Sally Beauty Holdings Q4 2026 Earnings Call Transcript

Sally Beauty Holdings (NYSE:SBH) reported fourth-quarter financial results on Tuesday. The transcript from the company’s fourth-quarter earnings call has been provided below.

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Summary

Sally Beauty Holdings reported fiscal 2026 full-year net sales of $3.73 billion, with a 9.5% increase in adjusted diluted EPS to $2.08 and cash flow from operations surpassing $300 million.

The company achieved 4% new customer growth in the U.S. and Canada, with e-commerce sales growing 10% year-over-year, driven by advancements in digital capabilities and marketplace presence.

Sally Beauty expanded its product categories and completed its ‘Fuel for Growth’ program, realizing $120 million in savings, and used robust cash flow for growth investments, debt reduction, and $113 million in share repurchases.

For Q4, net sales were $953 million, with adjusted gross margin at 51.9% and adjusted diluted EPS increasing 13% to $0.62.

The Sally segment saw a 2% increase in comparable sales, with strong performance in nail and fragrance categories, while the BSG segment saw a slight decline in comparable sales but improved margins.

Strategically, the company is focusing on leveraging AI, expanding digital ecosystems, and launching innovative products across various categories, including a relaunch of the Ion Care line in fiscal 2027.

Guidance for fiscal 2027 includes net sales between $3.77 and $3.81 billion and adjusted diluted EPS of $2.20 to $2.30, with expectations of 1% to 2% comparable sales growth.

The company plans significant investments in growth initiatives like Sally Ignited, with 100 new locations planned, and expansion of the Happy Beauty e-commerce platform and physical stores.

Full Transcript

OPERATOR

Good morning everyone and welcome to the Sally Beauty Holdings conference call to discuss the company’s fourth quarter and full year fiscal 2026 results. All participants have been placed in a listen-only mode, and after management’s prepared remarks there will be a question-and-answer session. Additional instructions will be given at that time. Now I would like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty.

Jeff Harkins (Vice President of Investor Relations and Treasurer)

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 Adrianne Lee, Chief Financial Officer. Before we begin, I would like to remind everyone 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 on 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 adjusted 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.

Denise Paulonis (President and Chief Executive Officer)

Thank you, Jeff, and good morning, everyone. Fiscal 2026 was a significant year for our company as continued progress across our four key growth drivers delivered sales and earnings growth while strengthening our foundation for the future. Our team’s strong execution throughout the year, while keeping our customers at the center of everything we do, drove full-year net sales of $3.73 billion, adjusted operating margin of 9%, a 9.5% increase in adjusted diluted EPS to $2.08, and cash flow from operations of more than $300 million.

I’m proud to share a few meaningful highlights from the year. We generated 4% new customer growth at Sally U.S. and Canada through the continued advancement of our marketing and customer analytics capabilities. We strengthened our digital capabilities through personalization, modernized apps, the launch of social commerce, and a robust marketplace presence, which delivered full-year e-commerce growth of 10%. We increased our TAM in both our Sally and BSG segments by entering compelling new product categories that leverage our strengths and beauty expertise.

We expanded our Sally Ignited initiative store count from 30 to 80 stores. We successfully completed our three-year Fuel for Growth program, which delivered cumulative run-rate savings of $120 million across gross margin and SG&A, while also embedding operational discipline and expense rigor into the organization. And lastly, we utilized our robust cash flow to invest for growth, pay down debt, and repurchase shares, all of which returned value to our shareholders.

On a full-year basis, we repurchased $113 million of stock and repaid $80 million of debt while investing in our key growth drivers. I’m also pleased to share that we wrapped up the year with strong fourth quarter performance. Net sales totaled $953 million. Comparable sales were up 1%, adjusted gross margin remained healthy at 51.9%, adjusted operating margin reached 10%, and adjusted diluted EPS increased 13% to $0.62. Importantly, we continue to deploy our strong cash flow to invest in the business, repurchase shares, and pay down debt.

Turning to our Sally Beauty segment, we posted the fifth consecutive quarter of positive comparable sales growth. Segment comparable sales increased 2%, highlighted by 3.8% growth at Sally U.S. and Canada, with comparable transactions up 1% and average transaction value up 1%. The results reflect continued strength in both new customer acquisitions and retention as our marketing, personalization, and Licensed Colorist on Demand initiatives continue to fuel engagement, and in the fourth quarter, more than 40% of our Licensed Colorist on Demand customers were new to Sally.

In addition, LCOD customers continued to outspend non-LCOD customers by 85% while shopping two times more frequently than non-LCOD customers. From a category perspective, we maintained our leadership position in color, delivering sales growth of 7% on a total segment basis and 9% at Sally U.S. and Canada, while the care category was down 7%. We saw encouraging trends following our August category reset. Textured hair and men’s grooming were standout performers, while key national brands such as Sauce Beauty, Soapbox, Level 3, and Sexy Hair all saw notable improvement in the final weeks of the quarter.

The primary area of pressure in care can be traced to own brands, driven by the planned relaunch of our Ion Care line in fiscal 2027, as well as short-term supply challenges related to a handful of SKUs, both of which created a bit more pressure on the quarter than anticipated. Looking ahead, we expect to see improvement in the care category during fiscal 2027 as we relaunch Ion, expand assortments, bring in newness, improve in-stocks, and continue the recent momentum in men’s care.

Looking beyond color and care, the nail category delivered positive results in Q4, up 2% as our customers continued to lean into the artificial nail trend, and we saw impressive performance from our fragrance category. From a channel perspective, we saw strong performance in both stores and digital during Q4. Total Sally segment e-commerce sales increased 13%, while Sally U.S. and Canada increased 19%, driven by continued strength in marketplaces as well as our redesigned Sally app, which is exceeding expectations across the board.

Turning to Q4 performance in our BSG segment, comparable sales declined 0.6%, reflecting a significant improvement in trend from our third quarter. Appointment books were busy and color services were strong, while add-on services remained relatively inconsistent. From a category perspective, color was up 2% while care was down 3%. The nail category continued to gain momentum in the quarter and was up 11%, fueled by refreshed assortments, including Kiara Sky and The Gel Bottle, a highly influential U.K. brand known for its cult-classic Builder in a Bottle Gel Polish.

Digital was a highlight at BSG in the fourth quarter. Our new app drove strong engagement and increased conversion. Segment e-commerce sales increased 3% on a year-over-year basis. As we continue to activate our strategic initiatives to drive sales growth, it was great to see BSG expand operating margin by 50 basis points to 12.7% in fiscal 2026, including growing both operating earnings and operating margin in the fourth quarter. As we turn the page to fiscal 2027, we have confidence in our ability to deliver profitable growth, continue to invest in the business, and build increasing value for all of our key stakeholders. This starts with leveraging our competitive differentiators. Our portfolio of salon-quality products and reach across both consumer and professional markets uniquely position us to deliver expertise, education, and continuous innovation. At Sally, this includes a mix of own and national brands, including a vast assortment of over 20 color brands supporting over 1,200 shades of color.

At BSG, this includes numerous professional brands that are under exclusive limited distribution agreements, with an unmatched assortment of over 20 brands supporting an impressive 3,000 shades of color. Importantly, our four strategic growth drivers continue to shape our path forward and support our three-year financial algorithm. As a reminder, these include understanding and activating the customer, unlocking and harvesting digital value, differentiating with product assortment and innovation, and accelerating new growth pathways. Underpinning these focus areas, we plan to increasingly embed AI across our operations and customer engagement to build enhanced capabilities and drive organizational efficiency.

Equally important, we will continue to deploy our strong cash flow into high-return growth opportunities and maintain capital allocation priorities that continue to return value to shareholders. There are a number of initiatives in each of our business segments, each of which supports a key strategic growth driver. I’d like to share a few I’m particularly excited about this year. I’ll start with the Sally segment. We continue to advance our marketing, CRM, and personalization capabilities, which have been fueling customer engagement and new customer acquisition. Localized events and activations have become a cornerstone of our strategy, putting Sally at the center of beauty culture in new and innovative ways.

Our Color Fest celebrations have been a notable success, generating meaningful results and landing Sally Beauty as a finalist in the Best Event category for the Beauty Matter Awards. Our latest activation, held across college campuses throughout the Southeast during fiscal Q4, attracted thousands of participants, generated more than 135 million social impressions, and brought new members to our Sally Rewards program. We will be building on this excitement in fiscal 2027 with plans for our next Color Fest event in the spring.

More to come on this later in the year. Turning to the digital opportunity at Sally, after a standout year of 18% e-commerce growth in the Sally segment, we’re building on the momentum of fiscal 2026 with further app enhancements, a new hair color virtual try-on feature, the launch of an AI-assisted shopping agent, and marketplace expansion, including the rollout of store marketplaces to Canada. Looking at product innovation and category expansion, we have an exciting roadmap planned for fiscal 2027 across both our core categories and newer TAM expansion areas. First and foremost, our teams will be focused on sustaining momentum in our core color category while driving improvement in care through newness in color-safe care, textured care, and the relaunch of Ion, as well as professional-quality men’s solutions and in-stock improvements. We also have a significant opportunity to build upon our success in the fragrance category while unlocking opportunities in cosmetics and skin care.

Recent initiatives to test, learn, and scale leveraging our Sally Ignited and Happy Beauty footprints are proving successful. By way of example, after testing L.A. Girl cosmetics in 40 Sally Ignited locations, we are rolling out the brand chain-wide in the second quarter. L.A. Girl is experiencing a surge in popularity due to a perfect storm of TikTok virality, a shift towards bold artistry trends, and the consumer trade down from luxury brands to high-performing value options.

This is a great example of our ability to keep Sally at the center of beauty culture. We’re incredibly excited about the potential to expand our total addressable market and drive incremental sales through both innovation and category expansion. Turning now to Sally Ignited, we accomplished a great deal in fiscal 2026, which was a year focused on laying the foundation for future growth and scale. Our core KPIs—traffic, dwell time, UPT, and ATV—trended upward throughout the year, driving robust sales performance, especially in nails and fragrances. Additionally, we refined the remodel process, reducing the store closure time from eight weeks to two weeks, which creates less disruption to our consumers.

In fiscal 2027, we will be focused on building a powerful growth engine for the future. Our plans call for approximately 100 new Sally Ignited locations nationwide, comprised of both new stores and remodels across standard and large formats. The cadence of openings is expected to be second-half weighted. We’re excited to take this from pilot to scale as we accelerate towards 180 stores by year-end and build the customer experience of the future. We’re pleased with the positive trendline we’re seeing across our KPIs.

Assuming this momentum continues, we will be well positioned to scale Ignited beyond fiscal 2027 in the range of 200 locations annually. Longer term, we continue to believe there’s the opportunity to convert up to 1,500 locations, or two-thirds of the Sally U.S. fleet. Looking now at our BSG segment, key focus areas that we expect will move the business forward include investing in personalization, unlocking digital, and fueling the innovation pipeline. Underpinning these initiatives, we recently completed a comprehensive pro customer research study to get a fresh perspective on how pros work, their motivations and preferences, and the choice drivers for where they shop. We’re in the process of mining the insights as we look to refine our customer strategy and strategic priorities for BSG, and we’re excited to partner with key vendors to leverage this proprietary research to ultimately grow together.

Among our top priorities is leveraging our successful Sally playbook to unlock customer data and analytics to drive increased personalization across our marketing and digital channels in BSG. On the digital front, we will develop an exclusive digital ecosystem to expand BSG’s relationship with stylists and increasingly integrate into the stylist’s daily life. This includes building a hub that centralizes education, community, and services. Additionally, we will be adding AI-assisted search capabilities, the same as we are doing for Sally.

Turning to innovation, we will continue to lead with color by dominating gray coverage, growing vivids with brands like Danger Jones and Pravana, and leading with education to own the stylist relationship. Additionally, glossing will be an important trend in the color category in fiscal 2027, and we have a strong pipeline of innovation led by Wella Shinefinity and newness from Schwarzkopf, Goldwell, and Danger Jones. On the care side, hydration and new technology for hair health are emerging as key areas of focus among many of our brand partners, including K18, Amika, Joico, and Wella.

In Skin and Spa, we’ve established a presence in the category anchored by key brands, Image and Matter of Fact, across 500 doors. In fiscal 2027, we’ll be expanding our clinical skincare offering with product launches from new brand partners such as Glymed and Olflex Skincare, while also focusing on CRM initiatives to drive repeat purchases among estheticians. Before wrapping up, I’ll briefly touch on our Happy Beauty initiative. I’m excited to share that we successfully launched Happy Beauty’s e-commerce site at the end of our fourth quarter. Moreover, from the original 20 stores, we have closed or converted nine non-mall locations to Sally and BSG stores, leaving us with 11 stores at the end of September. During our first quarter, we anticipate opening 10 new mall stores nationwide, most of which will open prior to the holiday season.

We are doubling down for holiday with these additional mall locations, e-commerce, and an expansive marketing and social program. The tagline for our holiday campaign, From Happy With Love, is aimed at establishing Happy Beauty as a key destination for beauty gifting. We’re supporting the campaign with promotions and merchandising that lean into our roots as an indie brand headquarters and our authority in key categories, including K-beauty and fragrances.

We look forward to seeing how customers respond to these new locations and the overall HBCO experience during the upcoming holiday season. Entering our new fiscal year, we will continue focusing our efforts and investment on the initiatives that are strengthening our foundation and positioning us to deliver long-term profitable growth, all of which is guided by our vision to inspire a more colorful, confident, and welcoming world. In fiscal 2026, we realized this vision by bringing new customers to the Sally and BSG segments, deepening our relationships with existing customers, and delivering innovation, education, and expertise to inspire product discovery and self-expression.

We are confident that our greatest opportunities lie ahead. We have proven and talented teams, our strategic initiatives are delivering compounding benefits, and our fiscal 2027 guidance is consistent with our three-year growth algorithm. We greatly appreciate the hard work and dedication of our associates and the ongoing support of our shareholders. Now I’ll turn the call to Adrianne to discuss the financials.

Adrianne Lee (Chief Financial Officer)

Thank you, Denise. We are pleased that our competitive advantages and key growth drivers enabled us to deliver strong top and bottom line results for fiscal year 2026. These results and our talented teams give us confidence in our ability to deliver another year of financial results in line with our long-term financial targets. With that, I’ll walk through our fourth quarter results. Fiscal Q4 consolidated net sales totaled $953 million, up 0.6%, including operating 32 fewer stores, partially offset by 10 basis points of favorable impact from foreign currency translation. Consolidated comparable sales increased 1%, including notable growth of 3.8% at Sally U.S. and Canada. Global e-commerce sales increased 8% year over year, an impressive 12 consecutive quarters of growth. We maintained a healthy gross margin of 51.9%, 30 basis points below prior year, but in line with our expected operating range.

Turning to operating expenses, Q4 adjusted SG&A totaled $400 million, a decrease of $5 million versus the prior year, primarily reflecting lower legal expense and $2 million in Fuel for Growth benefits, partially offset by higher rent and advertising expense. To drive performance during the fourth quarter, we captured pre-tax Fuel for Growth benefits of $7 million across gross margin and SG&A. This marks the conclusion of the three-year Fuel for Growth program, which delivered against its target of cumulative run-rate savings of $120 million.

Equally important, the program instilled new discipline and rigor across the organization with benefits that will continue well into the future. Turning to earnings, positive comp sales, healthy gross margin, and disciplined cost management enabled us to deliver strong earnings results. Adjusted operating earnings totaled $95 million in the quarter, an improvement of 7% versus a year ago, with adjusted operating margin expanding 60 basis points to 10%. Adjusted diluted earnings per share increased 13% to $0.62.

Moving to segment results, for Sally Beauty, net sales grew 1.6% to $550 million and operating earnings increased 2.6% to $88 million. The net sales increase included operating 34 fewer stores, partially offset by 30 basis points of favorable impact from foreign currency translation. We delivered comparable sales growth of 2% driven by transaction growth of 1.1% and an increase in average ticket of 0.9%. For the global Sally Beauty segment, color grew 7% while care was down 7% versus the prior year.

Sally e-commerce delivered another quarter of robust performance with sales up 13%, representing 10% of segment net sales. Sally U.S. and Canada e-commerce sales grew a remarkable 19% in the quarter. Gross margin at Sally came in at 60.6%, down 70 basis points versus a year ago, driven by lower product margin primarily related to category and brand mix. Segment operating margin expanded 20 basis points to 16.1%. In the BSG segment, net sales decreased 0.8% to $402 million. Comparable sales declined 0.6% with transactions down 1% and average ticket up 0.4% versus prior year. From a category perspective, color was up 2%, nails grew 11% while care declined 3%. BSG e-commerce sales increased 3% to $59 million and comprised 15% of segment net sales for the quarter. BSG gross margin of 40% was flat versus last year and segment operating margin increased 30 basis points to 12.9% as the team navigated softer sales and expense discipline.

Now I’ll turn to the balance sheet and cash flow. Our ability to invest for growth and return significant capital to shareholders reflects the strength of our business model and the consistency of our free cash flow. In fiscal 2026, we generated cash flow from operations of $323 million and free cash flow of $210 million, right in line with our expectations. This enabled us to invest behind our four key growth drivers, repay $80 million of debt, and return $113 million to shareholders through share repurchases.

We ended the fiscal year with cash and cash equivalents of $158 million and no outstanding borrowings under our ABL credit facility. Inventory levels totaled $1 billion, up 1% versus last year and in line with our expectations. As we turn to guidance, our full-year outlook for fiscal 2027 is consistent with the three-year financial algorithm we committed to at the beginning of fiscal 2026. For the full year fiscal 2027, we expect consolidated net sales in the range of $3.77 to $3.81 billion, comparable sales growth of 1% to 2%, adjusted operating earnings in the range of $334 to $347 million, and adjusted diluted earnings of $2.20 to $2.30 per share. Fifty percent of free cash flow is expected to be deployed to share repurchases.

Capital expenditures are expected to be approximately $140 million and free cash flow is expected to be approximately $200 million. Our outlook assumes the consumer remains resilient, we continue to invest in the business to drive top-line growth, and we experience inflationary pressures across labor, rent, and transportation costs. For the first quarter of fiscal 2027, we expect consolidated net sales in the range of $945 to $955 million, which includes approximately 30 basis points of unfavorable impact from foreign currency rates, comparable sales growth of 0.5% to 1.5%, adjusted operating earnings in the range of $75 to $80 million, and adjusted diluted earnings of $0.48 to $0.52 per share.

As we continue to deliver against our growth pillars and generate strong cash flow, we plan to maintain our disciplined capital allocation framework. We expect to balance investments in growth with returning meaningful capital to shareholders and further debt reduction. We appreciate your time this morning. Now I’ll ask the operator to open up the call for Q&A.

OPERATOR

Thank you. And as a reminder, to ask a question, simply press star 11 to get in the queue and wait for your name to be announced. To withdraw your question, press star 11 again. One moment. For our first question, it comes from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson (Analyst)

Hi, good morning. Thanks for taking my questions. Nice job on the quarter. I guess maybe just looking out to this year, first quarter in 2027. On the top, how should we think about the two segments? Are you expecting continued positive comps for Sally and then maybe an inflection in comps at BSG?

Denise Paulonis (President and Chief Executive Officer)

Yes, Susan, thanks for the question. When we think about the business for ’27, we’re excited about both sides of the business and how they’re going to perform. We do expect throughout the full year, Sally will likely grow a bit faster than BSG will grow. But we do expect BSG to return to growth this year. We’ve got great momentum and great agenda items there to do that. On the Sally front, you know, the momentum is continuing with a number of our initiatives, but specifically on BSG and the reason for us to inflect positive, we’re very excited about the new research we’re getting about the pros and how we can translate that into all of our strategies, notably in the digital front as well as personalization using that Sally toolkit, and then the innovation pipeline that’s behind us, we’re very excited about.

Susan Anderson (Analyst)

Okay, great, thanks. And then I guess maybe just on the Sally side, great to see another positive comp there. I’m just curious, are you seeing more consumers move to DIY for hair coloring to save money? And then also curious if you’re seeing any noticeable difference in trade down to private label from branded products in the stores. And then also just if you have any early reads on the launch of Happy Beauty e-comm site and what percent of those sales are private label.

Denise Paulonis (President and Chief Executive Officer)

Absolutely. So Sally overall, as I mentioned, great momentum. What was exciting for us is we have consistently now seen new customer growth quarter over quarter. So that, tied with a great amount of retention in our core customer base, is really creating some strength for us. And what’s even better is we do see it come through in our sales tree in the way customers are shopping with both transaction growth and ticket growth. So they’re coming more often and they’re filling up their basket a little bit more.

And we think that’s a testament to a lot of the policies and practices that we’ve had going on. When you think about what we’ve done on the personalization front, being more targeted with how we’re going after that customer or what’s appealing to them; on the innovation front, expanding into new categories like fragrance and men’s while still delivering on our core of color; and then in digital, the participation we’ve had in marketplaces has been fantastic. So we’re really pleased with those things that are continuing to drive the growth and where that consumer piece is going to deliver for the long term.

You also asked about Happy Beauty e-comm. On that front, we’re pleased with the launch. We launched as a tabbed experience on the Sally website. It creates this great opportunity to get the reach of the Sally customer base seeing the Happy Beauty offering. We’re just now starting to ramp up marketing as we’re going to head into the holiday season. We always test a few things to make sure there’s no glitches before we go too loud and proud, but we’re ready to do that and we’re excited to see how that shopper engages.

A key nugget there is, what’s nice to see is we’re seeing a mixed basket. So the customers that are shopping the Happy Beauty side of the house are usually also shopping the Sally side of the house. So a lot of momentum.

Susan Anderson (Analyst)

Okay, great. Thanks for all the details. Good luck this holiday.

Denise Paulonis (President and Chief Executive Officer)

Thank you.

OPERATOR

Thank you. Our next question comes from Olivia Tong with Raymond James. Please proceed.

Olivia Tong (Analyst)

Great, thanks. Good morning. Hi, Denise and Adrienne. I wanted to talk about a few things. First, you know you saw a nice improvement in the quarter across both divisions. Can you talk about the key factors that helped drive the upside at both, whether it’s tickets or transactions? And then, Adrienne, on the margins, the guide obviously implies margin expansion, and given that Fuel for Growth has been completed and the promotional and commodities environment still remains a bit challenging—perhaps a little less challenging, but still challenging nonetheless—can you talk about the offsets that are driving the margin expansion expectation for the year? Thank you.

Denise Paulonis (President and Chief Executive Officer)

Let me start off with a little bit about what drove both of our businesses. So on the BSG side, we were really happy to see that change in trajectory and posted a notably accelerated performance versus where we were in Q3. We continue to see great growth within color and really saw acceleration in the nail portion of the business at BSG, notably transaction trends improved as well. As we talked about last quarter, that was a piece of more softness for us.

So seeing that stylist engaged, back shopping, leaning into as we get into fall, we appreciated quite a bit and that drove part of our results. We also had our new app launch on the digital side and we saw great engagement and nice conversion. So as we’re giving that stylist a better tool to go purchase and participate with us in the app, we’re getting rewarded for that. And then overall e-commerce was strong at 3%. So overall nice trajectory change for BSG.

As I said, looking forward to them returning to positive growth in FY27. And when you think about Sally, we’ve got a lot of things that are really working together. We saw this was our fifth consecutive quarter of comp sales growth and in fact for the last quarter here for Q4 that would be a two-year stack of about 6%. So what are we seeing behind that? We are definitely seeing strength behind digital. That is both our core Sally.com site as well as marketplaces and engagement with the app.

We’re seeing increased conversion and we’re seeing increased baskets as personalization is hitting its key from a marketing standpoint and the marketing activations that we’re doing for things like our Color Fest or our university tours are really getting the word out about who Sally is. And then finally, innovation, new categories that we’re participating in. Very excited about what we’re seeing there as well. Underneath that, LCOD continues to run strong in terms of bringing in new customers who definitely have bigger baskets and Ignited. While we’re very excited about Ignited, the interesting part for us is great results in those stores not yet big enough to dramatically change the overall comp performance. So that is still goodness to come.

But I will turn it over to Adrianne to talk a little bit about margin.

Adrianne Lee (Chief Financial Officer)

Great. Well, thanks Olivia. Thanks for the question. And I’ll just say kind of as I step back, you know, a lot of work has gone into improving our margin profile over the last several years. So we think operating kind of BSG in the 52-ish percent gross margin range, Sally in the low-60% range is a really solid place to be, particularly as we continue to meaningfully invest in the business and grow sales. And I will just one more comment on as the Fuel for Growth program has officially sunset, that kind of muscle and cost-conscious, ROI-driven mentality is embedded within our kind of company and our DNA.

And so we’ll continue to find efficiencies throughout the P&L. But I would just say really pleased with the margin performance, particularly as we continue to invest in.

Olivia Tong (Analyst)

Great. Thanks. I want to double click a little bit on SG&A given the improvement there this quarter. Can you talk about how repeatable that is, you know, what’s in there, how much is structural versus some other changes that might have happened in terms of timing and how you plan on how you think about the input cost pressures for next year.

Adrianne Lee (Chief Financial Officer)

Great. Sure. Happy to. And I think, you know, in my prepared remarks, I’m, you know, always reminding us of our inflationary headwinds within kind of our labor pool, our rents, our transportation costs. Again, Olivia, we continue to invest in the business behind Happy Beauty Company, marketplaces, Sally, Ignited. So what I’ll just say is, you know, we’ll continue to manage that line and drive efficiencies and productivity, but again, you know, kind of up against those headwinds and really critical investments for growth.

Olivia Tong (Analyst)

Got it. Best of luck. Thank you.

OPERATOR

Thank you. Our next question comes from the line of Katie Elders with Jefferies. Please proceed.

Sydney (Analyst)

Hi, this is Sydney on, I think we got dialed in for Jefferies. On BSG, you noted that the appointment books and color services remain strong but add-on services are still inconsistent. Can you just talk about what needs to change for that broader stylist wallet to improve and then what visibility do you have into that recovery in fiscal ’27? And then maybe just one more. Can you talk about what you’re seeing in the promotional environment heading into holiday and any expectations there?

Thank you.

Denise Paulonis (President and Chief Executive Officer)

Yeah, happy to take those questions, Sydney. We think about that pro stylist and the consumer that’s sitting in their chair. Remember the real inflationary pressures that are out there. So when we think about that stylist book of business, we’re really pleased that their chairs are busy. So people are coming in for those core services. They’re appreciating the value that their stylist provides to them. But of course, it’s always a little harder to want to upsell or add something to that basket when you realize the customer sitting in your chair might be needing to conserve a little bit more.

It’ll be interesting to watch the holiday season. This would be the time that people might splurge a little bit more on that extra treatment or that extra process. We’ll see how that transacts through the year. You know, we’d see that in certain products coming through and selling in the stores, more glossing types of toners and add-ons and things like that or more selling of more treatments and masks that would come through. You know, we’ll read that as we go.

In FY27, you know, I think the way I’d characterize it is the stylist is healthy as a total population. The customer in their chair continues to come. We do a lot of survey work and if you balance it all out, they say we expect business to be relatively similar to what it’s been over the past year. So we think that that’s a healthy place to be. What we’ll be focused on is really winning share of wallet by having the right innovation, having digital offerings that make it incredibly convenient to shop and, importantly, this personalization and what we’re going to be able to do with the new customer research of creating personas to understand when we’re talking to a specific stylist, how are we going to talk to them? Are we going to talk about value? Are we going to talk about newness? Are we going to talk about convenience and make it that much easier for them to want to come their whole share of wallet and basket with us?

And then you also asked beyond that on the stylist book. Actually, I can’t remember the second part of the question that you had asked. Promo. Promo, yeah. So I would say we are all operating right now in a promotional environment. I think there’s no other way to put it on both the retail side and the pro side. As retailers, we’ve all become very sharp about what we do to offer promos that drive incrementality into our businesses while managing our margin profiles. So I anticipate that that promo environment will be consistent with what we have been seeing. But compared to where we were in COVID where nobody was looking for promos and they were really just looking for fulfilling needs, we were definitely back to a regular value-oriented consumer purchase cycle.

Sydney (Analyst)

And then maybe just one more: unlicensed colorist on demand. So you’ve mentioned that those customers shop more frequently and spend more, I guess non-LCOD customers. Is that higher value primarily concentrated in color or are you successfully migrating those customers into care and other categories? I guess, kind of, what’s the cross-shopping dynamic happening there?

Denise Paulonis (President and Chief Executive Officer)

Yeah, it’s a really great question. I will say it leads with color. So the idea that when they’re getting that consultation, the customer is understanding the full spectrum of how to get a successful color outcome, which both comes with how you pre-treat your hair, the care that you’re going to use following that service and things you’re going to do there. So it’s concentrated in care. What we like is with the increased frequency with which they shop, that is our opportunity to get them to cross-shop into more categories and experience more of the business.

So we’ve got a little bit of both going on, but it does get led by color.

Sydney (Analyst)

Great, thank you so much.

OPERATOR

Thank you. Our last question comes from the line of Simeon Gottman with Morgan Stanley. Please proceed.

Simeon Gottman (Analyst)

Good morning everyone. My question is first on Ignited and if you can share what the, I guess, comp spread in those stores are or how they’re tracking and then related to it in the 2,0— or 2,300 roughly Sally U.S./Canada. Can you talk about the breadth of, of, call it the 2% comp or is the entire chain well above in positive territory? Is there a mix? Can you just share some perspective on that please?

Denise Paulonis (President and Chief Executive Officer)

Absolutely. Good morning, Simeon. How about I go in reverse order? I think when we think about the underlying health of the Sally business, we actually see it pretty consistent across geographies. So we’re not seeing particular skewing by region. We’re not seeing skewing as we had been for a while in more border states or things like that. So in general I’d say it’s reasonably spread and if you think about the business that is both our store business and then the strength of our digital business.

But what I like to remind folks on the digital side of the business is a majority of that business is actually fulfilled through our stores and leveraging the store network with things like marketplaces, buy online, pick up in store. So there’s a real symbiotic relationship in how the stores are delivering, so broad-based healthy comps across Sally. When I turn to Ignited, we’ve talked about how excited we are about what we’re seeing. So when we just think about core KPIs, we are seeing improved average transaction values, we’re seeing more cross-shopping in stores, we’re seeing frequency. We particularly are seeing uptick in areas like fragrance and nails that get a very different presentation when you’re in those stores. In aggregate, in the test set that we’re running through and really monitoring performance, we’re seeing comps in the 8% to 10% range.

And as we’ve talked about cost of capital and a minimum for our ROI, reaching the cost of capital, which isn’t where we would stop. What we really needed over a two-year period was about a 10% growth. So we’re tracking really nicely against what we’re hoping to see. This next tranche of stores is a great big tranche of stores for us to be able to watch and see that that consistency of results is there. But excited to see the potential and looking forward to adding another hundred stores as we ramp up this year.

Simeon Gottman (Analyst)

Okay. And then thinking about margin in ’27, and then correct me if I’m wrong, the overall construct is flattish. If you take the comp sales, call it one and a half at the midpoint, is that a natural rate in which expense leverage or just SG&A ratio is flat or you’re having to take expenses out in order to get flattish leverage and then margin? If you think about the potential for upside to gross next year, and even though I know Fuel for Growth has passed us, could product mix surprise?

What are the potential good guys and bad guys to think about for gross for next year? Thanks.

Denise Paulonis (President and Chief Executive Officer)

Yeah. So let me start with the biggest picture and then Adrianne can jump in as well. You know, I think at the midpoint of our guide in our investment line, we will need to continue to drive cost savings to offset investment in what we go do. That’s not a new muscle. That’s the muscle that we’ve been building. So whether that is knowing we have inflationary pressures or important investments behind ignited or happy, we have a tier of cost savings that come with that.

We continue to drive efficiencies in our supply chain. We continue to drive efficiencies in goods not for resale work. So at that midpoint, we do balance both sides of the equation coming through. And then when we think about the go forward product mix in the business, I’m actually really excited about us bringing in new categories. We come in at slightly subscale as we enter those categories. So we come in a slightly lower margin in some of those categories. We’ll take that every day. If what we’re doing is expanding TAM and what we can go drive in terms of absolute flow through of profit for the company. But that will be something that we’ll be able to negotiate and manage over time as those subcategories get bigger.

So in general, I think Adrianne said it well and I’ll let her add any other points that she’d like to add. But that margin zip code that we’re in right now, we feel good about. We think it’s the right spot to be.

Adrianne Lee (Chief Financial Officer)

I don’t think anything to add, Denise. Well said.

OPERATOR

Thank you. Ladies and gentlemen, this will conclude our Q&A session. I will turn the call back to Denise Paulonis for closing remarks. Denise.

Denise Paulonis (President and Chief Executive Officer)

Well, thank you everyone for joining the call this morning. I hope you can sense the excitement that we have in our business, both the strength of what our associates are doing and the quality of work they’re delivering in serving our customers every day, as well as the momentum we have against our strategic initiatives. 27 is supposed to be a bright year. We’re excited about it, and with that, I’ll wish everyone a happy holiday season and look forward to talking to all of you next quarter.

OPERATOR

Thank you all for participating in today’s conference. You may now disconnect.

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