Sally Beauty Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings Fiscal 2021 First Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.

[Jeff Harkins:]

Thank you. Good morning, everyone, and welcome to the Sally Beauty Holdings First Quarter Earnings Conference Call. With me on the call today are Chris Brickman, President and Chief Executive Officer; and Marlo Cormier, Chief Financial Officer.

[Chris Brickman:]

Thank you, Jeff, and good morning, everyone. We hope that you are all safe and well. At SBH, we are fortunate to have an incredible community of team members, customers, and partners, that continue to help us navigate this dynamic environment. In the first quarter, our associates across the organization, delivered strong execution, despite the ongoing challenges of the pandemic. During a time of significant retail disruption, they remained focused on safely serving our customers, and continued to implement the key initiatives we outlined on our year-end earnings call in November. This allowed us to deliver strong gross margins, profitability, and cash flow, despite topline headwinds caused by the pandemic. Indeed, for much of the quarter, especially in the latter weeks, we were operating against the backdrop of temporary store closures, capacity restrictions, salon shutdowns, and an acceleration in COVID rates, that most certainly impacted traffic in our open locations. As a result, enterprise same-store sales declined 3.7%. For added perspective, at the end of the quarter, approximately 45% of our store locations were under some level of capacity restriction or closure across the globe. During the quarter, we saw ongoing strength in hair color, which is our chief recruitment vehicle for new customers, both for the retail consumer, and the professional stylist. Hair care is closely linked to color, while other categories like nails, skin, and wax, are incremental and drive additions to the basket. Despite the topline disruptions, hair color was up 19% at Sally US and Canada. In addition, vivid colors remained on trend and delivered another quarter of strong performance of approximately 50% at Sally US and Canada over the prior year. In Q1, vivids accounted for 25% of our total color sales, and they continue to attract a new and younger customer to our stores.

[Marlo Cormier:]

Thank you, Chris, and good morning, everyone. I've been at the company now for 10 months. So, I was really able to hit the ground running when I assumed the CFO position in November. I've enjoyed the opportunity to speak with some of you at recent virtual conferences and marketing days, and look forward to continuing to get to know our SBH shareholders.

[Operator:]

Thank you. And our first question will come from the line of Simeon Gutman with Morgan Stanley. And your line is open.

[Simeon Gutman:]

The first question is on the softer Q2. Can you talk about, is it entirely due to closed stores? Are you seeing anything else that it wouldn't be related to? And then with regard to your Omni-channel, are you seeing that part of the business pick up as the store traffic declined, given some of the restrictions?

[Chris Brickman:]

Thanks, Simeon. Here's what I would say. Yes. Yes, it is due to store restrictions, closures, and decline. So, obviously as we look at Q2, Europe's been significant, closures across Europe for all of January, heading into February, and we're not sure how long that will extend. It could easily extend into March. Canada has had some significant closures that are continuing. We had salons closed in California, and Latin America has some significant store closures as well. So they just seem to be a little deeper and more extensive and lasting longer as we get into this quarter. And that's really the driver of why we’re being conservative in our view of Q2. And yes, we are seeing increases in the Omni-channel. As an example, in Europe, we're seeing significant increases in our Omni-channel sales, due to the extensive closure. Same is true in Canada. But the reality is, it doesn't make up for the fact when you have 60% of your stores closed in Europe, you're not going to make up that with Omni-channel.

[Simeon Gutman:]

Got it. Okay. And then my follow-up is, the gross margin is being - it's benefiting right now from your promotions. Can you talk about what you learned on the promotion side? What can you tell us? What kind of promotions were most prevalent in - prior pandemic? Ones that you may not need to repeat so we could try to assess the sustainability of some of these gross margin trends.

[Marlo Cormier:]

Yes. Let me start, and Chris will jump in with more color, but what we found is, we really don't need to promote in our core category of color to win the customer. Promo is really not how you recruit a new color customer. So what we found was that the promotions in color, were really just leading to pantry loading. And so - and it was pantry loading of our existing customers. So instead, what we're doing is using the promotions on a very selective basis to drive traffic into basket adds. And so we're seeing that prove out, and it's working for us. We started the shift kind of at the height of the pandemic last year, and we're seeing that play through. we're shifting the marketing on the other hand to drive that traffic into more meaningful and educational content. So, we think it's working. It’s looking - it's proving in the margin, and we started to see it last third quarter. We see it in the fourth quarter where we were above 50%. Again, we delivered a solid 50% this quarter as well. So the shift is working and we are directing it more towards the basket add, not to the core.

[Chris Brickman:]

And I think that's right on target, Simeon. The only extra I'd add to that is we're going to - we're still optimizing this. I think it's - one of the things we've learned is that this - probably some promotional activity will return to BSG, because so much of it was vendor funded. So we think we'll - we’re probably going to add back a little bit more there, especially in the heavily vended funded - vendor funded categories. At Sally, Marlo is correct. Color doesn't make much sense to promote, but some of the adjacent categories and brands, oftentimes may, especially the ones where those are well-known brands. And so, we’re still optimizing and learning this, but the long-term trend is definitely fewer, deeper, bigger.

[Simeon Gutman:]

All right. Thank you both. Take care.

[Operator:]

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. And your line is open.

[Rupesh Parikh:]

Good morning. Thanks for taking my questions. Hey, Chris. So, I guess my first question, with the vivid color, very strong growth this quarter. Just curious how you’re thinking about the stickiness of the trend, especially coming out of the pandemic?

[Chris Brickman:]

Yes. This is one we've debated quite a bit. So I think it's a great question. The reality is, I do think there is a general - we've seen the trend, by the way, before the pandemic hit as well. So there has been a long-term trend, multi-year trend of vivid colors growing. So I do think a significant portion of it is sustainable, as people just feel more free to express themselves through air, but there may be additional experimentation that was created and opportunities to experiment that was created by the pandemic. So I would guess it will settle some, but your guess is as good as mine. I think what's great about it is that we're the clear leader in a category that's on trend and growing. We have a much bigger assortment than anybody else out there, and we love how it's bringing a new consumer to our stores.

[Rupesh Parikh:]

Okay, great. And then a follow-up question, just, I guess as we look at the BSG segment, I would say the decline was - I would say fairly limited considering some of the restrictions out there. Any sense how your market share held up during the quarter, just given some of the restrictions out there?

[Chris Brickman:]

Here’s what I would say, I don't know. We don't have any sign that says we're losing market share. We do believe - we do some indications that we're gaining color accounts, and we've had a lot of color conversions. So we feel strongly that that's the core of gaining share in the professional business, because color is so sticky for a stylist. So the best indicator we have is that we are seeing an increase in color conversions, which would suggest that we're gaining some share.

[Rupesh Parikh:]

Okay, great. And then my last question, shipping expense has been a headwind in recent quarters. Just curious, with the buy online pickup in store, like how that's progressed versus your expectation. And just in terms of how that's helping reduce maybe some of the shipping headwinds that you guys are seeing.

[Chris Brickman:]

Yes. We have more work to do on this, but the reality is that both - this was a key lever for us in terms of driving down our shipping expense. So we're excited about the early adoption we're seeing. And of course, we're excited to put that into our BSG business as well in the coming months. So the reality is that over time, we expect that more of our business will be supplied from the store in either in the form of buy online, pickup in store, curbside, or same-day delivery. And that that will lead to a better average shipping expense overall over time. But this is going to all settle out. This behavior will settle out in the coming months. Our job is to make sure we have all the right fulfillment options available to the consumer, and then optimize against those.

[Rupesh Parikh:]

Okay, great. Thank you. I’ll pass it along.

[Operator:]

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

[Oliver Chen:]

Hi. Thank you. You've done a really good job focusing on standing for haircare and color. Chris, what do you think about the non-hair haircare and color categories, and how you may focus strategies there, and what's ahead? Would also love your thoughts on traffic and traffic at Sally Beauty, what's controllable at the Sally stores, and what do you see happening ahead to maximize traffic - the traffic opportunity. Thank you.

[Chris Brickman:]

These are really good question. So the first is, we're going to continue to build dominance and leadership in our color and care category, especially color, because that's the core recruitment vehicle for business. And we have such a strong leadership position there we want to build on. The reality is that the other categories are basket adds outside of color and care. And when an enthusiast, whether it's a stylist or a consumer, walks into our store for color, she's going to add to her basket, or he's going to add to their basket, with these other categories. I think our job is to make sure they have a good selection there, that it's optimized so that it's efficient so we don't have too much inventory, so we get better turns and productivity out of it. So I guess my message to you would be, we'll still be in those categories. We may lean the assortments out some, and we make sure that we've got the right brands and products that are most likely to select as they're coming in. but we will focus on winning with color and recruiting color customers, and then use the other categories as basket fills. And that's the way the strategy works, and we'll continue to do that - execute against that strategy. On traffic, it'll be interesting to see how traffic settles post pandemic. Obviously, right now, what we're seeing is people making fewer trips, but buying more when they come. And that I think is across all of retail. The question, of course, is that some consumers within that mix are probably making almost no trips. And you can imagine some of the older consumers who are concerned about their health. And what we don't know is how much that will return in the natural course of things, as people get vaccinated and feel secure, and how much of it will people shift to new behaviors that they learned during the pandemic. That is all to sort out. If I had to guess, I would guess that traffic will be down some as more consumers use Omni-channel as their way of purchasing, but it won't be down to the level it is now, as some consumers return to their previous behaviors. That’s - your crystal ball is as good as mine on that one, but that's how I see it likely settling out.

[Oliver Chen:]

Okay. That's very helpful. And a final question is, Chris, as you think about the store fleet across both concepts, what's on your mind in terms of modernization and renovation and how refreshes may go? And also any evolving thoughts on footprint as the environment continues to rapidly change? Thank you.

[Chris Brickman:]

Yes. Oliver, evolving is exactly the right use - word to use there, right? We are deep into the assessment right now. Part of what we need to do is put all of these new delivery service functionalities in place, and let the consumer tell us, what do they want? Do they prefer BOPIS? Do they prefer same-day delivery? Do they prefer visiting the store and talking to our associates? We need to put all the right delivery service and fulfillment options in place, and then let them kind of guide us in terms of what's the right footprint over time. We are - I guess the message I would say to you is, we are deep into analyzing this. We're going to watch how behaviors emerge. We're going to do a lot of analysis of store profitability, the shift as we do different forecasts of Omni-channel. And then from there, we'll make the right decision on what's the long-term strategy for footprint. In terms of the store experience, we are working now also on, how do we think about a store experience that's truly centered in color, but also that has Omni-channel built into it as well, as we expect stores to do - to play a major role in fulfilling the customer order. So those two factors, the fact that we want the business to be centered in color as the core recruitment vehicle, that's going to change how we assort our stores, and you're going to see changes there over time. And two, we have to set up the front of the store so that it's easy for those Omni-channel customers who want to either do BOPIS, or as an example, have a delivery service like Postmates pick up, that it's easy for them to get in and out of the front of the store. So there's going to be significant changes at the front of the store as well to make that work seamlessly. So all of that is coming. We are looking at it and doing the analysis on it. Some of it is we need to see what the post pandemic reality looks like. And from there, we're going to be setting a course that will involve significant footprint changes and store design changes over time.

[Oliver Chen:]

Thank you. Very helpful. Best regards.

[Operator:]

Thank you. Our next question comes from the line of Mark Altschwager with Baird. And your line is open.

[Mark Altschwager:]

Good morning. Thanks for taking my questions. Wanted to follow up on the margin, and your really nice margin performance this quarter, I think the second quarter of solid growth in operating profit, which we haven't seen in in some time. I guess, how should we think about the sustainability there and the normalized growth algorithm as the COVID disruption abates? I would think that number is going to accelerate as we left COVID, but moving forward, I think you've spoken to consistent positive comps, and we see some nice gross margin tailwinds. So maybe it ultimately comes down to what a normalized SG&A growth looks like as we look at all the puts and takes on the cost front. So just any thoughts there would be great.

[Marlo Cormier:]

Yes. So let me start there at the topline. I think we've referenced the sales disruptions. We’ve experienced the choppiness. We’re in times where there's not restrictions pre-COVID. Going into last March, we were positive low single digits. We had - Q4 was another period of low single digit growth. Again, that was a period when the restrictions were lifted and it was lower issues from the pandemic during that time. Of course, then in November, the restrictions come back on. So we’ve seen the choppiness, but I think the way we're thinking about it and the way we've proven to ourselves, I think, is that we are a low single digit grower. And we believe when the pandemic headwinds abate that we are well positioned. We have new capabilities, better tools, better teams to continue. And we focused on that during the entire time of the pandemic, to continue to build out those capabilities. So we believe we're in a great position to deliver consistent, sustainable growth. Again, we've got to get past the pandemic. From a margin perspective, gross margin perspective, again, the sustainability of the - around 50%, is definitely something that we've proven. We believe the promotional strategy is working. The shift in marketing strategy is working as well. So we believe that that is something that we will see and continue to deliver going forward. From an SG&A point of view, that - we will have some headwinds there. There is wage inflation over time, but we will continue to work to optimize that. We’re getting better at the e-comm profitability. We will continue to look at, as Chris just mentioned, the store fleet is under analysis as well. So we look for improvements that we can make there. And then in terms of the other things we can do in margin, we've got pricing opportunity, we believe. Again, we've got a differentiated core that we believe we can leverage. So we feel confident that we can drive leverage on SG&A over time once we get to a point past the pandemic where we can grow the topline and those low single digits. So again, we're positioned really well for the long-term. And again, given all the capabilities and new tools that we brought to our business model, we're now at a good pivot point. Once the pandemic abates, we will be able to deliver on that.

[Mark Altschwager:]

Thank you for all that detail. And just a follow-up kind of on the near-term here as we look at the reclosures across the various markets. Thinking back to last year, you were pretty quick and aggressive about reopening your stores safely, leaning into curbside, and returned to positive comps, I think faster than anybody would have anticipated. So I guess the question is, how do the learnings from last spring and the investments that you've made last year, really affected the near-term strategy as you faced these new closures? I guess maybe wonder if you could speak to your ability to make better capture demand through some of these tools, and just how that might impact your near-term outlook.

[Chris Brickman:]

Yes. Mark, it's one of those things where we've gotten better at it, and it's one of those things you wish you didn't have to get better at it, but we have gotten a lot better at this, right? So, our teams are pretty agile at this point. They can adapt. Of course, it’s a little easier when you're not closing down all of your stores at the same time as well. But the reality is, our European team is working this on a day-to-day basis. Our Canadian teams are working this on a day-to-day basis, and they adjust accordingly in terms of, what does the federal - the local jurisdiction signal to us? What can we do? Can we move to curbside or not? How much digital can we push? Do we need to furlough teams during this, which of course we have, and then how do we get them back? We've built a lot of muscle around moving quickly in a dynamic environment. And I think that's helped us in the quarter we just finished. It's going to help us in the second quarter as we go through more of the disruption. And then, I'm hoping that we can move that muscle on to other things because dealing with local shutdowns is obviously not the best - not the most fun part of the business. For me, what's most exciting is, it just proves to me that we've built a much stronger retail leadership team. We've added a lot of talent over the course of the last year, year and a half. And we just have a team that's just better able to cope with whatever comes at us. And that team will also be better able to execute as we come out of the pandemic and drive our long-term strategy.

[Mark Altschwager:]

Thanks for all the detail and best of luck.

[Operator:]

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

[Steph Wissink:]

Thank you. Good morning, everyone. Just a couple of follow-up questions actually to prior questions that have been asked. The first is on margins. And maybe, Chris, you could talk a little bit about the penetration of color in the business now, and how that margin of that category compares to the overall company average. And then the same question on channel mix. How deeply penetrated is e-comm in the business today, and how does that margin look relative to maybe what has been the company average over time?

[Chris Brickman:]

You bet. Thanks for the question, Steph. I appreciate it. The reality is that color is obviously growing faster than all the other categories, and it is a higher margin category. And by the way, it has proven over time to be a very price inelastic category, because both consumers and stylists are very sticky to their color line. So historically, color was in the high 20s or 30 for Sally. It’s gained. That shares going up. Yes, for BSU it’s more like 40 and that share is going up, as we continue to see color growing faster than the rest of the business. And it is a higher margin category. So we expect that that mix shift is a positive headwinds for margin over time, and we continue to focus on color as our core. In terms of e-comm, as you signal and as other retailers often signaled, in our BSG business, e-comm is actually quite profitable because the orders are very large. So stylists tend to place very large orders. So the distribution expense is easy to amortize across a large order. In our retail business, e-comm is not as profitable as our store business. We have a lot of optimization that we're working on now, and obviously BOPIS significantly improves that profitability. BOPIS and same-day delivery are very close to our store margins. So part of this is, we've got to get better at delivering from the store. And then the other part is, we've got to optimize our ship-from-store and warehouse delivery as well. So that's where we're at today. E-comm across the whole business is about 7% of our total, but it's going to be growing fast, as we should expect. And so, we've got to continue to make it more profitable so that we’re more indifferent to the two channels.

[Marlo Cormier:]

And I would just add to that, that the way that we approach promo and e-comm now is across the board with the company’s total. So before, it was more of a promotional channel. it's not that anymore. It's more of a content delivery method, plus the product that we're delivering online is very similar to our product margin structure that we have in store as well. So I think there's an improvement there. The other thing that we're doing is optimizing the assortment that we're offering online as well. So, all of that in, e-comm profitability is improving. And so, we look forward to actually adding more and getting it to not quite neutral, but more closer to neutral.

[Steph Wissink:]

That's great. And just two quick follow-ups from some of your recent initiatives. If you could talk a little bit about the DIY hair color trends, and then you recently launched a new digital marketing campaign using some influencers or key opinion leaders. Can you talk a little bit about what you're learning from that venture, what you're learning about your social traction, and how that might affect marketing mix going forward? Thank you.

[Chris Brickman:]

No, I appreciate that, Steph. I'm glad you noticed that. Yes, the DIY, and we actually launched the DIY University. The reality is, is we think that's the way to grow color itself, is to provide education and training and tools so that it's easy - that the barrier to entry is less because correct, we sell professional color to the consumer, as opposed to other retailers sell box color. An all-in-one solution doesn't give you as good of a result, but it’s - the perceived risk is lower for the consumer. And so, one of our real focuses is to create more DIY education so the consumer feels more comfortable with it. And we think there's a strong desire for the consumer to absorb that information both digitally, as well as in-store, and to try and do that themselves. So we're really excited about where that's going. And of course, you just mentioned the SallyCrew, which is our influencer program. And we have some terrific influencers through that. I'd encourage you to go look at - I watch them every day, influencers like Charity Grace and Emily Boulin. The reality is that that they're doing fantastic content that really highlights, in many cases, vivid colors, but other techniques as well that excites the consumer, gets them excited about what they - the look they can generate for themselves, and give some DIY hints about how they can get it done and do it quickly. And so, I think SallyCrew is just at its infancy. It's going to get bigger from here. We'll probably add more influencers over time, and we'll continue to look for people who are good educators, as well as demonstrators. And that's the big difference. Linked to that previous strategy I discussed around DIY, we've got to have influencers who are good educators as well, because part of what we've got to do is share that this isn't impossible. It’s easy to do. You can do it yourself, and we can help you get there. So, I'm glad you've noticed it. We're going to continue to invest in it. We expect it to grow as a marketing investment and channel for us. And hopefully we'll - it'll continue to have the impact we want, which is to really recruit new color customers.

[Steph Wissink:]

Thanks, Chris. Very helpful.

[Operator:]

Thank you. Next, we will go to the line of Olivia Tong with Bank of America. And your line is open.

[Olivia Tong:]

Great. Thank you. Good morning. I wanted to ask a few questions. First, just a really quick housekeeping one. When you say sales declined in Q2 more than Q1, do you mean down more than 4.5% year-over-year, or that sales will be below the $936 million in fiscal Q1? And then I'll follow up with my other questions.

[Marlo Cormier:]

Yes. It's more the comparison, so your first thought. So the way we think about it is, the way we said is we expect it to soften moderately from the decline in Q1. So what we're saying is, the continued disruption and the choppiness that we're seeing going into Q2, that's going to offset the easy compares that we saw last March. But you also have to remember that last year we were trending positive in the pre-COVID time, so before March. So when we put it together, what we're expecting is that the continued disruption in Q2 this year, up against the strong pre-COVID compare and Q2 last year, is going to offset that easier compare to last year's March. So that's where you get to Q2 sales softening moderately from the 4.5% decline that we saw in Q1.

[Olivia Tong:]

Got it. That's very helpful. Thank you. And then I got disconnected in the middle of the call, so I apologize if this was asked, but just wanted to get a better feel in terms of the footprint, the retail landscape for beauty and hair, because there are a number of new partnerships geared more towards the face and hair. But what's your view on how the competitive landscape changes with Target Ulta and also Sephora has moved to Kohl's from J.C. Penney. I mean, I suspect it's not a direct comparable, but does this create more competition for you? Or potentially in a positive way, does it put additional focus on the categories in personal care, beauty, hair and you get a halo benefit from that? So just kind of curious how you were thinking about the increased retail partnerships and focus on beauty within the store, or across the store footprint. Thanks.

[Chris Brickman:]

Thank you for that. I've been thinking about it a lot. Obviously these get a lot of press. The reality is, we're in a very different category. Our category focuses color first. And neither of those partnerships are really focused. They're pretty much focused on cosmetics and skincare and those areas. So the reality is, I don't see it as a major impact or really affects our strategy relative to our focus on color. That being said, it immediately makes you think about, what do you want to do with your own footprint, and are there creative ways to recruit color customers in other locations that we should be considering? So, I certainly think it has spurned interest in terms of, where's the best place for us to reach color customers. And are there other places that we should be in order to do that? but I don't see it as much in the way of direct competition to us, because it's so much more focused on cosmetics, which is not a core category for us and is really just a small basket add category.

[Olivia Tong:]

Got it. Thanks. Appreciate it.

[Operator:]

Thank you. Our next question comes from the line of Carla Casella with JP Morgan. And your line is open.

[Carla Casella:]

Great. Thank you. My first question is on the JDA rollout. There were additional DCs. Any more color you can give us in terms of the timing, how many DCs over which quarters?

[Chris Brickman:]

Yes. I'm not going to go quarter by quarter. we're obviously in North Texas and one other DC is starting up now. Obviously, like any implementation, what you do is you start it up and then work the bugs out of it. And then once you've worked the bugs out of it, you then expand it across the platform because you know it's working well. We’re well down the path of working the bugs out of it, and feeling comfortable in scaling it to full scale. And then as we get past that phase, we'll go facility by facility, and it'll move pretty quickly, because again, once you've worked all the bugs out, you can scale quickly without fear of a disruption. So, we’re in the heavy problem-solving phase. It’s working well, and we expect that by the end of the year, it will be fully implemented.

[Carla Casella:]

And how many total facilities will get it, everyone?

[Chris Brickman:]

Yes, everyone.

[Carla Casella:]

Okay. And then you deferred rent last year. Did you get any rent abatements as well? And could you just give us any financials in terms of how much rent will be made up in ‘21?

[Chris Brickman:]

Yes. No, actually there's not much. The only thing we did when we - when they deferred rent was, they would add an extra few months onto the end of the previous leases. So there's no incremental payment that has to be paid. There's no deferred payment.

[Marlo Cormier:]

Yes. So it's - compare is where you're going to see the difference, right. So we had abatement last year. So this year, you will see an increase relative to last year, but nothing above normal.

[Chris Brickman:]

Correct. And in general, the trend, as we re-signed leases is, we're beginning to see lease rental rates come down, which is what you'd expect.

[Marlo Cormier:]

Right.

[Carla Casella:]

Okay. And then you did a good job with your inventories, low. Is that the right level, down 10%? And did I hear correctly? It sounds like working capital, we should expect to be a use of cash as we go into second quarter.

[Marlo Cormier:]

Yes. No. inventory level is definitely down, working towards optimal levels, but not quite to where we want them to be. We did improve our in-stock quite a bit. But we did go a little bit low and we're still trying to fill in in some of our areas, just certain areas. Mainly it was in the BSG side of the business. And most of the problem or part of the problem, I should say, is supplier disruptions from COVID. But we also are having some delays from the California port issues that are going on. So, we didn't get all the inventory that we wanted in Q1. We expected it and that's a little more heavily. You also saw our operating cash flow was better than we anticipated, and that's the reason. So we do have some of that inventory that has been delayed, will be received in Q2. So it's spilling over into Q1, or from Q1 to Q2. So really it’s just - it's a timing issue between Q1 and Q2 on the cash side. Obviously, we're trying to get better at our in-stocks and this will help us as we get to course correct it in Q2, just continue the thought on cash. We do still expect strong cash generation for the year. It's back half loaded just as we expected before, and we'll continue to maintain really strong liquidity.

[Carla Casella:]

Okay. And then just one other. On hair color, what percentage of your total Sally and BSG sales was that last year, and where could it go this year with your renewed focus on that area?

[Chris Brickman:]

No, it’s up with the growth there. Obviously, as I mentioned, we're seeing 19% growth in Sally and BSG is positive as well, even with all the disruptions, as is Europe, amazingly. So it's growing as a percentage of our category. It has been historically in the high 20s at Sally. It’s more like 30 - above 30 now, and BSG has always been in the 40 range and it's growing as well. So again, it's our core recruitment vehicle. It'll continue to grow as a share of our total. It also is higher margin, which is great. But it's just a very sticky category and it's where we have the greatest expertise.

[Carla Casella:]

That's great. Thank you.

[Operator:]

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

[William Reuter:]

Good morning. Can you remind us when the changes to the promotional strategy were made, so we can think about when those comparisons are going to be a little more challenging? And then, I'm wondering whether you believe that there may be some component of this that is related to the environment, the COVID environment and reduced promotions across most consumer products, and I guess your confidence that this won't revert to legacy promotional levels once we get out of this.

[Marlo Cormier:]

Yes. First question as to when, we really started to shift the promotional strategy, really at the height of the pandemic in Q3 of last year. You can see it in those - in that margin, although I'll say it's a little complicated when you go back and look at that. We did have some write-offs associated with some clearance activity, as we were cleansing our inventory positions. But when you peel all that back and we did try and show you those pieces in our script last quarter. When you peel all that back, we're at a 50% plus margin. Then you go to Q4 and you clearly see it. We're about 50% there. And then again, now you see it in our Q1. So it's really, once you peel back Q3, you see it there, but that's when you see it flowing through the financials.

[William Reuter:]

Okay. And then on your leverage target, is that two and a half times a net number or a gross number? And do you have an internal expectation of when you might be able to achieve this level?

[Marlo Cormier:]

Yes. The leverage is the net number. As far as timing, it's all dependent on the disruptions in our performance there. So as we stated before, we're positioned really well as the pandemic disruption subsides, to really get back to topline growth. That'll continue to flow through the cash flow, and will put us in a position to continue to work towards that leverage on the EBITDA side. On the debt pay down side, which is the other side of that equation, we're in a great cash position. You saw us pay down debt here just this past January. And we look to continue to rebuild cash and read the environment. We look forward to making more progress towards that target.

[William Reuter:]

And then lastly for me, I had seen an article that suggested that there may be stylists that have left the industry based upon more people doing DIY at home, and all the disruption that's in some areas kind of affected their livelihood. Do you guys have any indications that there may be a reduction in the number of stylists?

[Chris Brickman:]

I'm sure there is some of that. Some of it may be that people are taking time off because they're reluctant to work in an environment where they don't feel as safe. What we're seeing much more of, though, is fragmentation. So we're seeing larger salons break apart, and stylists either go on their own as suite renters, booth renters, or mobile. And that actually is good for our business, because many of the larger salons were served directly by the big brands. And as they become independents, they're more likely to be store customers and BSG customers. So we think that's the bigger trend that's going to - it was already a trend that was happening, but it's going to be accelerated as you see, I think, a lot of salons that just don't make it through the pandemic, especially in places like California, where you've seen three waves of shutdowns or New York City, or some of the big environments that really suffered here. A lot of salons won't make it. Those stylists will still want to earn a living and they'll go as either suite renters or mobiles. And that's a great target market for BSG in our store platform.

[William Reuter:]

That makes sense. All right. That's all for me. Thank you.

[Operator:]

Thank you. And I'm showing no further questions in queue. Please go ahead with any closing remarks.

[Chris Brickman:]

Well, thank you all for joining us for our Q2 or Q1 fiscal 2021 earnings call. We appreciate your support and your questions. We feel really strongly about the strength of our business, as we manage through the end of the pandemic, which we hope is coming in coming quarters. And we feel like we've positioned the business to really focus on a differentiated core color, and added a lot of new capability and talent to support that. And so, we feel quite strongly about our long-term trajectory. Obviously, there'll be some choppiness in the quarter right in front of us, but once we get past that, we’re excited about where we're going to land here, coming out the back of all of this, that we're going to be a better and stronger company, with a more differentiated core, and greater capabilities to serve that core. Thank you very much.

[Operator:]

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.