to analyze sales transfer and purchasing patterns, which will help inform our future plans for the portfolio. The initial test will consist of approximately 90 stores, roughly 70 Sally Beauty and 20 BSG locations, and will be spread across the country to provide us with a range of learnings in various markets.

Our teams remain focused on the 3 major priorities for fiscal 2021 that we outlined on our last earnings call. As a reminder, those include the following: we expect to substantially complete the remaining elements of our transformation, we expect to be leveraging all of our new capabilities and tools in service of our core mission to recruit and retain color customers and we expect to bring our debt leverage ratio closer to our target of 2.5x. In support of these priorities, we are working on 4 key initiatives. First, I'll talk about our expanded delivery service model. We are pleased to see adoption rates rising on our most profitable fulfillment option, BOPIS, which accounted for 20% of Sally's U.S. and Canada's total e-commerce sales during Q2, up from 11% in the prior quarter.

Ship from store represented an additional 20% of Sally's U.S. and Canada's total e-commerce sales for the quarter. Next month, we will begin offering highly competitive same-day delivery times for both our Sally and BSG customers. Our Sally customers will be able to get product to their front door in as little as 3 hours, and our salon pros will have the ability to receive product within 2 hours. We believe that BSG has a unique, competitive advantage in its ability to provide these high-value options to its pro customers based on its nationwide store footprint. In the second half, we will be adding another convenience option for our BSG customers with the rollout of BOPIS, which is currently slated to commence in the June time frame.

A second initiative we've been focused on is the replatforming of the BSG digital storefront, which I'm pleased to tell you is on schedule to be completed this month. This new, more robust platform will be a game changer in terms of how we recruit and engage with our stylists. Equally important, we are now able to offer our stylists new value-added features like product reorders, bulk orders and navigation enhancements that ultimately improve efficiency and strengthen the profitability of their businesses.

A third and important area of focus is loyalty and CRM. As you may recall, we relaunched our Sally Beauty Rewards loyalty program just over 2 years ago, and BSG just launched its first loyalty program last fall with our Private Label Rewards Credit Card. As we've layered on the Private Label Reward Card and added CRM capabilities and tools, we're really poised to increase customer interaction along the entire purchasing journey and ultimately drive incremental sales. In Q2, purchases from our loyalty members at Sally U.S. and Canada exceeded 72% of total sales and BSG U.S. surpassed 7% of wholesale.

The fourth key initiative for fiscal 2021, is continuing the rollout of JDA, which represents an important step in our multi-year transformation journey. We continue to expand the operations and functionality of our North Texas distribution center and remain on track to bring JDA to the majority of our remaining DCs by the end of the calendar year.

At the core of all of our strategic initiatives, is our mission to be the leader in color with an underlying focus on customer centricity. To that end, we are currently executing a full reset of our color offerings in all Sally U.S. stores that will be completed in May. This initiative, which really puts color at the heart of every Sally location, included the relocation of all hair color, including vivids, to the front of the stores. We also brought in new brands and SKUs, added 8 feet to the color aisle and dedicated 4 feet specifically to lightening and blonding, which has become a high-value volume category over the past year. We designed the new layout to create a better experience for our color customers.

Looking at the second half of fiscal 2021, we believe that business is well positioned, especially within the context of an improving external environment. Consumer demand for our core categories is robust. Both the Sally Beauty and BSG segments are strengthening as consumer confidence improves. Our gross margins remain strong. And our teams are executing well against our key initiatives. That said, our expectations are somewhat tempered by ongoing store closures in international markets and salon capacity restrictions in the U S. Notwithstanding any incremental disruptions from the pandemic, we are expecting Q3 net sales growth in the high double digits, primarily reflecting the easy comparisons to last year when we experienced broad-based store and salon closures. More specifics on this shortly from Marlo.

Before turning the call to Marlo, I would like to briefly touch on our ESG initiatives. First and foremost, we recognize the importance of our social and corporate responsibilities, ESG issues and the essential role they play in our long-term performance and value creation. Our strategy is focused on 5 key areas where we believe we can have a meaningful impact: our employees, diversity and inclusion, energy and the environment, product development and sourcing and data protection and security. We encourage you to review our full ESG report, which provides a detailed view of our best practices and was recently posted to our Investor Relations website.

Now I'll ask Marlo to discuss the financials, and then we'll look forward to taking your questions.

Thank you, Chris, and good morning, everyone. We're pleased to deliver strong results across the P&L during our second quarter. The outperformance on the top line primarily reflects the combination of improving consumer optimism, easing restrictions in the U.S., including California salon reopenings during the latter half of the quarter and U.S. government stimulus action.

Net sales were up 6.3% versus prior year and same store sales increased 6.5%. Similar to last quarter, in our open locations, traffic decreased versus prior year, while other key measures increased, including units per transaction, average unit retail and average ticket. Our global e-commerce business remained strong with consolidated sales up 56% on a year-over-year basis. We're pleased to see the investments we've made in our digital capabilities continue to bear fruit, particularly as our teams work to deploy and scale our new fulfillment options and enhanced tools.

From a gross profit perspective, we continue to deliver margins in line with our 50% plus target levels. Second quarter gross margin came in at 50.4%, up 110 basis points to last year. Adjusted gross margin was 51.2% and excludes a $7 million write-down of PPE inventory. For perspective, when the pandemic hit in early 2020, we took immediate steps to build a position in PPE inventory to ensure we could protect our associates, assist our salon professionals to help them safely open their businesses and serve our retail customers and communities who came to us for in-demand items like masks, gloves and sanitizers. As pandemic headwinds began to abate, we are taking steps to bring our PPE levels in line with anticipated demand.

In addition to the $7 million write-down, we also made the decision to donate approximately $31 million of PPE inventory that will be disseminated to organizations in need during the second half of fiscal 2021. This portion has been expensed in SG&A and accrued as a liability on the balance sheet. Turning to Q2 expenses. SG&A expense totaled $391 million. That includes the PPE donation of $31.2 million, partially offset by $2.2 million of Canadian wage and rent subsidy credits. On an adjusted basis, SG&A decreased by approximately $6 million, reflecting lower advertising and field labor costs and our focus on expense control while pandemic headwinds persist.

As a percentage of sales, adjusted SG&A improved by 320 basis points, coming in at 39.1%. In the second half of the year, we expect SG&A dollars to increase versus prior year, reflecting a combination of wage inflation and incremental spend on marketing and IT as well as the tough compares to last year's furloughs and rent abatements. Turning to earnings. Our strong performance on the top line flowed through to the bottom line, and Q2 adjusted operating margin expanded by 510 basis points to 12.1%. Adjusted EBITDA increased 55% to $141 million, and adjusted diluted EPS more than doubled to $0.57.

Moving to segment results. At Sally Beauty, same-store sales increased 4.9%. As consumer optimism strengthened and government stimulus took effect in the U.S., we saw a pickup in sales during the latter part of the quarter. The combination of strong sales and gross margin expansion drove a significant increase in segment operating margin, which expanded 750 basis points to 18.4%. We also delivered strong e-commerce sales at Sally's, up 46% versus a year ago. In our BSG segment, same-store sales increased 9.9%, reflecting a strong rebound as restrictions eased, coupled with higher operating capacity at salons and the reopening of California salons in February. E-commerce remained strong, posting growth at 68% on a year-over-year basis. Excluding the write-down of PPE inventory, gross margin was approximately flat to last year and operating margin expanded 80 basis points to 12.5%.

Looking at the balance sheet and cash flow. We ended the quarter with $408 million of cash on the balance sheet and a 0 balance on our $600 million revolving line of credit. Inventories at quarter end totaled $950 million, essentially flat to last year, inclusive of the $31 million in PPE inventory that we expect to donate by fiscal year-end. Looking at the balance of the year, we expect to close this fiscal year with inventory in the low $900 millions. As a reminder, we exited fiscal 2020 with inventory at suboptimal levels and successfully rebuilt our position in the first half of this year. We generated strong cash flow from operations of $93 million in Q2 and capital expenditures totaled $12 million, putting free cash flow at $81 million.

At the end of the quarter, our net debt leverage ratio stood at 2.34. For comparison purposes, the leverage ratio that we often cite as defined in our loan agreements where the impact of cash on hand is capped at a $100 million for net debt calculation purposes with 2.95. Given our strong liquidity position, subsequent to the end of the quarter, we fully repaid the outstanding balance of $197 million on our 5.5% unsecured notes. We expect to continue utilizing excess cash to deleverage the balance sheet with the goal of bringing our leverage ratio closer to 2.5x this year. We expect the business to generate strong cash flow from operations of more than $100 million in the second half of this fiscal year.

Based on the timing of working capital requirements around inventory receipts, we anticipate that Q3 operating cash flow will be approximately flat to prior year. We are maintaining our focus on liquidity and we'll continue to balance that with strategic growth investments and get paydown in the near term. Importantly, as the macro environment stabilizes, we will evaluate optimal paths for returning value to shareholders. Looking at the second half of the year, we expect the environment to remain dynamic with restrictions and closures continuing to be fluid. In the third quarter, we are up against particularly easy comparison. Keep in mind that net sales were down 28% in Q3 of last year, which reflected significant pandemic impacts and store closures globally.

Against that comparison, and as Chris previously stated, assuming no incremental pandemic disruptions, we expect net sales growth of 35% to 40% in Q3 of this year, reflecting strengthening consumer demand in the U.S., partially offset by ongoing choppiness from pandemic headwinds in international markets. Looking at the fourth quarter, comparisons normalize substantially. For perspective in Q4 of 2020, net sales were down less than 1% as restrictions lifted and store and salon reopenings took hold. In Q4 of this year, we anticipate that net sales will be approximately flat compared to the prior year.

For context, we view unit sales as the best measure of performance in the pandemic environment and anticipate that we'll return to providing same-store sales guidance when macro conditions stabilize. We feel good about our positioning and our ability to continue navigating from both an operational and a financial perspective.

We appreciate your time this morning. Now I'd like to turn the call over to the operator for questions.

(Operator Instructions) And we'll go the line of Oliver Chen with Cowen.

This is Joanna on for Oliver today. I'm just curious, you noted hair care saw a strong demand. What are you seeing in terms of the cosmetic side? Have you seen any improvement there? And then as we think about the promotional cadence throughout the year, you noted obviously lower promotional cadence this quarter. How are you thinking about it for the remainder of the year?

Joanna, let me remind you that cosmetics is a very small percentage of our business, less than 6% of Sally and even less at BSG. So it's not really a high-traffic category for us. That being said, it continues to be down as a category, but obviously, our larger categories like color and care are significantly up, and that's carrying our business. In terms of promotional strategy, I think we feel like we're at about the right cadence. So we don't see any significant change in our promotional strategy at this point. We're much more focused on the recruitment of color customers rather than promoting shorter-term sales. So I don't see any change in that through the back half of the year.

And our next question is from Rupesh Parikh with Oppenheimer.

So I guess, first, Chris, congrats on obviously a great quarter.

Thank you.

As we look at your comp performance during the quarter, I mean, clearly there were some stimulus benefits out there, but at the same time, you guys had some headwinds related to severe restrictions, especially international markets. As you guys look in totality, like do you guys think, the headwinds were more than the tailwinds? Like do you think comps could potentially have been stronger than what we saw during the quarter?

Rupesh, it's obviously hard to disaggregate, but if you just look at Sally and the Sally segment, disaggregating that really helps. So Sally U.S. was up 13.9%. It's a huge performance in the quarter. Some of that is optimism and some of that, of course, is stimulus. What happened, of course, is that the results in Europe, where we had significant shutdowns lowered the overall segment's results to 4.9%. So you see the headwind of international dragging Sally down by 900 basis points. Sally U.S. delivering an incredible performance of 13.9%. And again, you're exactly right, some of that is optimism, some of it's demand and some of it is stimulus. It's very hard to disaggregate those, but they all played a role.

Okay, great. And then from -- I guess from a market share perspective, do you believe you gained share, whether in the Sally Beauty segment or in BSG, during the quarter?

Well, I think Sally -- again, Sally is really the only outlet that sells professional color to the consumer for home use. And so it's hard to gauge market share there. I'll talk about BSG in a moment. The reality is, obviously, it's growing significantly in color, up 27%. Clearly we're outgrowing the category. So if you go look at some of the alternatives consumers have, whether it's box color or others, I'm pretty clear it wasn't up 27%. So we're outgrowing the competitive options that Sally's customers have, and that gives us confidence.

On the BSG side, comparisons with our next largest competitor, who is significantly smaller, are hard for 2 reasons, they're clouded for 2 reasons. One is geography, which is that we cover Canada and they don't. So Canada, as you know, has been through a significant disruption, and that's absorbed in our numbers. And they don't cover Canada. The other one is just footprint, which is we really have a national footprint other than a small franchise business in Texas, Louisiana. They make much more extensive use of franchisees throughout the middle of the country, and as a result, the footprints don't really match up. And that's why we have more than double the number of stores.

The reality, though, as we look at the data, the metrics we look at to think about the health and strength of the business competitively would be, first, color growth. So color is up 17% for BSG in the quarter, which is -- if you recruit a stylist, you get their color. That's the high-frequency category they buy. And then the next adjacency is care and care was up 16% at BSG. So those numbers are, are obviously encouraging.

The other thing we look at is growth on directly competitive brands. So although most of the brands in both businesses are exclusive, there are a couple of brands that are sold within both that are at scale. And the 2 largest brands that we sell that overlap with our next largest competitor are Matrix and Olaplex, and they're at scale. Obviously, these are big brands. And if you look at the growth of those in the US, where we both compete, Olaplex was up 106% at BSG in the quarter and Matrix was up 20% in the quarter.

So again, when we look at those metrics, although we don't have the external market share data, we look at those metrics and feel both very good about how the business is trending and the customer is trending as well as very good about how we're competing for a share in that business.

And next, we'll go to Steph Wissink with Jefferies.

Just a couple of housekeeping, if we could. Could you talk a little bit about your CRM and what you're seeing in terms of your new to file customers?

Yes. First of all, Stephanie, thank you for the question, and I'll cover a couple of parts on CRM. In terms of new to file, obviously, as the pandemic hit, we saw -- BSG didn't have a CRM program or a loyalty program at that time. It did have a customer file based upon people registering with a license. But Sally had a large customer file based on a loyalty program, and we saw a decline in the file at the beginning of the pandemic as a lot of customers just stopped coming out. Not surprising. We have seen that continue to come back in a significant portion over the last quarter or 2. And it's accelerating. It is not all the way back to where it was at the beginning of the pandemic, but it's well on its way.

And of course, the BSG CRM file is really just starting to pick up now that we've launched the loyalty program last fall. The better part about the CRM program is the new technology we've launched and the capability of the team we've added and our ability to add custom journeys for every customer. As an example, just in color now, for Sally, there are 20 unique custom color journeys that we take the customer on based upon what they buy in their first purchase. And therefore, how do we follow up with them in terms of advice. We give them content. We provide them as well as follow-up ideas on other products they might like.

So what I really like is how much better use we're getting out of the data we get, but I still think. There are customers to come back. Whether it be an older customer who's been reluctant to get out or other customers who are just intimidated by the pandemic itself, there is still some coming back that's going to happen. Much of it's already happened, but there's still some that's left.

Our next question is from the line of Mark Altschwager with Baird.

This is Sarah Goldberg on for Mark. I was hoping you could update us on some of the cost pressures you might be seeing such as labor or any inflation on the COGS side. And then also on the digital front, if you continue to scale the digital offering such as BOPIS and leveraging your delivery services, how should we be thinking about the unit economics?

I'll take the first one on the cost side. Yes, we are seeing some cost pressure. Certainly seeing some wage inflation and inflation on the cost side in the cost of product as well. We do feel very confident in our ability to hold our 50% margin targets and believe we have ability -- as those start to come our way, have the ability to pull pricing levers in the near term. As for the SG&A side, certainly, we're seeing a wage inflation coming here in the near term as well over the long term. We expect to be able to offset that with some of the good work we're doing on our e-comm profitability improvement measures as well as the work we're doing around our store fleet optimization initiatives that we have underway as well.

But when we look at the back half of the year, we are seeing sequential increases, back half to front half, on the SG&A side. Part of that is inflation, but a larger part is due to the fact that as economies and markets are opening back up, we'll be investing back into payroll and opening stores as well as marketing. And we do have a continued investment in our IP side of house as we continue to scale and optimize our technology tools. Probably the 2 biggest ones are the BSG replatforming that's happening now and should be complete, I believe, by the end of this month, and we're on track for that. And then we're also finishing the JDA implementation and ramping up our North Texas distribution center in the back half of the year as well.

And in terms of e-comm channel profitability, BOPIS is effectively its store margins. So it's effectively the equivalent of store margins. As we launch the 2-hour delivery at BSG and 3-hour delivery at Sally, they will be either at or just slightly below store margins. We use an outside third-party delivery partner. BSG is passing the majority of that on, I think they're subsidizing just maybe 20% of that cost. And Sally plans to pass all of it onto the customer. So the reality is that both BOPIS and same-day delivery should look very similar to store margins overall.

And next, we go to the line of Simeon Gutman with Morgan Stanley.

This is Michael Kessler on for Simeon. First, I was wondering if you could provide maybe with a little more detail on just the magnitude of the acceleration that you saw as we came into March. I'm curious how were trends tracking in line with your expectations before that point. And then I guess how much above would you -- relative to the different kind of factors that came into play in March that we saw play on that in that month. And I think based on your sales guidance, it would seem that -- it seems like maybe April trends seem to be continuing on a similar basis on an underlying level. I guess has that been what you have been seeing? And lastly on this, any indications you're seeing of restocking up post some of the, I guess, miniature shutdowns that we saw earlier this year?

There's a lot of questions in there. Let me try and take a few. Do you want to take...

Yes, maybe I'll just start on the sales trends and what we saw, and then you can jump in with the color.

Perfect. Perfect.

Month to month, I mean, we've seen this throughout the entire pandemic, it's been very, very choppy, and it continued almost on steroids in Q2. Sally, like Chris had mentioned earlier, delivered almost 14% in the U.S. Sally had a very strong January. That was a month where we did have a round of stimulus. And then had a very challenging February. And then we started to see things take off better than we expected as we got to the end of February and then end of March, where, again, we had another round of stimulus.

On the BSG side, BSG faced challenges that improved as we got into the latter part of the quarter. And then the international markets faced headwinds really the entire quarter with closures and heavy restrictions throughout the quarter. And so there's a number of puts and takes that were going on throughout the quarter. In January, we had the closes [and] salon restrictions, especially in California. That significantly impacted BSG. Like I said, also in January, we had a round of government stimulus. And then January was a challenging month for the international markets and to a lesser degree for BSG. January, though, like I said, was super strong for Sally.

February traffic and demand flowed through the first few weeks, but by the end of the month, we started to see trends in the U.S. pick up. And then that's when the acceleration really took off and more substantially in March. And so we had stimulus, but we also saw some improved optimism. As the vaccine rollouts in the U.S. were taking hold and ramping up, we started to see vaccine optimism. And then also in March, I guess, in terms of the compare, that's when the comparisons start getting tough. Last year was the first month where the COVID shut down on a global basis took hold. So that's where you see the year-over-year compares. But overall traffic, like I said, remained really choppy. And obviously we have a very dynamic environment. So it's actually giving us some concern, and we're being very cautious as we look into the balance of the year, making sure that we continue to pull the levers as needed, but also making sure that we're there when the demand is there.

Yes. And to your question, obviously, we're not going to give out results in April, in this quarter. But we do see strengthening consumer confidence would be the -- slowly but surely, and then as Marlo mentioned, mixed in with some continued closure. So there -- Canada, the Ontario province has closed down again, and that has shut down a number of our stores. And Europe, Continental Europe especially, has significant restrictions still in place. There are some closures in Latin America, especially in Chile as well. So it's a blend now of strengthening consumer demand, along with some ongoing turmoil from the pandemic. And we expect most of it to be gone after this quarter, which is great, but we obviously are going to continue to be agile.

Great. Thank you for taking apart my multipart question there. If I could just squeeze in one more. I wanted to -- just curious to get a little more color on the kind of store closure tests that you're about to start. And I'm just curious if there's a baseline expectation for what you might see from those and how do you even assess that just given the level of disruption that we're still seeing and the kind of volatility. So I mean I don't know if there's kind of a longer-term expectation as far as store count and how you're thinking about that and is there kind of a, I don't know, benchmark that you're going to be measuring against as you proceed on these tests.

Yes. No doubt. And thank you very much for the question. I think the reality is we've always been open that we're trying to balance the need for a broad storefront footprint so that we can supply e-commerce out of the store, especially in a very efficient way. And our store footprint is part of what makes us able to do 2-hour delivery out of BSG to salons and 3-hour delivery to consumers' homes out of Sally. So the storefront comes in as a strategic advantage, and I think other retailers have mentioned that as well.

That being said, as we mentioned on the call, there is significant wage inflation that we think will come in the next few years, and we've got to balance store economics with that need for a large store footprint. So we do have -- the #1 metric we'll look at, although there's many metrics, the #1 metric we want to look at is the accretion of those sales to either other stores or e-comm, and we can follow that quite closely by customer. And so as we close stores, the 90 stores I mentioned, we have a detailed marketing plan in place to contact customers, to notify them of where close by stores are, to notify them, obviously, of their e-comm options.

We're going to do that 90 days out, 60 days out, 30 days out. We'll then execute the closure. We'll track the customers, where they buy at, do we lose any customers and how many. And as we get through all of that, that'll really inform us about how much of this consolidation can we really do and how profitably as well as what is the need and at what point do you lose customers and how do we need to be cautious there. So we've got a lot of tracking in place. We're going to learn a lot in the next couple of quarters from it. And then we'll then use that to guide our thinking on the overall portfolio long term.

Our next question is from Joe Altobello with Raymond James.

This is Adam on for Joe. Thanks for providing detail on the cadence of results throughout the second quarter. That was particularly helpful. You alluded to a stimulus boost in January and then another one in March. While acknowledging, obviously, that it's tough to quantify the impact, I was just curious, have you seen the impact of stimulus wearing off at this point or maybe [even] overstating the impact? Just a little more detail there would be helpful.

Let me start and then Marlo can jump in and provide any extra color. I do think at this point now in May, we think most of stimulus has worn off. I can't tell you that for sure, but we think a lot of it has passed. And what we're seeing now is just increasing optimism and confidence from the consumer as they get vaccinated and as case counts drop. It was very interesting in April, you could actually see -- in markets where there was a resurgent versus markets where there was not, you could see a difference in demand patterns. So as we see the whole country, if it continues to move in this direction of reduced cases and greater confidence, we think that's a positive for the business, and that that'll be the primary driver going forward.

Great. That's very helpful. And I wanted to briefly ask if you guys saw any impact from the Texas storms from a couple months ago.

Well, yes, I mean, it was a significant weather event. And it was blended into a month where, as you know, we were just coming off peak cases and peak hospitalizations in the U.S. It's hard to forget that now that where we're at now. So I think it added to some of the challenge of February, no doubt. It was -- I think roughly a thousand stores of ours were closed and many others were impacted by the weather even if they weren't closed. And they weren't closed for just one day, they were closed for multiple days. So it was a significant impact. I don't know if it's better or worse than most other winters, but it was concentrated in February.

If I can squeeze in one last one. I was curious, and I know you guys aren't providing guidance, so this may fall on [deaf] ears. But I was just curious if -- from an EPS perspective, typically, Q3 is biggest of the year. Would you expect that to be the case again this year or you're not ready to make that statement?

Yes. I mean I think we did as best that we could try to give you a range of 35% to 40% versus last year. There's just a lot of puts and takes. We saw a lot of puts and takes in Q2, and we expect the environment to be dynamic as we continue into Q3 and into Q4. So Chris has mentioned a lot of the positives with the consumer optimism, I think, getting better in the U.S., and we still have a lot of closures internationally. And so again, I think that's probably the best guess we can give you at this point.

No, that's very helpful. And congrats on the strong quarter.

Thank you very much.

And next, we'll go to a Rupesh Parikh with Oppenheimer.

So I guess I just want to follow up. So on the operating margins, you guys had nearly 12% operating margins this quarter. Just any thoughts in terms of whether that's a sustainable level, I guess, maybe longer term or whichever period you can comment on?

Yes. Yes. Longer term, I'd say we're very confident that we believe, in a normal stabilized environment, growing it low single-digit same-store sales is something we're very confident in. And in that growth model, we believe we would leverage SG&A. In the near term, we are living in a very dynamic environment. And as we mentioned -- gave you some pretty good guidance, I believe, on top line. When I think about gross margins, the 50% target, very much in sight and something that we believe we can maintain. And then on the SG&A side, again, just looking -- as we get back into opening economies and opening markets, we will be investing back into payroll and back into marketing while we continue to invest in our strategic priorities.

So longer term, yes. Near term, it remains dynamic. And we'll continue to invest in the long term, while balancing the near term. And we continue to keep our sights on cash. And as you saw, we continue to deliver well and continue to maintain very strong liquidity. And so that is our focus in the near term. That sums it up.

Okay. Great. And then maybe just one additional follow-up. So the Q4 guide at this point for, I think, flattish sales growth versus the prior year, would you say that's conservative and at this point, just given the environment -- given the still volatile environment out there? Is that the right way to think about the Q4 commentary?

Yes. I think it's balanced. The reality is that we don't know how this will all play out. Will there be any second waves? Will there be any other additional closures internationally? Will there be a new variant spread? We just don't want to get out over our ski tips yet given how dynamic this has been. I mean let's be clear, think about last September, October, when we were having a great quarter and it looked like the virus was over after a great summer and all of a sudden, we had the worst wave yet. So I think you just see some reluctance on our part to get over our ski tips at this point in time. It's better just to play it down the middle.

And last Q4 was strong, very strong Q4...

It was, yes.

Given the environment.

And next, we'll go to Steph Wissink with Jefferies.

I just wanted to connect, Chris, your response to my prior question on CRM and kind of the rebuild of the new to file customers. With your comments on vivid color earlier in the call, I think you mentioned it's almost 1/3 of the business now. So what I'm curious is if you're seeing new customers coming to you for vivid for the new range of color that you're offering. And if that feels like a stickier customer as we kind of move back into a period of normalcy or if you're seeing old types of customers come back and then find you and discover you for new things. Just trying to think through your customer sequencing as we kind of move back towards a normal cadence.

No, thanks for the question, Steph. And you're right, vivid colors are now 27% of Sally's color business, not quite as much in BSG. And the reality is it does skew younger, although it's surprisingly across a larger age group. It was a growing category even before the pandemic hit. So I don't want to suggest that it went from to 5 to 20 -- it was already in the high teens before the pandemic and it had been growing for multiple years. I think there's a general trend towards self-expression and freedom of self-expression. And that trend was accelerated, obviously, as we went into the pandemic and are now coming out.

I think the reality is that the work models will continue to be hybrid. I think companies are, in general, going to be more accepting of people's differences and their desire to express themselves in different ways. So I think there's going to be more openness in society to vivid-colored hair or tattoos or piercings or any other form of self-expression. So I don't think this necessarily goes away. The other side is we have an incredible lead in terms of our assortment. We carry almost over 300 options of vivid colors in our stores out of a 1,200 option color assortment. And if you go to the next largest color of seller in the United States, they might have 25 to 30.

So we have this incredible breadth of assortment that is really appealing to the customer as well. And so yes, I do think it's bringing some new customers to the fold. I do think there is a general trend towards self-expression and feeding of expression. And we're going to pick up on that in some of our marketing that you're going to see coming in June around You by Sally and us enabling the customer to express themselves. I don't know if it -- I don't think 53% growth will sustain itself. I think that will slow down, but I still think it will be a growing category.

That's great. And Marlo, can I ask one follow-up on wages? Can you just remind us where you are on the minimum wage curve? I know some of your peers have done proactive hikes to the $15 level. Just wanted to square up where you are on that arc of wages.

Yes. We haven't released that amount of detail. What I will say is, think about our associates, they're well-informed beauty enthusiasts and consultation experts on the color and care side of the house. So they tend to be higher paid when you think about that relative to what I would say is a fast-food worker or other general [retailers].

Yes. So I think the reality is that's even more so on the BSG side. So -- but we still believe there is wage inflation coming and we're prepared for it.

Our next question is from Carla Casella with JPMorgan.

Just 2 questions here. One, I think I missed if you gave guidance on store openings for the remainder of the year and your thoughts on that going forward. And then I have one follow-up.

Yes. Although we do have a few stores opening, we also mentioned that we're actually going to be closing 90, 70 Sally and 20 BSG, as a test to understand how can we accrete those sales to other stores. So I don't actually have the net openings, but I'm thinking it's probably down slightly.

Roughly, it's a handful.

Yes.

Okay. So the net openings are down slightly. Okay. Great. And then e-commerce, did you about how much percentage of sales it is right now at Sally and BSG? But I'm more also curious on where do you think that settles in? And if you're seeing any kind of normalcy where it could settle in post-pandemic.

It's in the high single digits right now across our -- yes, I think it's 7% across the entire enterprise -- excuse me, 7.8%.

7.8%.

Yes, 7.8% across the entire enterprise. And there's markets that are above that like the U.K. BSG is quite strong. Sally's a little below that, but the reality is that we think it's going to grow. I don't know exactly how big it will be, but I think in 2 to 3 years to think of it being at 15% to 20% of our business is completely reasonable. And again, we think a lot of that it will be fulfilled from stores either through BOPIS or 2- and 3-hour delivery from store.

And next, we'll go to William Reuter with Bank of America.

I know you mentioned that you don't expect that the stimulus payments have been making or will make substantial, I guess, impact in terms of your future sales. But were you able to track at all when those payments went out this year and whether you saw spikes in sales during the second quarter?

Yes. No, we definitely did. As Marlo mentioned in her comments, we saw them, especially in our Sally business, in early January and in late March. And so we did see them drive purchases in our stores during those kind of 4 weeks of the quarter.

I think the March enthusiasm had some consumer optimism in there, too. So it's a bit of a hard read, but we did see the acceleration in March.

Okay. That's helpful. And then you're currently at net leverage of 2.3x, which I think your leverage target is a net leverage target, the 2.5x. So I guess how should we think about capital allocation at this point? Will you think about returning cash to shareholders in terms of share repurchase? What are your thoughts there? And that's all for me.

Yes. Thank you for the question. And as you pointed out, we've had a really strong cash generation through the first half of this year, and we expect, again, another $100 million of cash generation in the back half of the year. So our focus has been on maintaining really strong liquidity positions going forward. We expect to do that. And we'll continue to prioritize in the way that we have been throughout this entire pandemic, which is balancing investing in our strategic growth as well as working to pay down debt to reduce leverage.

So we are continuing to make great progress. We did it again subsequent to this quarter with the April paydown at the 5.5% notes. And then as things stabilizing the macro environment gets more predictable and we come out of the pandemic, we will evaluate optimal paths to return value to shareholders.

and to the presenters on the call, we have no further questions. I'll turn it back to you.

Just like to thank everybody for joining us today. We continue to be excited about both the health of our business as well as the speed with which we're executing on our core strategic initiatives and the value those will create for customers going forward.

Thanks again for your time today, and we look forward to talking to you soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.