SBH 2022Q1

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'll 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/investor-relations. 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 Securities 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 in this call represent our views only as of today. And we undertake no obligations to update them. The company has provided a detailed explanation in reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. Now, I would like to turn the call over to Denise to begin the formal remarks.

Thank you, Jeff. And good morning, everyone. We're pleased to begin the new fiscal year with solid financial results, which reflect strong demand for our core categories of color and care, among both DIY enthusiasts and professional stylists. Our first-quarter performance also reflects our ability to navigate and effectively manage macro headwinds from inventory and supply chain challenges, which have enabled us to maintain healthy inventory levels. I'm proud of our team for continuing to prioritize our customers and remaining focused on delivering a superior experience at every turn, and I believe we are well-positioned to capitalize on the ongoing demand for our products and services. Notably, we're managing through the current Omicron cycle, which is having various impacts globally due to restrictions and closures in certain countries. As the Omicron variant gained traction in the final weeks of the quarter, we continued to prioritize the health and safety of our teams and our customers. I'm proud of how our teams rose to the challenge to serve our customers while navigating a number of mitigation actions around staffing, store hours, and fulfillment. In the first quarter of fiscal 2022, comparable sales grew 6.1%, net sales grew 4.7%, gross margin increased to 51%, and adjusted EPS was up 26% year-over-year. With this strong start to the year and favorable industry dynamics supporting our roadmap for 2022, we remain on track to achieve our full-year guidance. When we spoke to you last quarter, I had been on the ground for just over one month. With another 12 weeks of the company, I've had the opportunity to dive deeper into the organization and have found the customer-first culture, talent, and capabilities here at Sally to be remarkable. We're just beginning to leverage the infrastructure and extensive resources that were put in place over the past four years, as we execute against our four strategic growth pillars. As a reminder, these include: 1. leveraging our digital platform, 2. driving loyalty and personalization, 3. delivering product innovation, and 4. advancing our supply chain. I'm going to spend some time updating you on progress within each pillar. On the digital front, we're creating a robust omni-channel platform for our DIY enthusiasts and stylists. Our Sally and BSG customers are utilizing our full suite of services across ordering and delivery, which allows them to get products how and when they want it in as little as two hours. During the first quarter, we completed the work to connect our CosmoProf app to our BSG store network to further enhance our fulfillment options of BOPIS and our delivery for our Sally community. Additionally, we are seeing increased engagement on the education section of the refreshed BSG website, as well as improved customer satisfaction rates around functionality and ease-of-use. On the Sally side, we launched another convenience for our customers with virtual color consultants currently being piloted in approximately 35 Sally stores in the Dallas-Fort Worth area. By way of a live video call conducted on-site, this new service provides an incrementally higher level of touch and expertise for our Sally customers seeking color and care advice and education. Initial response has been positive and further strengthens our position as the leading expert in professional color. Overall, we're continuing to increase our digital velocity. This quarter, e-commerce sales increased 22% versus a year ago, driven mainly by BSG's refreshed e-commerce platform and represented 8.3% of total sales in Q1. During the most recent quarter, our Sally U.S. and Canada stores fulfilled 35% of e-commerce sales, as BOPIS comprised 19%, rapid two-hour delivery represented 10%, and ship-from-store accounted for 6%. As we continue to scale and optimize a full suite of omni-channel services for both our Sally and BSG customers, we believe e-commerce can reach 15% or more of sales in the coming years. Moving to our second growth pillar, loyalty and personalization. In the first quarter, approximately 75% of sales at Sally U.S. and Canada came from our loyalty programs. In fact, active member count continued to climb and stood at an all-time high at the quarter end. Additionally, approximately 9% of our BSG sales in Q1 came from our nascent and rapidly growing rewards credit card, as compared to 8% in the previous quarter. This represents yet another way we are becoming increasingly engaged with our stellar community, who look to us as the go-to resource for helping them profitably run their business. There's no question that our customers are our biggest assets and we have the luxury of knowing who our customers are. This advantage, coupled with our growing data and customer insights capabilities, will fuel more efficient marketing and position us to deliver increased personalization and create stronger connections with our customers, all of which support accelerating revenue and increased customer lifetime value. On the marketing front, we'll be investing further in digital marketing and social media campaigns to drive traffic and sales in fiscal 2022. As we aim to expand consideration and acquisition of new customers into the Sally Beauty funnel, we plan to broaden our footprint in three key areas that represent critical touchpoints for beauty discovery. First, we're investing in brand ambassadors who are viewed as authoritative voices on Instagram and TikTok that drive brand awareness and create content for their followers. Beginning in Q3, we'll also be building our own Sally community of DIY micro-influencers. This is a grassroots organic community building initiative that will incorporate smaller influencers to receive samples, new products, and invitations to events. Lastly, we are creating a DIY 2.0 education platform for YouTube that is expected to launch in the third quarter. Turning now to our third growth pillar, product innovation. The pipeline of innovation slated for fiscal 2022 is rich and we expect this to be a significant driver of growth throughout the year. A few noteworthy callouts: At Sally, our new vivid color line, Strawberry Leopard, continues to gain traction both in stores and online on our dedicated Strawberry Leopard website. Additionally, in the first quarter, we launched Dashing Diva Glaze, an at-home gel manicure, as well as the Iron Locks Turbocharged dryer, a high-end hair dryer that goes head-to-head with the best in tech brands at a more affordable price point. We have more innovation on the way with higher-end appliances in the second half of the year, and we'll also be introducing Strawberry Leopard hair care products to supplement the recent color launch. At BSG, the Q1 launch of the 4P Toning Shampoo was among the best new product launches we've seen from the Olaplex brand. Another key partner for us is Wella, which represents BSG's largest color brand. This month, we'll see an exciting launch from their sub-brand, Shinefinity, which adds glossing to color. This is expected to be the biggest launch for BSG in 2022. Overall, there is a great deal of excitement around innovation, and much more to come during the year. With the customer at the forefront of our strategy, our fourth and final growth pillar is supply chain. Our mission is to be in stock in color and care every time, and we've made great progress towards building a highly automated integrated supply chain network that will take us well into the future and allow us to meet growing demand. We're in the final phase of JDA implementation, and as of this week, the system will be up and running in all Sally and BSG locations. The remaining step is fully integrating with our North Texas distribution center. Once completed, we'll be positioned to leverage and scale our new capabilities across inventory forecasting, localized assortment, pricing, promotions, as well as shorten Ship2me performance for 15% to 20% of our customers. As we look ahead, even given the uncertainties that COVID creates, we continue to have a great deal of confidence in fiscal 2022 and believe we are well-positioned to continue driving top-line growth at structurally higher operating margins in the years to come. We are reiterating our financial outlook for fiscal 2022 and expect the business to generate strong cash flow and provide meaningful capital allocation optionality moving forward. In addition to the four growth pillars I discussed, we're focusing on building out additional opportunities that will fuel our business and create meaningful shareholder value over the long term. I'd like to express my thanks to our talented and passionate team who are committed to delighting our customers and drive our confidence in the future. With that, I'll turn the call over to Marlo to discuss the financials, and then we'll look forward to taking your questions.

Thank you, Denise, and good morning, everyone. We are pleased to start the new fiscal year with solid performance across our key financial metrics. For the first quarter, comparable sales rose 6.1%, and net sales increased 4.7%, reflecting strong consumer demand. As a reminder, effective this quarter, we replaced our same-store sales metrics with comparable sales, which includes sales from our full-service divisions and franchise operations, including any related e-commerce sales. First-quarter traffic and conversion remained fairly consistent with recent trends, as customers continue to shop less frequently but spend more when they transact with us. On the whole, traffic was down, but units per transaction, average unit retail, and average tickets all increased versus the prior year. Global e-commerce sales increased 22% to $81 million, representing 8.3% of total net sales. The year-over-year increase reflects ongoing strength, especially with our recently refreshed BSG e-commerce site, as we continue to scale our digital capabilities and utilize our new tools and resources to drive customer engagement. Looking at gross profit, first-quarter gross margin came in at 51%, up 70 basis points from last year, reflecting strength in both the Sally and BSG segments, which both delivered increases in product margin that were partially offset by higher distribution and freight costs. Moving to expenses, first-quarter SG&A totaled $386 million, up 6% versus a year ago. The year-over-year increase is primarily attributable to higher labor costs, increased expenses in our international markets related to reopening this year, and planned increases in marketing spend. As anticipated, from a rate perspective, SG&A increased modestly by 30 basis points versus a year ago. 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. Turning now to earnings, we delivered strong profitability in Q1. Adjusted operating margin increased by 70 basis points to 11.9%. Adjusted EBITDA margin increased by 50 basis points to 14.8%, and adjusted diluted EPS rose 26% to $0.63. Looking at segment results, at Sally Beauty, consumer demand was strong across the U.S., Europe, and Latin American markets. Comparable sales increased 4.4%, and e-commerce sales totaled $32 million for the quarter. For the global Sally segment, the color category increased by 5% while hair care grew by 17%. For Sally U.S. and Canada, vivid colors grew by 12% and represented 27% of our total color sales. Gross margin at Sally expanded by 70 basis points to 58.4% compared to the prior year, as we continue to generate solid product margins driven primarily by pricing leverage. Segment operating margin was also strong, up 50 basis points to 17.9% compared to the prior year. In the BSG segment, comparable sales increased by 8.6% as salons were essentially operating at full capacity in the U.S. and Canada. E-commerce sales totaled $49 million for the quarter, representing growth of 47% compared to the prior year. The color category grew by 12% while hair care was up 10% compared to the prior year. Gross margin and profitability at BSG improved significantly on a year-over-year basis. Segment gross margin was up 120 basis points to 41.1% compared to the prior year, driven by improved product margins as a result of pricing leverage, while operating margin expanded by 150 basis points to 14%. Moving to the balance sheet and cash flow, we ended the first quarter in strong financial condition, with $298 million of cash and cash equivalents and a zero balance outstanding under our asset-based revolving line of credit. At December 31, inventories were approximately $1 billion, up 12% versus a year ago. Now, as we discussed on our last earnings call, we plan to continue building inventory levels and have made the strategic decision to pull forward purchases to mitigate ongoing supply chain disruptions. We expect our inventory levels to remain elevated in the short term and come down in the second half of the year. For the quarter, cash used from operations was $5.7 million, driven by the expected carryover of working capital requirements from the fourth quarter of fiscal 2021, as well as the planned buildup of inventory during the first quarter of fiscal 2022. Capital expenditures in the quarter totaled $26.4 million. We expect the business to generate strong operating cash flow in fiscal 2022, primarily in the second half of the year. Importantly, we remain focused on prioritizing strategic growth investments, as well as returning cash to shareholders. Last quarter, we stated our intention to restart our share repurchase program. During the first quarter, we used excess cash to repurchase 3.7 million shares at an aggregate cost of $75 million. This leaves more than $600 million remaining under our current authorization. At the end of the first quarter, our net debt leverage ratio was 1.87 times. We're pleased to have entered the year with strong momentum as we remain focused on our core growth pillars to drive the business forward. We are reiterating our full-year 2022 outlook against the backdrop of a dynamic macro environment, including the recent Omicron surge and supply chain challenges. While we experienced some impact on traffic and sales in January, we expect this surge to pass quickly, similar to recent waves. In addition, with nearly two years of pandemic experience under our belts, our teams know how to execute and navigate during these dynamic periods. Our guidance for 2022 includes the following: net sales growth in the range of 3% to 4%, 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 basis points to 60 basis points, GAAP operating margin growth of 90 basis points to 110 basis points, and adjusted operating margin approximately flat to fiscal year 2021. We appreciate your time this morning. Now I'll ask the operator to open the call for Q&A.

Thank you. Your first question will come from Rupesh Parikh with Oppenheimer. Your line is open.

Good morning and thanks for taking my question. Just going back to the commentary on the variant, it sounds like it didn't have much of an impact on your Q1 but you expect it to have an impact on Q2. Is that the right way to think about that?

Good morning, Rupesh, and thanks so much for asking the question. We certainly saw a little bit of impact at the end of our first quarter, particularly the last two weeks of December. Those were instances where we just had employees who needed to be out sick, which created a ripple effect. We've seen a little bit more impact in January, but the big part for us is it looks like this wave increased very quickly and is also coming down quite quickly. We've really figured out how to navigate our way through this. While we haven't seen as great a result in January as we might have hoped, we're very pleased with where we are, and I think we're well set up for the rest of the year.

Okay. Great. Maybe just a related question to that. I know with your last call, you guys mentioned that you expect sales to be stronger in the first half of the year than the back half. And I think you also mentioned that you expect the majority of expansion in the back half of the year on the gross margin line. If you can just update us on how to think about the quarterly cadence for sales and margins going forward.

Yeah. Let me take you through the various lines of the P&L starting with the sales. As we've mentioned, Q1 was a great start to the year, so feeling really good about the full year. Given the surge of Omicron in January, we are looking at Q2 sales being a little bit lower than Q1. Historically, Q2 hasn't been our lowest volume quarter, so we do have that planned down a bit. Still growth, but the growth just on a year-over-year basis won't be as strong as Q1. As I mentioned, we see the surge come in during the quarter, but we also expect and are actually starting to see it taper. We think that we're starting to see cases peak in many geographies. So we expect to move past it, but as I mentioned, Q2 from an overall perspective will be a little bit lower from a growth rate perspective than Q1. When we look at the back half, those comparisons get a lot tougher when we're looking at it from a year-over-year basis. Keep in mind, last year, at the beginning of the year, we had significant closures and restrictions, and then that starts to loosen and we go into a reopening phase in the back half of the year. So, we will have more normalized comparisons when you look at the back half. All that said, our full-year comps, our full-year outlook contemplates all of this, and we have confidence in the full-year guidance that we have. When we look at the gross margin line, we had a really strong performance in Q1, having good benefits from pricing leverage that we were able to execute, so we're looking at a full-year basis expansion of 40 to 60 basis points. We see that as relatively consistent from here on out as we look at the quarters. And just to finish out with the SG&A, from a full-year basis, we do expect as we've highlighted in the past, to increase year-over-year, there will be an increase in dollars and then the rate will be up slightly. Our expectations on this line take into account the inflationary pressures we've been talking about mainly from labor and we're seeing high freight costs as well. We have increased expense plans in our international markets as we reopen those markets in 2022. We are also investing in our growth initiatives, as well as marketing. So, looking to get back to more normalized marketing rates, we did have increased marketing dollars in Q1 and made some progress towards those more normalized rates but still have more room to go there. So we'll still work towards increasing that investment as we go throughout the year. So, as planned, SG&A dollars are expected to be relatively consistent from Q2 on out, with a little bit of a step-up from Q1 to Q2. From a full-year basis, that puts us in a great position to deliver the full-year operating margins pretty much in line with where we've been last year.

Okay. Great. Thank you for all the color.

Thank you. Our next question comes from the line of Stephanie Wissink with Jefferies. And your line is open.

Thank you. Good morning, everyone. I had a follow-up on your comments on pricing. I'm wondering if you're willing to quantify the level of price increases that you took and saw in the first quarter. Any incremental pricing you plan to take in the second quarter? Just trying to reconcile some of the inflationary pressures within the gross margin line.

This is Denise. I'll just start with some broader commentary, and then Marlo can fill in any additional details. I think importantly, for us, the way that we're really thinking about pricing is ultimately looking to stay in line with the market, cover costs that we see coming through, and then strategically price where we can. We are really able to do that with the new set of tools available to us in a stronger set of analytics around price elasticity and what we're seeing. So, while pricing is a very important lever for us, we take it quite prudently to ensure that we're making those choices and staying in line with what the consumer expects. In general, our price inflation has been trending towards what CPI has been. We're not particularly outsized, so no surprises there from the customer perspective and look forward to continuing to use the tools to do more as we go. The key point I would mention is that in the first quarter, our sales growth was balanced. It came from both price and volume improvements, which is what we're really looking to deliver.

Yeah. I guess just to reiterate, Q1 expansion of 70 basis points was driven largely by the pricing actions that we took. We're also having to overcome the inflationary pressures, both in the margin line, as we talked about on the SG&A line, but we also have rising freight and distribution costs that we're overcoming on that margin line. So, I'm really pleased with the delivery by the team to be able to expand the margins. They were strong at both Sally and BSG. And just in terms of the way that we think about it going forward, I think to Denise’s points, those are our pricing objectives, but I think what gives us confidence is just our ability and our advantages to take advantage of when the market moves; we can move. Some of those things are, if you think about our core categories, they're highly inelastic. We are in highly differentiated core color and care product assortments. At Sally, we're the only ones that really do pro colors for home use. 45% of our assortment is from owned and exclusive brands. On the BSG side, we're the largest wholesale distributor to the stylists, and we have over 50% of those sales coming from exclusive brands. We have a highly differentiated assortment, we have sticky and loyal customers; it's a unique position in the market that we're able to leverage. Denise, would you like to add anything?

Very helpful. If I could just follow up on the loyalty and marketing. I think that was one of your big strategic pillars. Talk a little bit about the marketing investment you made in the quarter. I know traffic was down, but other KPIs were up. Maybe help us reconcile how you're thinking about the return on investment on that marketing investment and also on the loyalty program advancement that you've seen. Thank you.

Absolutely. One of the things that I came into the company and was so impressed by is the number of our customers that we actually know and can associate with about 75% of our sales in Sally and 100% in BSG. Our opportunity with our marketing investment while we continue to reach our existing customers, the big opportunity for us is to put more people at the top of the funnel and understand who else we can attract. So, when you think about the investments that we made in Q1, it really was around digital and performance marketing and the pushes that we could do. Importantly, I think we did try to push a little bit harder up the funnel versus just the customers that we knew. When we think about the return on investment there, we know it's a little bit lower return when we go after the top of the funnel, but we do want to see that customer base increasing. A strong point to that is we finished the quarter with a record level of loyalty customers in our pool. That number went up again from the end of Q4 to Q1, and we have over 17 million customers on the Sally side that we can talk to. About 9% of our sales on the BSG side are now coming through our credit card. So, where we're trying to reach people and get them to be stickier, the metrics that we can measure give us confidence in the trajectory that we're on.

Thank you very much.

Thank you. Our next question comes from the line of Oliver Chen with Cowen and Company. And your line is open.

Thank you. Hi, Denise. The Sally Division comp was a little bit softer relative to expectations. What are some catalysts for Sally Beauty going forward? As we think about the average unit retail and sales performance across the brand, what should we expect there?

Oliver, I think unfortunately you're breaking up. Could you try to repeat your question?

The Sally division comps ahead and key drivers of the Sally divisions?

Certainly. If we think about the business and how our comp sales performed in the quarter, we saw particularly strong sales on the BSG side of the business as salons were really fully reopened, lapping last year where there was still a fair amount of challenge for a number of stylists in a number of states in operating their businesses. When we think about our performance at Sally, we should feel quite good about it. The performance was consistent across geographies. Sally is the business where we saw a little bit more slowdown at the very end of December with the uptick in COVID, and we needed to have a few shorter store hours and things like that. Overall, we felt good about what we were lapping and where we came out with that business. Care was particularly strong in delivering in the quarter, saw good growth with our Strawberry Leopard products, and continued growth with color, all of which indicate that we have a very healthy business in that Sally chain moving forward. Furthermore, our Europe and Latin America businesses were actually up against a little bit easier compares to last year. This helps their numbers in the beginning of the year, which tapers as we go through the year.

Thank you.

Thank you. Next, we will go to the line of Simeon Gutman with Morgan Stanley. And your line is open.

Good morning, everyone. I wanted to follow up first on Omicron in January. Can you give us a sense of now that the back half of the month seems like things have gotten better? Are you seeing a recovery that's as rapid as the variant's rise? Can you talk about the cadence of VSG versus SBS and how Omicron was handled by the consumer?

Sure. I'll start, and then if Marlo wants to add anything. In terms of what we're seeing, I think in the last week or so, you can definitely see an improvement in the traffic trend. We also see an improvement in the amount of our associates who might be out sick or experiencing other challenges in their lives. So, we do see that normalization starting to happen. We saw a fairly high number of case counts, so I won't say it's completely behind us yet. I think there's a little bit more to go. In general, the Sally business, being a retail-focused operation, has a lot more stores and a lot more team members operating in that environment, and it felt a little more pressure than the BSG business did. The stylist business stayed pretty sticky in terms of our sales and progress as we've navigated through Omicron, not to say that there wasn't a dip, but I think we’re seeing the same general pattern of ups and downs, with the BSG trend being a little less noticeable than what we saw on the Sally side. The unique point this time in Europe is that compared to prior times, we saw true lockdowns or shutdowns in a very small part of our geography. The Netherlands, for example, actually locked down again; but compared to other variants, there was regular business operating for a lot of our European markets this time. That was a pleasant surprise just in terms of how the variant is being managed.

Thanks for that. And then my follow-up is, can you talk about the elasticity in both of the businesses? On the surface, and this is just an observation, it looks like BSG seems to be more inelastic given how the top line is performing and some of the gross margin flow-through. Whereas it looks like SBS has some pullback in units. I know you said units in AUR were up. I don't know how you were classifying those across the brand. And then as a follow-up within that follow-up, is there anything you can share with your full-year guidance? Is anything changing between BSG and SBS based on how Q1 played out?

Let’s start with the inelasticity question. I would say from both businesses, we have some advantages in terms of the inelasticity, but in different ways. If you think about the Sally side, they are the only provider of pro color for home use, and it has at least 80% market share when you look at those statistics. So, where does the customer go if not Sally? Their choices would be either to trade down to box color, which yields a lower-quality result, or trading up to a salon treatment, where you're talking about moving from an average all-in cost of $7 or $8 to buying a tube of color, and adding the necessary tools for a total cost of $15 to $150 for a professional service. For a $5 difference on a $10 or $15 purchase, that's where we see a stickiness in the loyalty of our Sally consumers. To summarize, once we give them the confidence and teach them how to use the product, they're very loyal. Yes, we have moved prices a great deal over the last six months to a year, but we haven’t seen a significant change in customer behavior. Regarding the full-year guidance, we haven’t changed much based on Q1 performance; however, we anticipate a more normalized comparison for sales, given the surge of Omicron in January compared to last year, which also had restrictions and closures at the start. Therefore, we feel confident in our sales projections.

Okay, thank you, both.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. And your line is open.

Great. Thanks. Good morning. I wanted to follow up a little bit, put a finer point on your expectations for this quarter. Do you have a sense of when you think you can get back to what your pre-Omicron expectations were? Given the factors such as inflation, macro trends, and the fall-off from stimulus?

I'll start with the first part, which is where we are and what did Omicron do to us that we didn't know going into the planning process. We came into this year expecting the world to be dynamic. We've been living this up and down choppiness for two years now. So, we had expected some pressures, whether that be labor disruption, pricing disruption, or uncertainties around the pandemic. I don't think we're seeing a whole lot of difference in the way that we're thinking and planning. From my perspective, we believe there's a bit more pressure in January, but we have become adept at navigating these situations. Having said that, in regard to the store optimization plan that you mentioned, we continue to focus on where we can transfer sales effectively. All our stores are generally profitable. By shifting sales and reducing costs, we can support the business overall. We've been running a test that continues to yield positive results, as we look at about a 90-store closure while still assessing further optimization of our stores.

Got it. That's helpful. Given that some customers in SBS are not members of your loyalty program, can you provide more insight into why they might not be joining? Have you done any diagnostics about why they may not be joining, or are they just new to the store? I'd love a bit of color on that.

There could be all types of reasons. One, I think when you first see customers come into the store, if they're a new customer to Sally, we wouldn't expect them on day one to sign up for a loyalty program. We do continue to have new customers enter the store on a regular basis, and that's certainly a fraction of it. There are also some other customers who simply aren't as comfortable signing up for our loyalty program in terms of sharing information. We recognize that there will always be a population of customers who are not interested in participating, which is fine with us. We appreciate those customers who come in and shop with us. Generally speaking, customers who are not loyalty members will have smaller baskets than those who are. Our best loyalty customers enjoy larger baskets and more frequent visits. We don’t see any specific issues with the design of the program; it feels more like macro factors influencing why they haven’t signed up.

Understood. Thank you so much. Appreciate it.

Thank you. Our next question will come from the line of William Reuter with Bank of America. And your line is open.

Hi. So, I have two questions. The first is, you mentioned that you’ve been pushing through all the price increases that vendors have been sending your way. What types of increases in price have you seen or are you seeing on a year-over-year basis at this point?

I'd say just one thing to point out to you. From vendor price increases, that is a very normal aspect of business. Vendors do this at least annually; sometimes more often than that. So, when you think about it on the BSG side, it's a normal recurring part of their operation. In terms of the actual amount, again, it's mostly keeping up with CPI and other inflationary pressures.

I would say the increases have been slightly more frequent than in past years, with a higher tendency to implement them more than once a year. The shopping behavior, however, hasn't changed, especially for the stylist. Their main concern is to keep their clients happy, and they are able to do that through the products that they have confidence in. Again, they are very loyal to our brand.

I guess the 6% comps indicate units were relatively flattish; is that fair?

No, to clarify, Denise mentioned that sales growth was balanced, coming from both price and volume.

The second question is that your net leverage is down below two times. You repurchased $75 million of shares in the quarter. What does this say about the pace of your share repurchases? How focused are you on getting to a target of 2.5 times?

So maybe to rephrase, I’m not sure we've put a target out there. I think what we would say is a leverage ratio at 1.87 is a great place to be. We are really pleased with where we are. I would just go back to the overall. Our business has such a strong cash flow generating model, and our teams just really came through the pandemic. They’re managing well to produce a really strong balance sheet. We’ve got $300 million of cash on the balance sheet, and historically, we would usually run around $200 million, so we definitely have some excess on our balance sheet. We don’t have anything outstanding on the ABL, so we're positioned well in terms of deploying excess cash. We will continue to prioritize our growth initiatives. We did, as you mentioned, restart the repurchase program. We’ve deployed $75 million, which represents about 3% of the company’s shares. We have around $650 million left on that program. I would add that we have opportunities to optimize our capital structure as well. You’d see this in the past where we might generate additional interest savings on the P&L. Putting all that together, especially when considering our free cash flow generation—we're predicting $200 million for this year, back half loaded—sets us up well to continue returning value to shareholders through share buybacks while optimizing our capital structure.

Great, thanks for taking the questions.

Thank you. Our next question comes from the line of Jenna Giannelli with Goldman Sachs. And your line is open.

Hi there. Thanks for taking my question. On the inventory balance, you're bringing up a healthy amount year-over-year and said you're comfortable—are very comfortable with it now. Just curious if you can comment on how that looks across categories and if there are any areas you're looking to still fill out or replenish given some of the industry supply chain headwinds?

I'll start and let Marlo jump in. I think that we're really pleased with what we've been able to pull forward to ensure that we can service our customers. When we think about where some of that inventory really went, it fell into our core products; it's our fastest-moving products. This heavily supports our BSG business around color and also our Sally business on the color front, but with a keen focus on that core category of color to make certain that we're in stock across the entire line for what people are looking for. As we manage demand, we have a few categories where styling tools and some other products might be a little lower than where we need to be. But as we are able to get those in and into the system, we believe that those needs will be offset by that color inventory being appropriately utilized across the business as we move through the quarters.

Okay. Excellent. Thank you. You emphasized the strong market share, particularly on the Sally side around 80%. Can you comment a little more on the broader competitive landscape, including mass retailers or even Amazon professionals who have been quiet? Any updates on either of those and the broader competitive landscape?

There really hasn't been much new news. We feel like we're watching all the competitors; they are certainly all the same players who have been out there before, and we keep an eye on what's happening there. We haven't seen any of them noticeably step closer to what our core offerings are. When we think about how to position ourselves for the future, we want to expand our vision on growth opportunities now that our transformation is complete. We have the data and analytics we need to drive our business forward. So while we're monitoring competitors who might be looking a little more closely at areas we serve, we also intend to seek out new areas of growth for ourselves.

Makes sense. Thank you so much.

Thank you. And with that, we have no further questions. Speakers, if you have any closing comments.

I'd just like to thank all of you for joining the call today. Importantly, I'd like to thank all of our associates around the world. It is never without a lot of effort that our customers are so well-served, and I appreciate all that they do to serve us well and drive our profitable business and growth in the future. So, thank you all for joining the call today.

Thank you. 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.