SBH 2022Q2

Good morning, everyone, and thank you for joining the Sally Beauty Holdings conference call to go over the company's fiscal 2022 second quarter results. I would now like to pass the call to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings.

Thank you. Good morning, everyone, and thank you for joining us. With me on the call today are Denise Paulonis, President and Chief Executive Officer; and Marlo Cormier, Chief Financial Officer. Before we begin, 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. I'd also like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today and we undertake no obligations to update them. 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. Now I'd like to turn the call over to Denise to begin the formal remarks.

Thank you, Jeff, and good morning, everyone. I'm pleased to be here today to share our quarterly results and how we are managing through some interesting and challenging macro dynamics. As we anticipated, disruption from the Omicron surge began to recede in early February. In subsequent weeks, global inflationary pressures and supply chain challenges intensified. These factors, in addition to the lapping of stimulus benefits in January and March of 2021 muted our sales performance. That said, we see these as point-in-time challenges and remain confident that our strong competitive positioning, loyal customer base, and strategic growth initiatives position us well to drive profitable growth over the longer term. For the full quarter, we posted slightly positive comparable sales and a net sales decline of 1.6% as we operated 142 fewer stores than last year. Despite industry-wide increases in distribution and freight costs, we maintained our strong gross margin profit profile, with adjusted gross margins coming in above 51%. Let me share a bit more detail on the sales performance of our two largest businesses, Sally U.S. and Canada and BSG. In our Sally business, both inflation and supply chain challenges impacted purchasing behavior among our core Sally customers. First, inflation. Both our internal and third-party data indicate that discretionary spending is under pressure due to elevated fuel and grocery prices and higher inflation generally. We know this creates tough decision-making for our lower-income Sally customer, and we saw her reduce trips as she stretched her time between coloring her hair. While her basket was up sequentially in Q2 from Q1, it was down on a year-over-year basis as she shifted her basket mix to lower-priced to core categories, including color and care, and away from higher-priced categories, such as styling tools that performed well during last year's stimulus period. This category mix shift was further reinforced by softness in stock levels in styling tools due to supply chain challenges. It's important to note that we expect in-stocks in secondary categories, such as appliances and tools, to begin to improve later this fiscal year. In our BSG segment, demand was strong, and we were chasing it all quarter as supply chain disruptions resulted in a shortage of raw materials for some of our vendors, negatively impacting stock levels of some of our top-performing SKUs. At this point in time, we expect this pressure to begin to alleviate in our fiscal fourth quarter, with a more pronounced improvement in our stock levels in fiscal 2023. As I mentioned a moment ago, our loyal customer base is stronger than ever. When we look at key factors such as Sally U.S. and Canada's Net Promoter Score of 83, and 17 million loyalty members comprising 76% of sales in Q2, we know our core customer is highly engaged. In our BSG segment, our stylists are engaged, demand is strong, and we are confident in the underlying health of the business. We have data on 100% of our BSG customers, and we are continuing to gain traction on our rewards credit card that was launched just 18 months ago, with 9% of our BSG sales coming from the cards in the first half of this year. We believe our ability to leverage our loyal customer base through personalization, education, and highly targeted marketing initiatives at both Sally and BSG will be instrumental to helping us navigate the challenging environment in the second half of 2022 and beyond. More on this shortly. As we look to the second half of the year, we're evaluating macro forces and making adjustments as needed. Our revised full-year outlook for fiscal 2022 assumes that current macro issues, including inflation and supply chain disruptions, will persist to varying degrees for the foreseeable future. During this time, our teams are remaining nimble and continue to be laser-focused on delighting and engaging the customer through our four strategic growth pillars. These include: leveraging our digital platform; driving loyalty and personalization; delivering product innovation; and advancing our supply chain. I'll briefly provide an update on each one. First, from a digital perspective, we're continuing to focus on leveraging the robust omnichannel platform we built over the last four years. E-commerce sales penetration continues to increase, reaching 8.9% of sales in Q2 of this year, driven by BSG's e-commerce sales growth of 37%. During the quarter, our Sally U.S. and Canada stores fulfilled 37% of e-commerce sales as BOPIS comprised 16%, rapid 2-hour delivery represented 14%, and ship-from-store accounted for 7%. We're seeing greater adoption of 2-hour delivery, including lower cancel rates driven by improved supply chain efficiency as well as increases in average ticket and conversion. Additionally, we're expanding our partnership with DoorDash for both Sally and BSG and recently added 2-hour delivery to the Sally mobile app, which provides another convenience to our Sally customer, 80% of whom engage with us using a mobile device. Response to our new virtual color experts at Sally has been strong, with the store pilot program currently at 35 stores in the Dallas-Fort Worth and Northeast markets. We're planning on expanding our pilot program to another 20 stores in the second half of this year, and we'll evaluate further as we look to scale in fiscal year 2023. At BSG, we're expanding our distribution partnership with Regis by taking over servicing of the remaining 2,500 salon accounts from a competitor beginning in the fourth quarter. To that end, we're implementing a new Regis portal to streamline the ordering process for those salons, which also gives us a great ecosystem for the future growth of our large chain accounts. Moving on to our second growth pillar, loyalty and personalization. As I mentioned earlier, in the second quarter, approximately 76% of sales at Sally U.S. and Canada came from our loyalty program. Active member count continues to climb and stood at an all-time high at quarter end. In fact, we're particularly proud to note that Newsweek recently reported that Sally's loyalty program ranked in the top 10 out of 238 programs overall and ranked #2 in the food, health, and beauty category. We have a number of initiatives underway in personalization, encompassing product suggestions, imagery, and educational content. We recently rolled out individualized journeys and personalized website views based on historical search and purchasing behavior. The majority of our Sally customers will have a unique view on our site when they log in via their browser or mobile device. Next up, we'll be expanding our customized communication to SMS, social media, and direct mail. This will be rolling out during the second half of this year, with full implementation in fiscal 2023. Additionally, in the second quarter, we implemented marketing mix modeling, a new data science tool that enables us to measure ROI on our marketing investments. In recent years, we brought in new marketing leadership and built a robust team, now layering on an important finance tool that will allow us to more effectively balance and optimize spending going forward. Turning now to our third pillar, product innovation. We are continuing to deliver a rich pipeline of innovation that is expected to fuel long-term growth. At Sally, we saw a positive response to our launches in color, care, tools, and extension. Supporting the personalization trend, we recently launched Urban Alchemy's new customizable hair care line at Sally. And in Q3, we have more exciting hair care roll-up planned from brands like Wella and our own Strawberry Leopard. The innovation pipeline is equally robust at BSG. We saw positive response to our Q2 launches across color, care, and nails, including Wella's new Shinefinity line, our most significant BSG launch of fiscal 2022. On deck for Q3, we have exciting innovation coming in color, care, and tools, including Olaplex No. 9, Goldwell's Weslaco, and the new Urban Alchemy line. In the nail category, we're rolling out a reset of this category in both Sally and BSG during the second half, bringing in new fixturing with more visible in-store placement. This will be complemented by the recent launch of Kiara Sky nails at BSG and forthcoming innovation at Sally in our own fiscal Q4. Moving to our final and fourth pillar, supply chain. At a high level, we're leveraging the important investments made in our systems, processes, and teams over the past several years to build a best-in-class merchandising and supply chain platform for the future. Outside of the macro supply chain issues that are affecting us right now, we continue to make progress in being in stock in color and care every time. Additionally, our teams are continuing the work of transforming our transportation network to pool distribution, which is expected to increase our speed to market, improve reliability, and reduce cost. We're also piloting overnight deliveries in several markets to minimize disruptions during operating hours. Looking ahead, we are leaning into our strong competitive positioning, loyal and growing customer base, and trusted vendor partners, and we remain confident in our key growth pillars. We believe these attributes will enable us to drive growth and shareholder value in the coming years. I greatly appreciate the dedication of our team as they keep our customers at the forefront of everything we do and their ongoing commitment to the journey ahead. With that, I'll turn the call over to Marlo to discuss financials, and then we'll open the call to questions.

Thank you, Denise, and good morning, everyone. Second quarter net sales decreased 1.6% to $911 million, and comparable sales were up slightly. As Denise previously mentioned, the net sales decline is primarily attributable to operating 142 fewer stores versus last year and a combination of macro factors at both Sally and BSG. Global e-commerce sales increased 12% to $81 million, representing 8.9% of total net sales. The year-over-year increase reflects our ability to scale our digital capabilities and utilize our new tools and resources to drive customer engagement. Looking at gross profit, second quarter adjusted gross margin increased 20 basis points to 51.4%, reflecting strength in both the Sally and BSG segments, which both delivered increases in product margins. These benefits were partially offset by higher distribution and freight costs, and unfavorable sales mix shifts between our higher-margin Sally U.S. and lower-margin Sally International operations. Moving to operating expense, adjusted SG&A totaled $378 million, up 4% versus a year ago. The increase is primarily attributable to higher labor costs and expenses related to reopening international territories that were closed last year, which were partially offset by lower variable and accrued bonus expenses. As a percentage of sales, adjusted SG&A increased by 240 basis points compared to the prior year, driven primarily by the lower sales volume in combination with the incremental expenses. We continue to expect that our store optimization program will begin serving as an offset to wage inflation beginning in the latter part of 2022 and into fiscal 2023. Turning now to earnings. While we experienced top-line pressure, our ability to maintain our strong gross margin profile enabled us to minimize some of the bottom line impact. Second quarter adjusted operating income totaled $90 million, adjusted EBITDA came in at $116 million, and adjusted diluted earnings per share was $0.47. Looking at segment results, Sally Beauty's net sales declined 3.1% with comparable sales down 0.5%, while operating 126 fewer stores versus a year ago. The sales decline was highly concentrated in the U.S. and Canada, which had a decline in comparable sales of 9% and accounted for 79% of our segment net sales in Q2. Sales from our operations in Europe and Latin America were very strong, with comparable sales growth of over 50% as they lap significant COVID disruption from the prior year. For the Global Sally segment, the color category increased 3% and hair care was up 7% compared to the prior year. For Sally U.S. and Canada, vivid colors continued to outperform the overall color category and represented 27% of color sales. Additionally, as we stated previously, some of our secondary categories, like styling tools and appliances that support the customers' basket adds, were down in the U.S. and Canada due to supply chain challenges. Gross margin at Sally expanded 40 basis points to 58.8% compared to the prior year as we continue to generate solid product margins, driven primarily by pricing leverage, in addition to a smaller write-down of COVID-related personal protective equipment inventory compared to our second quarter last year. These benefits were partially offset by higher distribution and freight costs and an unfavorable sales mix shift between the higher-margin Sally U.S. and lower-margin Sally International operations. Segment operating margin came in at 15.4%. In the BSG segment, net sales increased 0.5%, with comparable sales growth of 1.3% despite the impact of Omicron in January and lower-than-expected stock levels of our top-performing SKUs. We estimate that the sales loss from raw material shortages was approximately $10 million or just over 250 basis points of impact on net sales growth. The color category was essentially flat, while hair care increased 3% compared to the prior year. Gross margin at BSG strengthened by 140 basis points, driven by improved product margins as a result of pricing leverage in combination with a smaller write-down of COVID-related personal protective equipment inventory compared to the prior year. These benefits were partially offset by higher distribution and freight costs. Segment operating margin came in at 11.9%. Moving to the balance sheet and cash flow, we ended the second quarter in strong financial condition with $227 million of cash and cash equivalents and a $0 balance outstanding under our asset-based revolving line of credit. At March 31, inventories were approximately flat to last year at $963 million. For the quarter, cash from operations was slightly positive. Capital expenditures in the quarter totaled $18 million. We restarted our share repurchase program in fiscal 2022, repurchasing approximately $75 million in the first quarter and $55 million in the second quarter. This leaves approximately $600 million remaining under our current authorization. At the end of the second quarter, our net debt leverage ratio was 2.07x. We expect operating cash flow to strengthen in the second half of fiscal 2022 and remain committed to prudently investing for growth while creating long-term value for shareholders. Subsequent to the end of our second quarter, we filed a redemption notice on April 29, announcing our intention to retire our $300 million 8.25% senior secured notes. The repayment date is scheduled for May 31, and the payment will be funded by both excess cash and our ABL facility. After seeing the macro environment intensify in Q2 and given the level of external pressures, including escalating inflation, supply chain disruptions, and geopolitical unrest, we are managing the business to a more conservative outlook and have revised our full-year 2022 guidance accordingly. For the full year, we now expect the following: net sales approximately flat to down 2%, net store count to decrease by approximately 1% to 2%, driven primarily by Sally U.S. stores as we continue to optimize our portfolio; gross margin expansion of 40 to 60 basis points; and GAAP operating margins and adjusted operating margins to be approximately 11%. Regarding the pacing of sales for the remainder of the fiscal year, we expect Q4 to be stronger than Q3 in both total sales volumes and year-over-year growth. We expect the supply chain issues to start improving in Q4, and we will be further along into expanding our distribution partnership with Regis as well as the personalization and marketing initiatives at Sally, as we previously mentioned. Also, keep in mind that last year's Q3 was a record quarter with sales well over $1 billion as we had reopening momentum from markets that were previously restricted earlier in the year. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A.

Our first question will come from Rupesh Parikh with Oppenheimer.

So I guess I just want to start with, first, the top line guidance. Is there any way to frame the reduction that you guys took between the supply chain headwinds and maybe the inflation and weaker consumer dynamics that you're discussing?

Sure, Rupesh. This is Denise. I'll begin, and Marlo can add to it. Let's discuss Q2 as a prime example of the changes we've observed on the Sally side, and then Marlo can elaborate on our plans moving forward for the remainder of the year. Overall, we are very satisfied with our Sally customer base, which demonstrates strong loyalty. While we did not experience a decline in customer numbers during the quarter, we did notice a reduction in the frequency of their visits and a decrease in their spending per trip. When we compared our performance from Q1 to Q2, the business faced two different comparisons: a positive trend in Q1 and a negative 9% in Q2 for our Sally operations in the U.S. and Canada. During our conversation in February, we identified about half of that gap, which we attributed to the significant impact of last year's stimulus and the effects of Omicron in January. Omicron's impact unfolded as we had anticipated, mainly affecting store operations due to associate availability, rather than a downturn in customer traffic. The remainder of the changes stemmed from supply chain issues in secondary categories and inflation impacts on our customers. We dedicated considerable time to exploring the inflation aspect. Our analysis revealed that we were losing the frequency of purchases rather than customers themselves. We conducted in-depth customer research, and our findings indicated that customers were experiencing cost pressures, leading them to adopt a more cautious spending approach. They were extending the time between purchases and avoiding higher-ticket items that they readily bought last year when they had received stimulus checks. Nonetheless, we are focusing on factors within our control, such as implementing our strategic initiatives in personalization, the nail reset we are excited about, fortifying our own brands, and working to restock products, even though it may take some time. Overall, we've adopted a cautious stance regarding the second half of the year and the outlook for the Sally customer. We anticipate that inflationary pressures will remain stable, neither improving nor worsening. We do expect some improvements in supply chain product availability, particularly toward the year's end, though less so in the current phase of Q3. As I mentioned, our strategic initiatives are showing promise, particularly within the nail business and marketing personalization efforts, which we believe will help shift trends positively. That wraps up the discussion for the Sally side of the business. To provide a complete view for the rest of the year, we believe the BSG business remains strong, with robust stylist demand. We're actively working with our vendors, who have been excellent partners, to navigate supply chain issues related to raw materials and ingredients. We foresee improvements in this area starting in the fourth quarter, which we are eagerly anticipating. Additionally, we are excited about the opportunity to further expand the Regis business with the addition of 2,500 storefronts, surpassing our largest competitor in the distribution space. I hope this gives you a clear understanding of our viewpoint regarding both Q2 and our forward outlook.

Okay. Great. I know you might not be able to comment on this, but can you share if trends in April are stable compared to what you experienced in March? Is there any information you can provide regarding the consumer pressures observed in April?

Yes. I would tell you what we are stable to is the forecast that we see going forward. We think here April is performing pretty much spot on, on top of what we expected to see, which is what is giving us a lot of reassurance that we really do understand the drivers as they exist today and are managing those the best we can.

Our next question comes from the line of Olivia Tong with Raymond James.

I wanted to discuss the impact of rising gas prices on your core customers. Last quarter, you mentioned that adjusting your pricing helped improve your gross margin, which seems significant. Considering the increase in gas prices and its effect on your consumers, could you share your perspective on pricing moving forward? Do you see continued opportunities or other strategies to boost sales momentum despite your consumers making fewer trips?

Yes. Let me start with the pricing concept and then we can work in some of the other kinds of customer behaviors that we're seeing. But in terms of pricing itself, we're consistently looking at price. Not only where we can take it, but also just the competitive actions that are inside the market. We constantly have to test and market to understand how the customer will react and is reacting. Price increases so far have been used to cover costs from suppliers, but we have also been able to drive some increases in margin rate, mostly in our core categories, the color and care. We do believe there is still some more pricing leverage in color and care. We have been building out our strategic pricing and promotion capabilities and tools for some time now. Our ability to leverage those new capabilities with expanding data sets and insights is more robust than really it's ever been before. So we're constantly evaluating pricing opportunities. We're closely monitoring the impact on consumer behavior. So far, we haven't seen that that's what's driving the change in behavior. We are seeing some on the Sally side, the frequency change, but we haven't seen that they are going away from the product due to pricing.

I want to add to your second question about what we can do if consumers are feeling pressured by gas prices. We have invested considerable time in this area, testing various items that have shown promising results, which you will see us continue throughout the year. Our focus is on implementing promotional activities that demonstrate value in the core categories, encouraging customers to add more to their baskets. Importantly, these promotions do not compromise margins; they are well-thought-out strategies that resonate with customers. For instance, on the Sally side, we will bundle products like a tube of color, a bowl, and a brush into a value package. We connect this to our in-house brands, which maintain strong margins while providing added value for customers. Additionally, we’re ensuring that we have our key hair care line in stock when we run our regular sale of four items for $20. Our goal is to maintain availability throughout the promotion to fully capitalize on its value. We aim to sharpen our approach so customers see that adding to their basket does not significantly increase their overall spending. We are very aware of their feelings and are trying to offer thoughtful incentives that align with our margin targets.

Got it. And then just following up on gross margin. Can you just talk about the puts and takes that are embedded in your expectation for second half to drive continued gross margin expansion? Because what we've seen across many companies is, quite frankly, lower gross margin expectations while you're maintaining it. So last quarter, you had said more equitable for the remainder of the year. Obviously, decelerated quite a bit in Q2. So can you talk about some of the offsetting moves to drive the expansion in the second half? You just talked about promo having a net flattish impact on your targets. So did you make any other modifications to how you're thinking about investments given your view on consumer spending? Anything else that creates an offsetting impact despite the incremental cost pressures? Appreciate it.

We are very pleased with our margin profile, which has strong margins exceeding 51%. We expect this to continue. We believe our gross margins for the full year will be 40 to 60 basis points higher than last year, and we are confident in maintaining that in the latter half of the year. Our pricing actions have been effective, yielding positive results. We have successfully offset supply chain increases as well as rising freight costs. Additionally, we have considered the changing mix with Sally and the recovery of international markets compared to last year. Overall, I feel optimistic about our margin profile and our ability to sustain it in the second half.

Next, we go to the line of Oliver Chen with Cowen.

Regarding inflation and its frequency, how do you foresee stability in that area, and how does it connect to your marketing strategy? Historically, marketing has presented opportunities, and in today’s digital landscape, there are chances to consider performance marketing, the effectiveness of spending, and algorithms. Additionally, how are your average unit retails responding in light of your previous strategy of having fewer, deeper, and simpler offerings? Lastly, concerning inventory levels, which segments of your portfolio are you most worried about? The supply chain remains a significant issue with considerable uncertainty in various areas.

Okay, Oliver, you've packed a lot into that question. Let me break it down, and if we miss anything, please let us know. The first part of your question seems to focus on inflation and whether it has stabilized regarding its impact on frequency, as well as any marketing strategies we might implement. In short, we have observed some stability. While we can't predict future developments related to macroeconomic events, April is performing as we expected. The customer behavior has been consistent since the shifts made about six weeks ago. Regarding marketing, you are correct. We’ve discussed marketing mix modeling, and we are becoming smarter about how we allocate our performance marketing budget to reach the right customers effectively. We're combining that with personalization to present relevant add-on products, especially for customers who recently completed treatments. We are still in the early stages of personalization, finishing this year with a foundational approach that will allow us to progress more quickly next year. Our evaluation of performance marketing through the marketing mix model has provided valuable insights, helping us adjust our strategies. In terms of your second question about average unit retails (AUR), they are modestly up due to inflation, but this can vary by category. Generally, AURs are rising. The customer basket increased from Q1 to Q2 for the Sally side but is down compared to last year due to the effects of last year's stimulus spending in higher-cost categories. Overall, we feel strong about our hair color and hair care portfolio. Our biggest opportunity on the BSG side lies with our core vendors, helping them get back to full stock, especially for brands that customers rely on professionally. We’re working to ensure we have these categories fully stocked, including styling tools and cosmetics, primarily on the Sally side. We also see significant potential in our nail category reset across both BSG and Sally as we transition out of Q3 into Q4, presenting a more attractive layout for customers, simplifying the shopping experience, and introducing new brands at competitive price points while focusing more on gels and dips than on traditional lacquers. This represents a reinvention for us, and we are excited about it as part of our overall portfolio.

Next, we go to the line of Steph Wissink with Jefferies.

I wanted to just ask another question on your feedback that you're getting from your customer, but maybe talk more about the stylist community versus the individual customer. Any sense of how that community is feeling about their book of business, their bookings trends? Any change in consumer attitude around or approach around booking frequency?

Yes. Happy to answer that. Overall, our stylists are feeling reasonably confident they're seeing a good book of business come through, and I think that they believe that that's going to persist. The change from Q1 into Q2, I think in Q1, they were very worried about product availability as we were still all rebounding from COVID last year, and they likely stocked up in some of their shops a bit. What we're hearing from them now is they're back to buying a bit more just in time for what they think they need. Now that falls a little short when occasionally we might be short of product, we fully acknowledge that. But they are using that as a way to manage their own cash flow as they have their own impacts of inflation hitting them personally and things like that. For the most part, we're seeing our stylists take price increases along with price increases that are being passed along to them. It's a little harder choice for them, they do feel a nervousness in asking their customers to pay more. But in the grand scheme of the nature of a price increase they're taking versus the price of an overall service, which is hair color service could run close to $200. And they are making a few of those shifts as well. So overall, stylists are feeling pretty good. I think they're appropriately cautious as they're watching things around them as well. But they have not seen their book of business decline.

Okay. That's helpful. And my follow-up question is just on the competitive environment. Have there been any changes either from your direct competitors that maybe look like you in style? Or are there competitive threats from some of your brands going direct to the stylist community or to the consumer? Is that changing the competitive dynamic?

We haven't noticed any significant changes that we would highlight. However, we do consider our recent achievement of converting another 2,500 Regis storefronts to be serviced by our BSG division as a significant victory against our competitors and a step towards bringing that business in-house. While some brands are still opting to go directly to stylists, we haven't observed an increase in that trend. Typically, brands associated with both color and care continue to favor distributor models like CosmoProf, which are more focused on color products and stylist care. Therefore, on the professional side, we haven't seen any notable shifts or changes in behavior. As for the retail side, we also haven’t experienced any significant movements.

Next, we go to the line of William Reuter with Bank of America.

When you were discussing a little bit of the weakness in higher ticket items, do you think that this was just that there were a lot of these appliances that were sold during the pandemic and now they don't need another one of these? Or do you think it's more trading down within categories to lower-priced items generally?

I think the simple answer to that question is that several factors are driving it. We know that in the second quarter and into the third quarter last year, higher ticket items were purchased at a greater rate due to COVID, as people had extra cash from stimulus payments and were spending more time at home. Last year was a significant year to compare against. Additionally, for those shopping now, if your blow dryer is functioning, you might not be actively looking for a new one, especially if you feel more budget-conscious. Therefore, we believe people are more likely to buy only if they need something rather than making spontaneous purchases of new styling tools. The overall category is healthy, but we cannot fully assess how healthy it is because we encountered our own supply chain issues, which dampened the demand more than we would have preferred, as some components were difficult to obtain and our manufacturing was delayed. We see the trend shifting, and at this point, we think it has more to do with last year than this year, although we definitely believe that frugality is a genuine trend.

Okay. And then just a quick follow-up. You announced the redemption of your bonds. You don't have a leverage target at this point. Previously, there was going to be a refinancing. Is this a change in strategy where you expect to run the business with less debt in general? Or is this just the market and you will reserve the right to potentially issue debt in the future when credit markets are a little more stable?

Yes. I would say it's definitely not a change in the strategy. All along our capital allocation plan has contemplated potential debt pay down. And so I'll just kind of go back to our strategy, we are a very strong cash flow model. We've made a ton of progress on our balance sheet over the last couple of years. And we're just in a great position to be able to deploy cash. We ended Q2 with $227 million of cash on the balance sheet. That's more than $150 million more than our historical cash levels that we would typically carry on the balance sheet. So our net debt leverage ratio at near 2 is in a great place as well. So it gives us the opportunity to continue to prioritize our investments to grow the business. We've restarted our share repurchase program. And now we have the opportunity to pay off some expensive debt that we put on during the outset of COVID. We put that on as an insurance policy at 8.75%, it finally became callable in April. So we are taking that opportunity to remove that debt off the balance sheet. From a leverage ratio point of view, we're basically swapping cash for debt. So we'll stay in that kind of range.

Our next question comes from the line of Carla Casella with JPMorgan.

A couple of follow-ups. So on the Regis, can you give us a sense for the magnitude of that, the opportunity there? And will that make Regis your largest kind of partner in that? And is that margin accretive or dilutive for BSG?

And so I guess we'll step back and say, we're excited to have gained the Regis business overall. And it's a long list of salons, big component large customer profile. We haven't talked exactly about how much the 2,500 additional stores are going to contribute. I think we'll give you guys that information a little bit as we go into next quarter. But it's a meaningful growth of the business for next year that we're excited about. It will start in Q4 and ramp its way through. Regis is certainly one of our biggest chain accounts, which has been really nice to see them grow with us and see the benefit that what they understand is how cumbersome the distribution process can be, right, and how hard it is to manage that yourself or to manage it through smaller companies. Our ability to effectively step in and disintermediate that for them to make it a much easier business is something that we should think is a positive trend that these larger salon chains are really looking to take advantage of to take one more complication out of their business.

Have you disclosed how much of that BSG is large chain versus the smaller customers at Regis?

I don't believe that we have. I don't believe that we have. It's a healthy mix of the business. But if you remember, one of the largest portions of our business, which comes primarily from our stores is the independent stylist in the booth renter, which would still be the more predominant portion of our business.

Okay. But are there larger changes that are typically margin dilutive, or is that not the case because you don't have the store overhead?

There will always be a slight margin dilution. However, in terms of dollar value, the impact on our overall margin is not significant, especially since we do not incur the overhead associated with servicing those. While the distributor relationship may differ slightly, the financial gains will offset what would be a minor margin impact.

Maybe just to follow back on the top line. We talked about the first chunk of Regis business that we received some time ago, and it was about a 1% lift on to the BSG segment. So think about this as taking the remaining part of that distribution will certainly double and slightly more than that as we go forward.

I have another margin-related question regarding the Sally segment. It appears that Sally's gross margins are approximately 300 basis points higher than prepandemic levels. What are the main factors contributing to this? Is it sustainable? Has there been a change in distribution and e-commerce, or is some of it due to inflated full-price selling recently?

I would say it's twofold. You kind of got to go back about 1.5 years, probably maybe more than that. As we started into the pandemic, we took a different approach on our promo strategy, that fewer, deeper. And that really is what catapults us over into the solid 50-plus margins. We've held onto that ever since those promotions and approached promotions in a different way. You've heard Denise talk about several that we're approaching that we've been using over time and really driving great purchasing behavior and keeping that margin profile strong. On top of that, you have pricing that has been going on over the last several quarters as well. So the combination of those two is really what's driving the margin profile for Sally.

There are no remaining questions in the queue. Please continue.

Great. Well, I'd just like to thank everyone for taking the time to join us on the call this morning. And hopefully, it was a good illustration of what we're doing to really move the business forward for the longer term, but while we're working through some shorter-term dynamics. I also want to take a moment to thank all of our team members across the globe. They are what makes it possible for us to serve our customers, and we appreciate what they do every day. So with that, I'll thank you guys for joining, and we'll talk to you soon.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T conferencing service. You may now disconnect.