Lowered Margin Guidance
Q: Why did you lower operating margin guidance despite maintaining top-line outlook?
A: Management reduced the operating margin guidance due to adjustments in gross margins, which came in slightly lower than expected at 51% in Q2. This was primarily driven by a shift in sales mix, with lower penetration of the higher-margin Sally U.S. business and increased promotional activities. They updated gross margin expectations for the remainder of the year to a range of 50.5% to 51%, still historically strong.

Consumer Spending Trends
Q: How is consumer behavior affecting sales across different customer segments?
A: There's a bifurcation in consumer behavior. Stylists serving middle-to-higher income clients are seeing a return to normal routines, boosting demand in the BSG segment. Meanwhile, lower-income consumers typical of Sally customers are feeling financial pressure, becoming more selective, and seeking value, which impacts their purchasing behavior.

Promotional Impact on Margins
Q: How are increased promotions affecting margins, and what are your plans?
A: The company observed a higher take rate on promotions in both professional and retail sides, reflecting consumers' search for value. Management is adjusting promotional strategies—including design, depth, and duration—to balance maintaining customer loyalty and preserving margins. These changes are expected to moderate the impact on margins in the second half.

Capital Allocation and Leverage
Q: What are your capital allocation priorities, and is the leverage target still 1.5x to 2x?
A: The leverage target of 1.5x to 2x remains appropriate. The company refinanced debt, reducing principal by $80 million. They plan to balance debt paydown and share repurchases, aiming to exit the ABL facility as they progress through cash-generating quarters. Guidance includes approximately $10 million in share repurchases for Q3.

Innovation Driving BSG Growth
Q: What specific innovations contributed to BSG's strong performance?
A: Growth in BSG was driven by new brands like Moroccan Oil, Color Wow, and Amika, which expanded territory rights and store distribution. Recent additions such as Briogeo and Epres also contributed, offering innovative hair care and styling products that resonate with stylists.

Initiatives to Boost Sally Foot Traffic
Q: What initiatives are you implementing to increase foot traffic at Sally Beauty Stores?
A: The company is enhancing its omnichannel approach, including ramping up marketplaces like DoorDash, Walmart, and Amazon, with Instacart launching in Q3. They're focusing on experiences like Licensed Colorist OnDemand and promoting own brands like bondbar to attract new customers. Personalized CRM activities are also being used to drive engagement.

Demand Variance Between BSG and Sally
Q: Why is demand improving in salons but consumer spend at Sally softer?
A: Salons serve middle-to-higher income clients who are returning to regular services, boosting stylist demand in BSG. In contrast, Sally's lower-income consumers face financial pressures from inflation and are more selective, impacting sales.

Industry Pullback: Macro or Innovation
Q: Is the beauty sector's pullback due to macro factors or slowing innovation?
A: The pullback is attributed more to macroeconomic pressures on lower-income consumers than a lack of innovation. The innovation cycle remains robust, especially with new professional products and hair care innovations for stylists.

Managing Shelf Space with New Brands
Q: How are you adjusting shelf space with new brands added to BSG?
A: The addition of brands like Moroccan Oil, Amika, and Color Wow hasn't materially changed shelf space for existing brands. Only a few SKUs were trimmed, with no significant reductions in any product lines.

Second Half Margin Expectations by Segment
Q: Are you adjusting second-half margin expectations by segment?
A: The mix shift—stronger momentum in BSG and softness in Sally due to AUR pressure—is impacting margins. While they haven't adjusted segment expectations separately, they are being prudent in gross margin guidance and are adjusting promotional offerings to drive traffic and maintain wallet share.

Weakness in Higher Ticket Items
Q: How is the weakness in higher ticket items affecting sales?
A: The company expects Q3 sales to range from -1% to +1%, showing progress despite continued softness in higher ticket items. They are focusing on planning and adjustments in Q3 and Q4 to navigate this softness and aim for sequential improvement.