Consumers are trimming down on the frills and only indulging in essential items, according to Sally Beauty in its latest quarterly update on Tuesday (Nov. 14).
“We certainly see a little shift in behavior from what we had seen earlier in the year about a little bit more frugality. The trend that’s persistent from the beginning of the year as people does not buying things that they don’t need,” said Denise Paulonis, president and CEO of Sally Beauty, during the Q&A segment of the call.
Reinforcing this concept are insights from PYMNTS, indicating that 10% of paycheck-to-paycheck consumers, totaling 16 million individuals in the United States, identify nonessential expenditures as the main factor contributing to their financial challenges.
Read more: Nearly 30% of High Earners Cite Nonessential Spending as Reason for Paycheck-to-Paycheck Lifestyle
The beauty products chain has observed an ongoing trend where items like styling tools consistently experience a cut in demand. This phenomenon can be linked to the consumer habit of buying such products only when necessary or when individuals feel they have a surplus of funds in their wallets.
“So, a general sense of frugality, but not much more than that in terms of new trend or new behavior,” continued Paulonis.
With that in mind, the company is implementing strategies to encourage shoppers to increase their spending.
As an initial step, the company highlighted the introduction of Studio by Sally in fiscal 2023, which is presently in the pilot phase at six locations spanning diverse markets. Paulonis noted the company’s satisfaction with the current level of customer engagement and outlined plans to integrate essential insights into expansion strategies for fiscal 2024. The company is planning to relocate or remodel 30 existing stores to align with the studio concept, with an overarching goal of scaling to more than 100 Studio locations in the long run.
Sally Beauty is transitioning to Licensed Colors on Demand, enhancing customer service through an online rollout to all 50 states, completed in October. The effort has attracted new customers and achieved conversion rates of about 45%. By the end of fiscal 2024, the company anticipates close to 100 licensed colorists serving customers via this platform.
In terms of its eCommerce efforts, Sally Beauty has launched a partnership with Walmart, with plans to expand to other online sites in fiscal 2024. Furthermore, DoorDash and Instacart will be integrated for in-store fulfillment to minimize shipping expenses and boost the bottom line.
On the B2B side, Paulonis mentioned that Cosmo Prof Direct initiatives are fostering customer-centricity, boasting over 4,500 digital storefronts and officially rolling out in 12 states by the end of fiscal 2023. This platform enables professional stylists to navigate the digital realm, offering a seamless online storefront experience.
Lastly, the newest growth avenue, Happy Beauty Company, a value concept, engages shoppers through the launch of 10 pilot stores in the DFW and Phoenix markets. Early performance metrics surpassed initial projections, prompting the company to plan a dedicated marketing push to enhance awareness, envisioning the potential for 500 to 1,000 locations across the U.S. in the long term.
These initiatives build upon the retailer’s previous endeavors to stimulate consumer purchases. In the last quarter, Sally Beauty highlighted that incorporating a buy now, pay later (BNPL) payment option through Klarna resulted in an increased average order value and introduced a fresh and younger customer demographic to the Sally Beauty platform.
This strategic maneuver corresponds with the growing trend among younger shoppers who are increasingly embracing the BNPL model as a means to indulge in beauty products while also practicing financial prudence.
See also: Sally Beauty CEO: Gen Z Adopts BNPL, Boosts eCommerce Sales by 7%
In a recent report by PYMNTS, BNPL solutions are purportedly overcoming prior worries about the impact of rising interest rates on all BNPL lenders.
The report noted that, unlike traditional banks, BNPL providers depend on the market to secure funds to provide small loans and installment plans to shoppers, making them susceptible to the effects of escalating interest rates. Nevertheless, BNPL platform Affirm is flourishing and drawing in additional loan buyers to its funding platform, as reported by The Wall Street Journal (WSJ) on Thursday (Nov. 9).
Related: Buy Now, Pay Later Thrives Despite Rising Interest Rates
In the fourth quarter of fiscal 2023, Sally Beauty reported a consolidated net sales figure of $921 million, signifying a 4.3% decrease compared to the prior year.
The consolidated comparable sales experienced a decline of 1.6%, while global eCommerce sales reached $87 million, accounting for 9.4% of the net sales. The GAAP gross margin showed an increase of 240 basis points, reaching 50.6%, primarily driven by the prior year’s non-cash inventory write-down of $19.4 million associated with the distribution center consolidation and store optimization plan.
The adjusted gross margin was also increased by 50 basis points to 50.6%. GAAP operating earnings amounted to $77 million, with a corresponding GAAP operating margin of 8.3%, while adjusted operating earnings were $79 million, accompanied by an adjusted operating margin of 8.6%.
In terms of earnings per share, GAAP diluted net earnings were $0.39, and adjusted diluted net earnings per share were $0.42. The company demonstrated strong financial performance in cash flow, with $117 million generated from operations and $90 million in operating free cash flow.
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