Sally Beauty Q3 2025 Earnings Report

Sally Beauty EPS Results

• Actual EPS: $0.51
• Consensus EPS: $0.42
• Beat/Miss: Beat by +$0.09
• One Year Ago EPS: $0.45

Sally Beauty Revenue Results

• Actual Revenue: $933.31 million
• Expected Revenue: $928.78 million
• Beat/Miss: Beat by +$4.53 million
• YoY Revenue Growth: -1.00%

Sally Beauty Announcement Details

• Quarter: Q3 2025
• Date: 8/5/2025
• Time: Before Market Opens
• Conference Call Date: Tuesday, August 5, 2025
• Conference Call Time: 8:30AM ET

Sally Beauty (NYSE:SBH) operates as a specialty retailer and distributor of professional beauty supplies. The company operates through two segments, Sally Beauty Supply and Beauty Systems Group. The Sally Beauty Supply segment offers beauty products, including hair color and care products, skin and nail care products, styling tools, and other beauty products for retail customers, salons, and salon professionals. This segment also provides products under Wella and L'Oreal brands. The Beauty Systems Group segment offers professional beauty products, such as hair color and care products, skin and nail care products, styling tools, and other beauty items directly to salons and salon professionals through its professional-only stores, e-commerce platforms, and sales force, as well as through franchised stores under the Armstrong McCall store name. This segment also sells products under Paul Mitchell and Wella brands. It operates stores and franchised units in the United States, Puerto Rico, Canada, Mexico, Chile, Peru, the United Kingdom, Ireland, Belgium, France, the Netherlands, Spain, and Germany. The company distributes its products through full-service/exclusive distributors and open-line distributors. Sally Beauty Holdings, Inc. was founded in 1964 and is headquartered in Denton, Texas.

Sally Beauty Q3 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Third quarter financials: Delivered 13% EPS growth with flat comparable sales at the high end of guidance and an adjusted operating margin of 9.2%, enabling $21 M of debt repayment and $13 M of share buybacks.
• Positive Sentiment: Sally segment color strength: Color category grew 4% with higher customer counts driven by performance marketing, personalization and 4,700 average weekly consultations via the Licensed Colorist on Demand platform.
• Negative Sentiment: Hair care and ancillary categories soft: Customers exhibited cautious spending and some trade-down in hair care and related categories, prompting refined tactics in promotions and personalization to boost engagement.
• Positive Sentiment: Fuel for Growth program: On track to generate $70 M of cumulative gross margin and SG&A benefits by FY25 and $120 M run rate savings by FY26, with $30 M reinvested in strategic initiatives and $40 M flowing to the bottom line.
• Positive Sentiment: Store refresh momentum: Completed 20 Sally store makeovers, with refreshed locations showing higher units per transaction, average unit retail and transaction values, and plans to update 35 stores this year and 50 more in FY26 without extra CapEx.

Presentation

[Operator]

Good morning, everyone, and welcome to Sally Beauty Holdings' Conference Call to discuss the Company's Third Quarter Fiscal twenty twenty five Results. All participants have been placed in a listen only mode. After management's prepared remarks, there will be a question and answer session. Additional instructions will be given at that time. Now, I'd like to turn the call over to Jeff Harkins, Vice President of Investor Relations and Treasurer for Sally Beauty Holdings.

[Jeff Harkins, VP - IR & Treasurer at Sally Beauty Holdings]

Thank you. Good morning, everyone, and thank you for joining us. With me on the call today are Denise Polonis, President and Chief Executive Officer and Marlo Cormier, Chief Financial Officer. Before we begin, I'd 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 report and report on Form 10 ks and other filings with the SEC.

[Jeff Harkins, VP - IR & Treasurer at Sally Beauty Holdings]

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 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.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Thank you, Jeff, and good morning, everyone. The resilience, educational excellence and customer first mindset of our team was on display in the third quarter. In turn, we delivered 13% earnings per share growth amidst a complex macro backdrop. Comparable sales were approximately flat, near the high end of our guidance range, and adjusted operating margin of 9.2% exceeded the high end of our expectations. In fact, our healthy gross margin profile and prudent cost control, coupled with benefits from our Fuel for Growth initiative, drove a fourth consecutive quarter of operating margin expansion.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Additionally, our strong cash flow generation allowed us to strengthen the balance sheet through $21,000,000 of debt repayment and also return value to shareholders via $13,000,000 of share repurchases. In our Sally segment, our color category delivered continued standout performance, growing 4% with color customer count up supported by strength in our performance marketing results, particularly our do it yourself value messaging, expansion of our personalization journeys, and consultation growth from our licensed Colorist on Demand digital experience. Additionally, momentum continued in our digital marketplace expansion. Continuing the more cautious spending behavior we saw last quarter, our Sally customers were more choiceful in hair care and other ancillary categories, with some trade down in price and a focus on value. We are digging in deeper into our customers' needs in these areas and are refining our tactics from personalization and performance marketing to promotions to better serve them.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Looking at BSG, sales returned to positive territory as the external factors that impacted stylist appointment books and purchasing behavior in Q2 receded. Of note, BSG has now delivered sales growth in six of the last seven quarters. Key drivers of Q3's top line strength include expanded distribution and robust product innovation across categories and brands. While navigating today's dynamic landscape, we're laser focused on profitability and driving operating efficiencies through our Fuel for Growth program, which is currently in year two. This work encompasses merchandising, sourcing, supply chain, best cost location, and non trade spend, where we've carried out deep dives and are extracting value.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We remain on track to generate cumulative gross margin and SG and A benefits of approximately $70,000,000 by the end of this fiscal year and expect to capture cumulative run rate savings of $120,000,000 by the end of fiscal twenty twenty six. Marla will provide a more granular look at the program in her remarks. Now I'll move to an update of some of the key initiatives under our strategic pillars of enhancing our customer centricity, growing our high margin owned brands and amplifying innovation, and increasing the efficiency of our operations. Starting with our marketplace strategy, we are pleased to see strong momentum across our portfolio partners, which includes DoorDash, Instacart, Uber Eats, Amazon and Walmart. Our marketplace growth continues to be a key driver of e commerce sales at Sally U.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

S. And Canada, which increased 21% over the prior year in fiscal Q3 and comprised 8% of total sales. Our presence on high visibility platforms is attracting new customers to the brand and enabling us to meet them where they shop while driving more profitable sales. We're pleased with how quickly this initiative is scaling and believe there is more growth to come. Turning now to our licensed colors on demand initiative.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We're continuing to see broad based strength across the platform with consistent increases in key metrics, including traffic, consultations, average transaction value, and purchasing frequency. In Q3, we had more than 90 licensed colorists averaging over 4,700 consultations per week. Additionally, our LCOD customers had an average transaction value of $35 which is 25% higher than what we see for non LCOD customers. And LCOD customers are averaging one more trip on an annual basis compared to non LCOD customers. Customer feedback has been overwhelmingly positive, and retention rates are significantly higher than non LCOD customers.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

When we initially launched this platform, it gained traction quickly and has proven to be a powerful tool for broadening our reach, attracting new customers to Sally, and deepening our strategic moat in professional color for home use. Moving to innovation, which remains a cornerstone of our operating and growth strategies. In both segments of our business, we are proud to have built a reputation for bringing our customers a consistent pipeline of on trend innovation, relevant brands, and exclusive launches. In the Sally segment, we saw strong performance from many of our own brands in Q3, including ION, Bonbar, Inspired by Nature and Strawberry Leopard. In June, we doubled down on the nail category with a significantly expanded assortment focused on trend driven innovation, including brands like Nail Boo, Kiss, and Dashing Diva.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We view nails as an important growth category for Sally, one that has become a leading discovery channel for new Sally customers and furthers our position as a leading destination for shoppers seeking trends, value, and convenience. At BSG, recent launches continue to perform well across color and care. This includes the successful and much anticipated April launch of K-eighteen, as well as guidance maintenance, a brand rooted in biotech. Additionally, Arcellus embraced newness and expanded distribution from Color Wow, Image, Moroccan Oil, Schwarzkopf and Wella. Innovation continued as we entered Q4 with the launch of the cruelty free brand Unite in 800 Cosmoprost stores, our full service channel, and e commerce.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Unite includes hair masks, styling, and detangler products. I'm pleased to note that our core strategic pillars are continuing to drive sales and engagement. The combination of marketplaces, licensed colors on demand, and innovation, as well as personalization and enhanced performance marketing contributed approximately two ninety basis points of comp sales growth in the third quarter and two fifty points year to date. Now I'll turn to our longer term initiatives, Starting with our Sally brand refresh, which is designed to pivot Sally Beauty from a beauty supply house to a modernized specialty beauty retailer. As of July 31, we have completed the refresh in a total of 20 locations, which includes 18 stores in Orlando, one in Ohio and one in Minnesota.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We expect to complete another 15 stores across The U. S. During our fourth quarter, resulting in approximately 35 stores updated by the end of our fiscal year. In these refreshed locations, we're prioritizing the customer journey and operational execution to deliver a superior in store experience, one that encourages discovery, inspires, and engages. We're also testing expanded categories such as nail and cosmetics along with adjacencies such as fragrance by creating additional space through SKU count rationalization.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

To date, we see customers spending more time in store and cross shopping categories at an increased rate, as evidenced by basket growth coming from nails, cosmetics, and skincare. Additionally, we're seeing key indicators, including units per transaction, average unit retail, and average transaction value, all trending above the rest of the fleet. In short, the new look, feel, navigation, and merchandising strategies are driving the desired results. Importantly, in mid July, we kicked off our Orlando marketing initiatives, which includes billboards, paid social, paid search, YouTube, and CRM. This is a planned incremental marketing investment spreading the word on our transformed Sally experience to drive traffic and new customer acquisition.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

For a look at how the store refreshes are taking shape, please visit our IR website where we posted a short video. Looking ahead to fiscal twenty twenty six, we expect to complete another 50 refreshes, all occurring in stores that were previously slated for update or relocation. Therefore, we don't anticipate a material deviation to our historical CapEx levels. We're moving forward at a measured pace to ensure we're positioned to generate meaningful returns and continue to have conviction in the opportunity to refresh up to 1,500 stores or approximately two thirds of the Sally U. S.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Fleet. We believe the refresh has the potential to be an important contributor to driving consistent top line growth and look forward to advancing this strategy over the coming quarters. Shifting now to our Happy Beauty initiative. We continue to see some nice trends in our Happy Beauty stores, especially in our mall stores where there's natural traffic. We are still testing and learning on this concept and are leaning into Happy Beauty as an indie brand headquarters with a focus on key trends such as Korean beauty and fragrance stories.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Additionally, our marketing message is focused on highlighting on trend brands, offering tests before you buy, and utilizing influencer partnerships and social media to drive traffic and conversion. We're pleased to be entering the final stretch of our fiscal year on a strong note. We're raising our full year adjusted operating margin guidance to reflect the strength of Q3 and our confidence in the company's strong market positioning, durable operating model, and long term growth potential as we continue to advance our strategic pillars. We appreciate the support of our shareholders and remain committed to building long term value for all of our stakeholders. Now I'll turn the call over to Marlo to discuss the financials.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Thank you, Denise, and good morning, everyone. Our third quarter financial results are a testament to the actions we have undertaken through our Fuel for Growth program. While comparable sales came in roughly flat, but improved from our second quarter, our Fuel for Growth initiative drove strong gross margins and enabled us to hold SG and A expenses relatively flat for the prior year for both our third quarter and fiscal year to date. These positive benefits were instrumental in delivering bottom line performance above our guidance range, which drove continued strong cash flow generation. Turning to the numbers.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Third quarter consolidated net sales of $933,000,000 represented a decrease of 1% while operating 35 fewer stores compared to the prior year. Consolidated comparable sales declined less than half a point. While macro uncertainty continued to impact spending among our Sally Beauty customers, this was partially offset by strong growth in hair color in digital marketplaces. We were pleased to see a strengthening top line trend and return to positive comparable sales at ESG, driven by expanded distribution and new brand innovation. Global e commerce sales increased 8% to $99,000,000 and represented 11% of total net sales.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

We continue to deliver a strong gross margin profile in Q3, with adjusted gross margin expanding 100 basis points to 52%. The year over year improvement is primarily attributable to our Sally Beauty segment, which delivered higher product margins driven by our Fuel for Growth initiative and also benefited from lower distribution and freight costs versus a year ago, as well as reduced shrink expense. As we communicated last quarter, we expect to maintain our healthy gross margin profile amidst the changing tariff landscape, especially given our limited exposure. We expect to largely offset potential cost of goods impact through cost sharing with vendors, modest price increases on select products, and sourcing optimization. Looking at expenses.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Q three adjusted SG and A totaled $399,000,000. That's up just $2,000,000 to last year, reflecting higher labor and IT costs, partially offset by $6,000,000 in fuel for growth benefits and lower depreciation expense. In total, we captured an incremental $12,000,000 of pretax fuel for growth benefits to both gross margin and SG and A in q three, enabling us to deliver $31,000,000 in pretax benefits year to date. This leaves us on pace to capture 40,000,000 to $45,000,000 of savings in full year fiscal twenty twenty five after generating $28,000,000 in savings in fiscal twenty twenty four. This keeps us on track to deliver cumulative savings of approximately $70,000,000 since we initiated the program in fiscal twenty twenty four.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

To summarize the program details, the $70,000,000 in cumulative savings over 2024 and 2025 is comprised of two buckets, gross margin and SG and A. Gross margin benefits totaled about 30,000,000 coming from the optimization of our supply chain, vendor partnerships and promotional efficiencies. SG and A benefits totaled about $40,000,000 coming from transportation efficiencies, outsourcing, and reductions in non trade spend. Of the $70,000,000 in cumulative benefits over fiscal years 2024 and 2025, approximately 30,000,000 will have been reinvested in the business to support our strategic initiatives, including marketplaces, licensed colors on demand, our Sally brand refresh, and Happy Beauty Company, as well as advertising and IT capabilities. The remaining $40,000,000 will have flowed to the bottom line as profit or to offset inflation.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

We anticipate delivering an additional $50,000,000 in run rate savings in fiscal twenty twenty six, with about two thirds coming from gross margin and one third from SG and A. By the end of fiscal twenty twenty six, we expect that our cumulative run rate savings will be approximately $120,000,000 Returning to the P and L. We're pleased to report that bottom line results exceeded our expectations, driven by both gross margin expansion and cost reduction. Additionally, we delivered an increase in both adjusted operating income dollars and adjusted operating margin rate over the prior year. Adjusted operating margins were 9.2%, representing an increase of 30 basis points over the prior year.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Adjusted diluted earnings per share was $0.51 a 13% increase over the prior year with debt reduction and share repurchases complementing the positive impact of our operating results. With these Q3 results year to date, our adjusted operating profit is up 6% with 60 basis points of margin expansion and 13% earnings per share growth. Moving to segment results. Sally Beauty net sales decreased 1.8 to $527,000,000 on 32 fewer stores versus a year ago with comparable sales down 1.1%. Comparable transactions declined 1%, while average ticket was approximately flat.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

For the global Sally segment, color increased 4%, while care declined seven percent compared to the prior year. Sally e commerce sales grew 15% to $43,000,000 and represented 8% of segment net sales for the quarter. In addition, e commerce sales for Sally US and Canada grew by 21%, primarily driven by the strength of our digital marketplace strategy. Gross margin in our Sally segment increased 110 basis points to 60.9%. The year over year improvement primarily reflects fuel for growth benefits, lower distribution and freight costs and lower shrink expense.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Segment operating margin came in at 15.8, down 40 basis points to last year. Looking at the BSG segment, net sales were approximately flat at $4.00 $7,000,000 and comparable sales increased by half a point. Comparable transactions were up 6% while average ticket was down 5%. From a category perspective, color was up 3% and care was approximately flat. BSG e commerce sales were $56,000,000 representing 14% of segment net sales for the quarter.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Gross margin at BSG was 39.4%, flat compared to prior year, primarily reflecting lower distribution and freight costs offset by product margins due to brand mix. Segment operating margin was strong, coming in at 12.5%, up 100 basis points to the prior year. Turning to the balance sheet and cash flow. We ended the quarter in strong financial condition with 113,000,000 of cash and cash equivalents and no outstanding borrowings under our asset based revolving line of credit. Inventory levels were approximately a billion dollars, down 2% to last year, with units down 5%, equating to a half week of reduction in weeks of supply.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

As we continue to focus on driving efficiency across the business, on top of the great work our teams have already done, we believe there's additional opportunity for process improvement around inventory turns. This includes a deeper dive at the SKU level aimed at enhancing inventory productivity, which we believe will create incremental cash flow on top of our existing strong free cash flow profile. More to come on that as we enter fiscal twenty twenty six. The business continues to be a strong and steady cash flow generator, providing us with the ability to consistently return value to shareholders. Third quarter cash flow from operations totaled $69,000,000 while operating free cash flow totaled $49,000,000 We utilized excess cash to repay $21,000,000 of term loan debt, bringing our net debt leverage ratio down to 1.7 times.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

We also deployed 13,000,000 of cash to repurchase 1,500,000.0 shares of stock under our existing share repurchase program. Ending the final quarter of the year, we remain on track to generate 180,000,000 to $200,000,000 of free cash flow for the full year. Additionally, we expect to repurchase approximately $20,000,000 of our stock and repay approximately $20,000,000 of debt during our fourth quarter. Turning now to guidance. We are pleased with the consistent profit growth our business has generated over the last four quarters and believe there are additional opportunities ahead.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

As we continue to focus on our core strategic pillars of enhancing our customer centricity, growing our high margin owned brands and amplifying innovation and increasing the efficiency of our operations. Based on our current business trends, we are adjusting our full year comparable sales outlook to the high end of our previous range and raising our full year adjusted operating margin guidance as follows. Comparable sales are expected to be approximately flat compared to our prior range of flat to down 1%. Consolidated net sales are expected to be approximately 75 basis points lower than comparable sales. This reflects the expected unfavorable impact from foreign exchange rates on full year net sales and approximately 30 fewer stores in operation compared to the prior year.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Adjusted operating margin is expected to be in the range of 8.6% to 8.7% compared to our prior expectation of 8% to 8.5%. This implies that our Q4 adjusted operating margin will be down modestly versus prior year, which reflects a planned step up in marketing investment to support our Sally brand refresh in Orlando. We appreciate your time this morning. Now I'll ask the operator to open the call for Q and A.

[Operator]

Thank you. Our first question comes from the line of Oliver Chen with TD Cowen. Your line is now open.

[Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen]

Hi Denise and Marlo. I would love your thoughts on macros and how they may be impacting the Sally Beauty division differently from BSG. You had a really nice transaction momentum at BSG but it was a little softer at Sally. So I would love thoughts there. And then the store refreshes and renovations sound quite compelling.

[Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen]

What's stopping you from going faster in that discipline as well? Thank you.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Good morning, Oliver. We were really pleased with our results in the quarter. As you mentioned, macro is certainly a factor. But we think it wasn't as big of a factor as it could have been as we were thinking about the business as we exited Q2. So the strength in Sally really came in the color side of the business, which was up 4% in the quarter.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Where we saw a bit more softness in that business was in the care space. So consistent with Q2, where we have the macro weighing in, is this is an area where a customer can do a modest trade down, look a bit more for value than they might do in the distinctiveness of our pro color for home use side of the business. So that's where we saw a bit of the softness. We're very focused on the Sally side of the house, in terms of understanding what the consumer is looking for in that space, and navigating what we can do to improve that business, whether that be through our marketing messaging, our promotional activity, things that can compel our customer to shop back in that space. On the BSG front, we were very pleased to see the rebound to positive comps, driven by color, but with nice business in care as well.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

The transactions were up, we continue to see our stylists, shopping closer to need. So while transactions were up, ticket was down a bit as they kept getting what they needed when they needed it. But we were pleased to hear from our stylists in the quarter, that they're feeling overall optimistic about their businesses, where the only point of softness to them is the actual trend right now is to a bit more natural lower maintenance hair color, which perhaps strength stretches the time between services a bit more than something that might be a high maintenance color. But seeing the stylist rebound after the flu and weather impact in q2 was great for us to see. So overall, pleased with the performance of both businesses in the quarter and looking forward to that momentum continuing.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Your second question was on brand refresh. Why aren't we moving faster? You know, what I would say is we are still in the early days, right? We need with Orlando and eighteen stores now working, we need more time to really understand the lift because all those stores went through some form of transformation. So the traffic patterns and overall transactions is a piece that is a bit disrupted.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

But we really like what we're seeing behind that with the initial tranche of the stores being UPT, AUR, ATV, all in the direction that we want, with a mix in the basket that includes more things like nail, fragrance, cosmetics, skincare, the things that we're really trying to test into as we mature, the work that we're doing. So what we are pleased about is moving forward with a plan for another 50 stores in fyi twenty six. Great news is that we've already been built into our CapEx to be touching about that many stores. So that's not an incremental cost, but will let us keep understanding the performance trends and being able to watch traffic and transactions. I feel great that by the end of fiscal twenty six, we'll have close to 100 stores out there that will be working in our new model, and then be able to adjust from there.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

And the final piece that we're working on in this quarter, as I spoke about in my prepared remarks is we are really amping up the marketing efforts in Orlando to be sure that for a market that has been fully redone, the customer knows we're out there, both our existing customer and our new customer, about the new Sally and what you can expect to experience and why you should come back in to visit us. So all in all, pleased with the progress, looking forward to doing more in 'twenty six, and we'll continue at a good measured pace as we understand the return on the investment.

[Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen]

Thank you. Just a follow-up on Color. What do you think key catalysts are for Color going forward? Do you expect that momentum to continue? And it's impressive that the marketplace has been kicking in as well.

[Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen]

And then finally, on the Sally division, you had nice gross margins on Fuel for Growth as well as Freight and Other. How are you balancing that gross margin profile relative to trying to drive consistent positive traffic at Sally division? Thanks a lot.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Sure. You know, on the color front, you know, at Sally, we're seeing strength in great coverage. We're also seeing strength in visits. It's ticked up a bit over the last couple months, as a bit of a resurgence into that bright, side of the world. But we're also seeing great support from our brand partners.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

So if it's in the vivid world, Manic Panic, Euro Euro are all nice performers on that Sally side, in addition to our own brands with Bonbar and ION and Inspired by Nature being big contributors. With marketplaces, we're also seeing nice growth on the Sally side, which is supporting color as well. Licensed colors on demand combined with marketplaces are bringing new customers in and our Color customer count is up. And so that performance marketing working combined with multiple channels for the customer to be able to shop, we feel good about. And on the BSG side, we think we just have a great portfolio of brands that our customers really responding well to in the world of color.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

And we expect that that trend will continue. So we feel really strong and great about that as well. I'll let Marlo comment a bit on the Sally gross margin and how we're feeling about that side of the house.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Yeah, on the gross margin front in terms of Sally, very pleased with the performance there. I'm getting the planned and track the benefits from our field for growth effort in terms of how we're redeploying that to drive that consistent traffic. It's really our marketing efforts, CRM, our personalization, and then bringing innovation. So feel very good about continuing to maintain that profile as well as the traffic driving activities that we have that we're deploying going forward.

[Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen]

Thank you, best regards.

[Operator]

Thank you. Our next question comes from the line of Susan Anderson with Canaccord Genuity. Your line is now open. Susan Anderson, your line is open. Please check your mute button.

[Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group]

Hi, good morning. Thanks for taking my question. I was curious just on the Sally Beauty stores, it looks like there was an acceleration of store closures in the quarter. I guess, should we think about the store plans going forward? And how are recently renovated stores performing as well versus the rest of the fleet? Thanks.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah. Good morning, Susan. On the Sally store front, the Sally Beauty segment includes our businesses in Mexico and Europe in addition to our U. S. And Canada businesses.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

The slight uptick in store closures in the quarter was actually tied to our European business, where we actually exited our store base in Spain. So there were 19 closures tied to that exit. We actually sold that business to a competitor. As we look to focus where we think we can drive the most growth in our European operations. So pretty immaterial to the total set of Sally financials, whether that be sales and operating profit.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

But an important strategic move as we look to strengthen Europe and drive growth. So that's what really drove the store closures there. No outside trends in The US. And we think about how stores are performing overall, as we are doing refreshes and relocations, they really are about targeting the customers where we want to be. So we've seen nice performance.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

And as I mentioned earlier, for the stores that we're doing as part of the brand refresh program, we're still in the early days. So love what we're seeing in the in store metrics and more to come as those things mature and we can read the sales longer term.

[Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group]

Okay, great. Thanks. And then maybe if you could just talk about, I guess, the consumer behavior you've seen between, I guess, the two formats. Are you seeing any pullback? Or does it feel like consumers are maybe doing their hair a little bit more at home, which is helping Sally Beauty, just given some fears, I guess, around higher prices and tariffs.

[Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group]

I guess just curious if you've seen any pullback there. Thanks.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, overall, I would say is compared to where we thought the economy could have gone in Q2, I think we ended up in a better position than where that evolved. But where we think about consumers are on the Sally front in particular, we are seeing our consumers continue to be choiceful. Not a further step down in consumer confidence and spending, but continued frugality. And so with that, we have customer research that does show more customers thinking about how DIY can serve as an in between and going to the salon, or more curiosity in Google searches and things about how do you color your hair. So we know that's on folks' minds.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Right now, what we see that weighing is that's a nice positive to our business with a bit of an offset in where a customer can pull back, which is a bit more in the care and the ancillary businesses. But in terms of what we have as a business overall, right, we think there's a lot of our business model that performs well in this type of economy. So value offering lets us navigate macro better than a lot. And what we bring around innovation, education, engagement, really allows our DIY customers to succeed on the Sally side of the front. So that combined with our strategic initiatives, we think we're well positioned for the quarters ahead.

[Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group]

Okay. Great. And one last one, I guess, on that online kind of education or how to tool. Is there I guess, is there any way to quantify, you know, are consumers typically buy after using that? Is there any way to show, you know, I guess, if that's driving sales or not? Thanks.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, absolutely. So License Colors On Demand is our online real time platform to get education and support from a licensed stylist. To be able to go on to that platform, you register yourself as you're coming on. So we can track absolutely whether you purchase immediately online, or you later come to a store. Because we've identified you, we can attract you through that progress that process.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We actually see a great purchase rate. What is fascinating to us is fewer customers will immediately press the buy button to the you know, the list that they've gotten online, but most of them print it out or bring it on their phone into a store and come and shop those products in store. So we've gotten a great redemption rate from doing that with 4,700 consultations on average every week. On an annual basis, that adds up to quite a bit of sales. And when we look at those customers, they're actually coming in one time more often a year, than our non LCOD customers and their transaction value is about 25% higher than a customer not engaged with LCOD.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

So absolutely part of the sales driving improvements that we're seeing is one of our strategic initiatives.

[Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group]

Okay, great. That sounds amazing. Thanks for all the details here.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Thank you.

[Operator]

Our next question comes from the line of Olivia Tong with Raymond James. Your line is now open.

[Olivia Tong, MD & Senior Analyst - Consumer at Raymond James Financial]

Hi, thanks. Good morning. I wanted to follow-up a little bit on that and see if you could compare and contrast the performance in SBS versus BSG. Clearly, a very nice rebound in BSG after a tough winter. How much of that do you think was the pent up demand?

[Olivia Tong, MD & Senior Analyst - Consumer at Raymond James Financial]

Perhaps if you could talk about performance, you know, start of quarter versus end of quarter to start? And then I have a follow-up.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Absolutely, we are pleased to see the performance rebound in BSG as we had anticipated. The challenges in the second quarter were really transitory in nature with the flu and weather. Throughout the third quarter, the business was quite consistent. So once we got past those one timers, as we got past March, business really evened out, as you saw really nice performance on the color side of the house, continued growth there with the right assortment of brands. And care rebounding to about flat is what we anticipated that it would do.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

We still think that's great response from our stylists and engagement behind, new innovation like K-eighteen, as well as expansions in areas like ColorWow. But what we also know is we still have a bit of two down to trending, brands in our business portfolio on that side of the house. And so we'll continue to work through that. But seeing Care Flat and the response to innovation, we were really pleased with. So overall, that stylist seems to be in a healthy space.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

As I mentioned earlier, just continuing to buy close to need out of the concern that something might change. So they will watch the macro just like we do, but their current books of business are nice. And it wouldn't have been necessarily from a rebound of services. As I said, Q3 was pretty consistent across the business.

[Olivia Tong, MD & Senior Analyst - Consumer at Raymond James Financial]

Great. That's super helpful. And then a number of your competitors have started to expand into wellness, and you've done great things with respect to some of the newer concepts in terms of pilot stores and what have you. Is there potential for new categories within the Sally Beauty store? You've got a fantastic loyal customer, realize, of course, that there are some near term just thinking bigger picture about the opportunity to expand into new categories in SBS while still keeping the core and obviously not potentially confusing the consumer as well. Thank you.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, absolutely. And we think about new categories, there's a nice role that we are trying to better understand in that regard when we're looking at our brand refresh stores. So in our brand refresh stores, which by the end of the year, we'll have 35 and another 50 next year. And we are doing very targeted SKU rationalization across our core categories to be able to free up space for newness around cosmetics, skin care, additional nail participation, and fragrance would be the largest ones that are out there that we're working on. So definitely some trend right categories that we think could be a great offering to our Sally customers.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

As I said, the unlock here is that with the brand refresh and the new assorting process in the stores and the new fixtures, we believe we have the opportunity to bring those new categories to life and have our customers see them and participate and recognize them. So we'll be understanding how that is progressing over the course of the next few quarters and with the eye to the potential to be able to continue to expand that brand refresh, which would include category mix updates as well. Understood. Best of luck. Thank you.

[Operator]

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

[Analyst]

Hi, this is Lauren on for Simeon. Thanks for taking question. Our first one is on the care category. It continues to trend softer versus color. Just curious how you're maybe thinking about driving more engagement in this category despite the softer macro.

[Analyst]

Could this be for more promotions, awareness, just how you're thinking about raising that care category?

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, absolutely. You know, we realized that two quarters in at Sally, we're seeing that care be softer than we would like to see and really related to consumer spending and a place where, you know, they'll pull back a little bit more on care and not pull back on color, just given the opportunity for a broader product assortment or an AUR change. You know, when we've been working through the past quarter, we've been working hard to look at tactics that we have, whether that be in personalization, performance marketing, promotions, where customers are eyeing more single item promotion rather than quantity discounts, to be sure that we can refine our offering and serve those customers the best way that we can in this macro environment. A couple of examples, we're using a lot more taglines on our Sally side of the business about skip the salon, or why drop $100 every two weeks, create salon quality nail looks at home. So across the whole portfolio, not just care, but in nail and other categories, are really leaning into what that DIY equation can be from a value perspective and how to continue to advance that.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

So more to come. But performance marketing and promotion, and promotion design more than promotion depth are really the areas that we're focused on to work on a rebound.

[Analyst]

Okay, great. That's helpful. And our follow-up is just on the implied q4 comp, which should be maybe flattish to slightly positive given your guide. Can you break this out between SBS and BSG? Maybe what are your expectations for both heading into the quarter?

[Analyst]

And any early reads for quarter to date? Thank you.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, so I would say everything is built into our expectations because we have about eight weeks left in our quarter and eight weeks left in our fiscal year. So all that's included in the guidance. Underneath that, we expect a sequential improvement in the top line in both businesses, assuming a consistent macro environment to what we've been living in to date. So with that at Sally, the momentum we have in hair color is fueled by innovation, performance marketing, all the things we've been discussing, we think that will continue. And we're also working, as I just mentioned, to deliver stronger performance in the other categories, specifically, care, where we're adjusting some of the tactics to drive improvement.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

And then at BSG, we think innovation will be the continued fuel behind the growth in that business with K-eighteen continuing the recent launch of Unite being another good example of how we're winning in that space. So overall sequential improvement in both businesses as we finish out the year.

[Analyst]

Great, thank you.

[Operator]

Thank you. Our next question comes from the line of Ashley Helgans with Jefferies. Your line is now open.

[Sydney Wagner, Equity Research Senior Associate - Beauty & Personal Care at Jefferies]

Hi. This is Sydney on for Ashley. Thanks for taking our question. So you discussed seeing some trade down and price and value sensitivity from the consumer. How are you kind of balancing that with some of these planned price increases?

[Sydney Wagner, Equity Research Senior Associate - Beauty & Personal Care at Jefferies]

And then can you just talk about traffic pacing throughout the quarter and then what you're seeing quarter to date, maybe any changes of trends from exit rate last quarter into now? Thank you.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Yeah, so overall, in terms of traffic and transactions, we're seeing a business directionally in line with what we saw in Q2. So we are excuse me, with Q3, as we're entering q4. So we saw a nice rebound from q2 as we recovered from some of the weather macro related trends that were persisting there. You know, and then I think when we think about the business overall in care and what we're working on, as I just mentioned, there's a lot of things that we're working to have that customer respond well to us in terms of performance marketing, promotion activity. But in terms of price increases, we aren't planning material changes in prices in the near term.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

I'm wondering, Marlo, if you want to talk about just where we sit with tariffs, if that's a driver of the question.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

Yeah, so as we're thinking about tariffs, we've talked about it last quarter as well. Our exposure is somewhat less than most or others we would say. We're limited to 20% of our COGS is coming out of either China or Western Europe. And that's split pretty evenly between both of those. So as we look forward, we'll look beyond this fiscal year.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

We talked about this year, it's not too impactful given our inventory position only eight weeks to go. We really haven't seen a lot of vendors pass through cost increases to us. But as we look towards next year, we are carefully watching our vendors and we would work to cost share with our vendors. We may have modest pricing actions and then we also look for sourcing optimization. But we believe there is incremental opportunity from the work that we're doing on our SKU rationalization as well.

[Marlo Cormier, SVP & CFO at Sally Beauty Holdings]

So we feel confident that we can maintain both our healthy gross margins and that we'll be able to pass through any of those pricing adjustments we may need to make.

[Sydney Wagner, Equity Research Senior Associate - Beauty & Personal Care at Jefferies]

Great. Thank you.

[Operator]

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Denise Polonis for closing remarks.

[Denise Paulonis, President , CEO & Director at Sally Beauty Holdings]

Thank you for joining us today. I appreciate all the interest in Sally Beauty. And as always, a big thank you to our associates around the world who work hard to serve our customers every day. And we look forward to providing an update at the end of our fiscal year in just a few months.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Jeff Harkins, VP - IR & Treasurer
• Denise Paulonis, President , CEO & Director
• Marlo Cormier, SVP & CFO

Analysts

• Oliver Chen, Managing Director - Retail, Luxury, New Platforms Sector Head at TD Cowen
• Susan Anderson, MD & Senior Analyst at Canaccord Genuity Group
• Olivia Tong, MD & Senior Analyst - Consumer at Raymond James Financial
• Analyst
• Sydney Wagner, Equity Research Senior Associate - Beauty & Personal Care at Jefferies