Image source: The Motley Fool.
Sally Beauty Holdings Inc (SBH 2.76%)
Q3 2020 Earnings Call
Jul 30, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
[Technical Issues] [Operator Instructions]
I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.
Jeff Harkins -- Vice President of Investor Relations and Strategic Planning
Thank you. Good morning, everyone, and welcome to the Sally Beauty Holdings Third Quarter Earnings Conference Call. Before we begin, I will remind everyone that we have made a presentation available for today's call that can be viewed from the link provided on our investor site at sallybeautyholdings.com/investorrelations. In addition, given the impact of COVID-19 and consistent with our recent disclosures, we will be providing limited supplemental disclosure for some operating and financial metrics for the months of April, May and June within the quarter.
I would also like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.
Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and similar words or phrases. These statements are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings' filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K. The Company does not undertake any obligation to publicly update or revise its forward-looking statements. 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.
With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, President of Sally Beauty Supply and Chief Financial Officer; and Marlo Cormier, Senior Vice President of Finance and Chief Accounting Officer. Chris will start by offering thoughts on our third quarter as well as why Sally Beauty Holdings is uniquely positioned to take advantage of consumer trends, respond with agility to the COVID environment and generate cash. Aaron will then discuss our third quarter consolidated and segment financial results, touch on our liquidity and provide some perspective on our fourth quarter. Finally, Chris, Marlo, Aaron and I will be available for your questions.
Now, I'd like to turn the call over to Chris.
Christian A. Brickman -- Director, President and Chief Executive Officer
Thank you, Jeff, and good morning, everyone. What an incredible couple of months it has been. On our last earnings call, we spent time highlighting our aggressive response to the COVID-19 pandemic, the successes earlier in the second quarter on our transformation initiatives and the positive comps our business experienced prior to the onset of COVID.
During that May call, we also highlighted our views of changes to consumer behavior, the recession-resistant nature of our categories in our company and our aggressive efforts to reduce cash burn and to tap additional sources of liquidity. Since our last earnings call, we have provided a number of COVID-related updates on all of these topics. And each month, the consistent message has been one of agility, resiliency and decisive action as we continue to grow cash on the balance sheet and maintain liquidity, while quickly getting our store fleet up and running, bringing our team back from furlough and pushing ahead with our fast pivot to the future in our digital business.
Progress continues, but I think our team can be quite proud of their efforts in the quarter. In the face of everything COVID can throw at us, we got a lot done. Here are some of the key highlights I want to emphasize for you about the third quarter. We brought down the entire store fleet and then brought it back up again, so that as of today, we are now operating everywhere except a handful of stores in international territories. We pivoted rapidly to e-commerce by rolling out ship-from-store and same-day delivery. We quickly set up contactless curbside pickup at many of our stores as COVID forced us to shut down customer-facing operations. We saw a significant growth in digital over last year even as our store sales were surging as we reopened.
As the quarter progressed, we saw strong demand, while the overall quarter will show a decline in sales due to COVID and the shutdown. As the network has opened up, sales have been coming back strong. Both Sally Beauty and Beauty Systems Group had positive same-store sales in June even with parts of the network closed at the start of the month.
Beauty Systems Group had its highest monthly sales ever with revenue of $155 million in June as stylists and salons refilled their supplies in response to strong customer demand. We exercised incredible discipline, relative to both cost and cash control. We aggressively managed our working capital, including inventory dropping to a six-year low during the quarter. We reset our inventory open to buy process and cleared out an overhang of inventory and componentry in Europe and the United States.
We grew our balance sheet cash to $839 million. We executed a restructuring in the United States, which prioritizes our digital future and capability bills, consistent with the outlines of our transformation plan. And we did all of that while much of our staff was on furlough, allowing us to regain sales momentum fast and bring back most of our team by mid-June.
I would also like to highlight some observations about our consumers. We have seen data, which suggest that consumer sentiment was increasing until the middle of June, largely in line with states reopening and the hope that the country had beaten COVID. But sentiment then leveled off and retreated late in the quarter as COVID fears reemerged in new parts of the country. In contrast, we also saw consumers change their purchase patterns. While spending early in the quarter was quite depressed as consumers we're addressing sudden unemployment and the uncertainty of COVID, over the quarter, we increasingly saw our consumers less cautious of spending even in the face of high unemployment and fears of recession.
While impossible to quantify with certainty, we believe this increased spending was driven by three things. First, the historical experience in our categories that consumers will cut other expenses before they stop investing in their appearance. They want to feel good about themselves. Second, the fact that our consumers may have some surplus discretionary spending because they are spending less elsewhere on things like restaurants, entertainment or travel or because they receive stimulus payments. Lastly, some of you may have seen third-party data like we did suggesting that the beauty consumer is trailing consumers in other categories like housewares, auto parts and toys. We have not seen that materialize in our own demand and believe it is due to the categories within beauty where we lead. Hair color is fundamentally different from cosmetics.
There is no escaping that we are operating in a world of uncertainty. Investors are seeking assurances from companies that keep -- from companies that see fundamentals are in place to drive performance going forward. This is particularly true in retail and even more so in specialty retail. I recently heard a well-known investment manager comment publicly that in his mind, companies that deserve investors' attention in this market have three things in common. They can take advantage of consumer trends initiated by COVID and changing consumer needs, they have proven they can operate effectively in an environment impacted by COVID and they have strong cash flow and cash on the balance sheet. Sally Beauty Holdings hits all three of these characteristics. So I'm going to structure my remarks accordingly.
Let's talk about the investment managers' prioritization of companies that can take advantage of consumer trends initiated by COVID and changing consumer behaviors. We are seeing several trends for which our business is uniquely positioned to respond. First, do it yourself. Whether in home improvement or hair color, consumers have responded to the fear of COVID by spending more of their time at home taking on tasks that they previously would have paid others to do for them, such as coloring their hair or doing their nails. Our Sally Beauty retail business is perfectly aligned with this trend. Sally is the industry leader in professional color for home use. Our customers can find all of the needed solutions or products either online or in our stores. Additionally, they can find How-To content on our digital sites starting with Hair Color 101 all the way through more complex application techniques.
Alternatively, a consumer can talk to a Sally associate at a store who has been trained in hair color. We have the right products and the right expertise to respond to the consumer DIY trend.
Second, there is a consumer trend around creative expert experimentation, which is driven by customers with time on their hands as they social distance, deal with boredom or revel in the escape from normal workplace appearance expectations. With more of our customers working from home or learning online, there is an opportunity to express themselves and how they look, which previously may have been constrained. The result of this strong interest in creative categories like vivid colors and nails.
Since the start of COVID, we have seen increased interest in vivid colors in our Sally retail business in the U.S. and Canada. The category actually grew 22% in the quarter, compared to the prior year, despite stores not being open for the entire period. Vivid colors now represent 27% of total -- of the total color category, compared to 20% in the prior year.
During the quarter, we also observed that many consumers desperately wanted to get back to their stylist, once restrictions were lifted. And our Beauty Systems Group business was ready to provide the needed products for our stylist and salons. We see signs that we have been more nimble than some of our competitors in getting back up and running and with BSG delivering its strongest month ever in June, we believe that we have gained share by better serving the professional during this difficult period.
The second criteria called out by the fund manager was companies that have proven they can operate effectively in an environment that will continue to be impacted by COVID. We believe that the agility with which we have moved in the last three months, makes a strong case that we are that type of company. We have been successful in launching new assortments to allow our retail customers protect themselves and to allow our professional customers to protect both themselves and their clients.
Whether with hand sanitizer, Barbicide, gloves, masks or case, Sally Beauty and Beauty Systems Group were in stock with these items before the crisis hit and quickly moved to bring additional assortment and inventory into our network. It was not by accident that during the crisis we're identified in the national media as one of the few places that consumers could find hand sanitizer. While the supply and demand curve is normalized in connection with sanitizers and masks, we believe that personal protection will continue to be a customer need, particularly in salons and we will continue to support it in our assortment.
In addition, we rapidly change our service model during the COVID crisis to provide our customers with more choice on how they interact with us and more access to their -- to our inventory chainwide. We have continued to iterate on the changes to our service model and believe that they will serve us well as consumer preferences change and as we see outbreaks of COVID across the country. We started this journey by putting safety first. Our team members are required to wear masks and gloves and we are actively monitoring for compliance. We have installed the plexiglass screens at the counters, created social distancing operating procedures and our stores are regularly cleaned. We took similar steps at our distribution centers, while increasing capacity.
We also offer flexibility, we created curbside for our customers and have recently reenergized that offering in areas seeing COVID increases. We rolled out same-day delivery at Beauty Systems Group to address the need to be a busy stylist. We rolled out ship-from-store at Sally Beauty to increase the inventory that was available to our retail consumers. We have spent time optimizing both efforts and growing our capabilities and expect to continue to add services. And in contrast, it is also the case that we are able to operate in the COVID environment, because of what we are not.
We are not a mall-based retailer, very few of our stores are attached to a mall complex and most of our small footprint stores are located in strip malls or in developments with big-box retailers like Walmart or Target or other large food retailers that stayed open during the crisis. This means that we are not dependent upon foot traffic at department stores or apparel outlets for our business, it also means that we do not have to rely on others to create a safe environment for our customers.
Finally, let's talk about Sally Beauty Holdings as a company with strong cash flow and cash on the balance sheet. In our last earnings call, we updated the investment committee on our successful efforts to increase liquidity, including increasing the size of our revolver and issuing a $300 million bond. We also commented on our aggressive efforts to manage cash. As you can see from today's earnings announcement, we delivered strong positive free cash flow for the quarter of $180 million, this was by design. We also continue to increase cash on our balance sheet with our quarterly books now closed, we can report that we now have $839 million of cash on the balance sheet as of the end of the third quarter. At the start of the crisis, we shifted our management focus from profit to cash and that has worked well for us. Our success in generating cash was driven by several key tactics we deployed in response to a changing environment, removing unnecessary promotions, limiting advertising, adeptly managing working capital and delivering against key initiatives such as negotiating rent abatements from landlords.
This is all work that the team will continue as we carry forward, but I want to emphasize that our company is in an excellent liquidity position.
In closing, let me offer a few final thoughts on why we believe Sally Beauty Holdings has a great opportunity to do well as the world manages through the ongoing pandemic and the associated economic downturn. To begin with, our categories are in high demand and our customer will sacrifice other things before she sacrifices for hair and beauty regime. Our business has been relatively recession-proof and we have built a built-in hedge between Sally Beauty and Beauty Systems Group. As DIY moves to the forefront, Sally may benefit over Beauty Systems Group, but we see opportunities within BSG as well, with PPE growth and the potential failure or downsizing of smaller distributors.
We do not face the overhang of mall stores and the fear that consumers may have of mall crowds going forward. In addition, our store footprints are relatively small and social distancing is relatively easy to enforce. We are building strong digital platforms at an accelerated pace and let me be clear that we will continue to prioritize investments in our digital platform and new delivery service models in order to better serve our customers and drive growth in a disrupted environment.
Finally, our team is aggressively pursuing our transformation, while leveraging the impact of what we have done with the restart of our continent spanning store networks with an emphasis on safety for our customers and for our team. This all means that we are well positioned to serve our customers, strengthen our leadership position in professional color and grow our business despite the continuing impact of COVID in coming quarters.
Now, I will turn it over to Aaron to discuss our financials and our liquidity in more detail.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Thank you, Chris. Good morning. I would like to start my comments by thanking the Sally Beauty CosmoProf and Pro-Duo associates in our stores around the world. Their hard work and creativity in the face of the COVID challenge was and continues to be frankly incredible. I'm going to spend my time today providing some context on the complexity or the puts and takes that are contained within our quarterly numbers.
Let's start with revenues. Consolidated revenue was $705 million for the quarter, down 27.7% for the prior year. Consolidated same-store sales for the quarter were down 26.6%. Our primary revenue decrease for the quarter, of course, was driven by the shutdown of customer-facing operations due to COVID with the shutdown impacting all of April, May and June. We did lose one entire selling day in our largest business, the Sally U.S. retail business as a result of a one-day total network shutdown surrounding the civil protests for racial justice. We estimate this cost was $5 million in sales for the quarter.
We also operated 27 fewer stores during the quarter, given that we had put a stop to store remodels, relocations and new store openings due to COVID. Finally, we saw unfavorable impact from foreign currency translation of approximately 30 basis points on our reported sales. In contrast, on the positive side of the equation, our global e-commerce business showed strong growth. For the third quarter, e-commerce sales were $137 million, representing growth of 278% as compared to the prior year. This growth was enabled by three things. Our quick pivot to digital options for our customers, a noticeable channel shift between stores and e-commerce early in the quarter and a large group of new customers in our online retail channel with almost 50% of the total e-commerce customers being new to us as measured by an email address that we had not previously transacted with. As our stores reopened, our e-commerce business tapered a bit, but still showed strong growth versus the prior year with e-commerce growth for April, May and June coming in at 353%, 317% and 115%, respectively. We also saw strong consumer demand in our stores as they reopened. The disruptions from COVID had a bigger impact on the first two months of the quarter, but as our store network started to reopen, we saw outsized improvement evidenced by same-store sales being down 72% in April, down 90% in May, but up almost 11% in June.
The U.S. and Canadian business opened stores faster than the other businesses, followed by Beauty Systems Group then Europe and our Latin American business, which still has a few stores closed. However, as June progressed, we saw significant pent-up demand and opportunity from competitor disruption, particularly within Beauty Systems Group. BSG, a business for which you have to have a professional license registered with us, saw almost 38,000 new customers walk into our stores during the quarter, particularly in June.
Now the strong demand I am referencing, even with the new customers, was driven by higher overall ticket, which itself was a result of higher units per ticket and higher average unit retail, notwithstanding clearance efforts, offset in part by lower traffic or in the case of BSG, a lower transaction count, which has not yet fully recovered in stores as consumers react to COVID. However, while store traffic has not yet recovered to pre-COVID levels, our data suggests that our traffic has recovered at a much faster pace into a much higher level than other non-grocery and non-mass retailers, whose traffic is measured by the same system.
So as I said at the start of the discussion, it was a complex quarter with multiple moving pieces impacting sales, but we are quite pleased with the agility with which our teams responded and in particular, with June and July as a sign of potential things to come.
Let's turn now to gross margin, which is also a complicated picture for the quarter. Consolidated gross margin for the quarter was 45.6%, which represented a 390 basis point decrease as compared to the prior year, which landed at 49.5%. The changes to gross margin result from the interplay of eight factors, four of which are positive and four of which are negative. On the positive side of the house, the combination of base price and field promotions drove gross margin up by more than 500 basis points. This increase was a result of a relatively stable base price points across categories, combined with positive mix shift toward higher margin categories like hair color and PP&E in the quarter as well as vastly reduce promotions across all businesses.
We also saw some slight P&L geography benefit to gross margin, resulting from our business over indexing on e-commerce during the quarter. However, because we were not promoting heavily and we were buying this inventory, we also recognized less vendor income in gross margin, which offset about half of the increase I just called out, leaving our gross margin before clearance actions, hovering around 52.4%, still a very respectable increase over last year.
Somewhat uniquely for the third quarter, we also had three different types of clearance actions, which impacted our results. First, in the absence of other promotions and in service of our intentional inventory reduction efforts to maximize cash and reset our inventory position, we ran aggressive clearance sales within our Beauty Systems Group and Sally Beauty U.S. and Canada network. These clearance efforts on goods, which sold through during the quarter, impacted gross margin by 280 basis points. Had we stopped there, our gross margin would have been roughly equivalent to last year.
However, our teams elected to take what I'm referring to as more aggressive clearance actions. We wrote-off and destroyed aged inventory in Europe and recognized a loss on private label product componentry at key suppliers for our retail businesses as part of executing transitions to lower cost suppliers in our own brand portfolio. In addition, after driving our inventory down over the course of the quarter and running those percentage off clearance sales, I referenced earlier, we still had a pool of inventory largely in retail stores that had not sold. Rather than hold that inventory for further percentage off clearance actions in the future, our merchandising teams took further more aggressive clearance actions and marked that inventory down permanently in our systems.
As a result, we incurred a cost loss accounting charge on that inventory even though it has not yet sold. This effort is all part of our merchandising transformation, including resetting the inventory baseline and reestablishing key retail fundamentals such as robust open to buy process and having a defined cadence and depth of discount on clearance inventory, so that we have our exit plan in place for unproductive items before we make the inventory purchases from vendors. The combination of the inventory restructuring write-off and the cost loss write-off equated to a 390 basis point reduction in gross margin, putting us at a reported 45.6% for the quarter.
While the final gross margin for the quarter is below historical levels, I want to emphasize that these actions in the third quarter were the right thing to do for the business and set us up for better execution and delivery on the gross margin line going forward. Because we took these actions in Q3, our Chief Merchant, Pam Kohn, does not anticipate the need for further more aggressive clearance activity in the fourth quarter.
Selling, general and administration expenses were a good new story for us. SG&A decreased by $45.6 million or 12.7% versus the prior year, primarily driven by aggressive cost controls that were slightly offset by $8.8 million of COVID-19 related personnel expenses as part of the company's furloughs early in the quarter. As a percentage of sales, SG&A was 44.6% compared to 36.9% in the prior year due entirely to the deleveraging impact from lost sales and the more personal -- and the higher personnel expenses related to the company's furloughs.
GAAP operating earnings and operating margins in the third quarter were $1.4 million and 0.2% respectively, compared to $120.1 million and 12.3% respectively in the prior year. After excluding charges related to company's COVID-19 furlough expenses and restructuring charges from transformation efforts in both years, adjusted operating earnings and adjusted operating margin were $16 million and 2.3% respectively, compared to $122 million and 12.5% respectively in the prior year. GAAP diluted earnings per share in the third quarter were a loss of $0.21, as compared to a profit of $0.59 in the prior year, largely due to lost sales from a shutdown of public facing operations in stores across the globe and the aggressive inventory clearance actions impacting gross margin.
I should note that the non-cash inventory write-offs itself was the equivalent of approximately $0.17 of EPS. These headwinds were partially offset by aggressive cost cutting in SG&A and lower income tax expense. Adjusted diluted earnings per share were a loss of $0.11 in the third quarter compared to a profit of $0.60 in the prior year. In the third quarter, the company had a net loss of $23.5 million compared to net earnings of $71.2 million in the prior year. Adjusted EBITDA was $73.3 million in the quarter compared to $151 million in the prior year. Consistent with prior reporting, adjusted EBITDA included add backs for charges related to share based compensation, restructuring costs and COVID-19 expenses related to furloughs. In addition, this quarter included add backs for the non-cash write down of inventory of $27.1 million and the modest impairment charge, not including restructuring -- not included in restructuring of $0.9 million.
Let's turn to the segment performance. The global Sally Beauty segment generated revenue of $415.5 million in the quarter, a decrease of 27.7% compared to the prior year, driven primarily by the decline in same-store sales from the impact of COVID-19, 14 fewer stores and an unfavorable foreign exchange impact of approximately 40 basis points. Segment same-store sales decreased by 25.9% for the full quarter. However, similar to our consolidated same-store sales, as our store network reopened, we saw a sequential improvement over the quarter with same-store sales down 67.3% in April, down 16.1% in May, but up almost 5% in June, driven by the U.S. and Canadian business, which delivered same-store sales of up 10.2% in June.
Our Sally U.S. and Canadian e-commerce business experienced tremendous growth as the store network shut down and remain strong despite stores reopening later in the quarter. As we mentioned earlier, part of the growth was driven by new customers finding Sally Beauty for the first time. Sally U.S. and Canada delivered e-commerce revenue growth of 555% for the entire third quarter with growth rates for April, May and June of 872%, 585% and 200%, respectively.
Gross margin for the accounting segment was 48.7% in the quarter, down 710 basis points compared to the prior year, driven by the positive and negative factors I described earlier. Segment operating earnings were $3.1 million in the quarter, a decrease of 96.8% compared to the prior year, driven primarily by lost sales from the impact of COVID-19 and the decline in gross margin related to the cleanup and clearance of inventory, but partially offset by lower SG&A expenses from aggressive cost controls. Segment operating margin declined to 0.7% compared to 16.7% in the prior year.
Now Beauty Systems Group. Net sales for the segment were $289.8 million in the quarter, a decrease of 27.6% compared to the prior year, driven primarily by the impact of COVID-19 and same-store sales and our full service business, 13 fewer stores and an unfavorable impact from foreign currency translation of approximately 20 basis points. Segment same-store sales decreased by 27.9% for the full third quarter. Similar to the Sally segment, as our BS store -- as our BSG stores started to reopen throughout the quarter, we saw sequential improvement as same-store sales were down 81.5% in April, down 25.4% in May, but up 23.1% in June due to strong demand from stylists and salons in the pro channel.
Additionally, BSG's e-commerce platform grew by 158% for the third quarter, driven by strong and consistent demand throughout the quarter. BSG's gross margin was 41.2% in the quarter, an increase of 90 basis points compared to the prior year with the combination of both dramatically fewer promotions and the positive P&L geography, resulting from customer channel shift from stores to full service to our e-com business, which were only partially offset by the clearance activities that I described earlier. Segment operating earnings for BSG were $40.1 million, a decrease of 34.9% versus the prior year, driven primarily by lost sales from the impact of COVID-19, partially offset by higher gross margin and a decrease in SG&A expenses related to the aggressive cost control implemented as we pivoted to a focus on cash and liquidity. Segment operating margin declined by 160 basis points to 13.8%.
Now I would like to comment on cash and liquidity. During the third quarter, the company generated a whopping $198 million of cash flow from operations, an increase of 112% versus the prior year. Payments for capital expenditures in the quarter totaled $18 million, reflecting the fact that while we had initially dialed back capital spending for the quarter, we quickly realized that we could both manage the impact of COVID, grow cash and continue to invest against our business transformation. This allowed us to complete the rollout of our point-of-sale system to all Sally and Beauty Systems Group stores in the U.S. and Canada, continue our investments in our e-commerce platforms, restart our JDA and North Texas distribution center efforts and do the work to launch our private label credit card program at both BSG and Sally, which is now in test market.
Free cash flow was $180 million for the quarter, which was up 146% as compared to the prior year. The company did not retire any debt or repurchase any shares during the quarter. At the end of the third quarter, the outstanding balance on our recently upsized $600 million revolver was $375.5 million and included a separate FILO loan fully funded at $20 million. As previously disclosed, we did execute a $300 million senior secured note offering back in April and received proceeds of approximately $295 million, none of which has been spent. So what I want you to take away from this is the company has significant liquidity. We've not fully drawn our upsized revolver, we have not spent the proceeds of the April secured notes sale, we have aggressively managed cash spend and generation within the business, we have proven that we can dramatically reduce cash burn when necessary.
All-in-all, we are in a good place for liquidity. The company's leverage ratio was 4.81 times at the end of the quarter, of course, we also had $839 million in cash on the balance sheet. With the uncertainty still surrounding COVID, especially with trends in California, Texas and Florida, we are sticking with our position of not providing full year fiscal 2020 guidance at this time. However, I will offer you some forward-looking perspective on Q4 that may be helpful as you think about our business. We will continue to focus on safety for both our teams and our customers and are tracking developments in mass retail. Demand was strong in June, it has been strong in July. We anticipate mid-single digit positive same-store sale comps for Beauty Systems Group, Sally Beauty U.S. and Canada and Sally Europe for July, the first month of our fourth quarter. This is the result of all the factors that Chris highlighted earlier.
Of course, we cannot predict how demand will play out in August and September, but believe that we have created the right option to serve the customer needs and that we made benefit from shifts between our businesses depending on circumstances. I should note that absent a significant change in the COVID situation, we will not be providing separate July, August or September updates in the next report in early November with our full -- our quarterly results. During the fourth quarter, we anticipate that gross margin will be at least in line, if not exceeding, historical levels as the business benefits from its much more modest promotional structure versus prior year. Cash and liquidity will continue to be a strong focus across our global operations, while we are investing in inventory to catch up with the strong sales we experienced in June and the demand in July, maximizing cash remains at the top of our priority list and we will continue to carefully monitor our investments to maintain our flexibility and our strong cash position. While we hope to avoid store shutdowns at the state or local level due to COVID, we have proven that we have the agility to act rapidly and create cross channel options for consumers.
To this end, we will benefit from our continued refinement in investments in our new service models and digital capabilities, including curbside pickup, ship-from-store at Sally and same-day delivery at BSG. We expect to see continued digital growth at moderated levels as we have our store fleet entirely open and as our consumers respond to a new COVID normal. We have completed the first phase of our detailed store fleet -- of our detailed store fleet analysis with Intalytics. While the results confirm our hypothesis that our fleet is a strategic asset and that we have the opportunity to drive profitable sales growth by adding to the fleet in conjunction with digital growth, the results also confirmed our internal analysis that we have a number of lower return stores to close and we will act on approximately 50 of those stores during Q4, including 23 of our 29 clearance stores, which has served their purpose.
, And we will continue to invest in our ongoing transformation plan. Notably, we are quickly approaching issuing the first purchase orders for inventory for our new North Texas facility and expect to take receipts and start servicing a limited number of customers by the end of our fourth quarter.
Finally, let me address capital allocation. As I have just alluded to, we will continue to invest against our business. With respect to our large cash balance, for the foreseeable future, we intend to hold cash on the balance sheet. As we see how COVID-19 plays out at the end of this calendar year, we will further consider our options. So for the moment, expect to see us hold cash and to see the increased interest expense that comes with it.
Thank you for your time this morning, now I would like to turn the call back over to the operator for Chris and I to take your questions.
Questions and Answers:
Operator
[Operator Instructions] And our first question will come from the line of Rupesh Parikh with Oppenheimer. And your line is open.
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
Good morning. Thanks for taking my question and congrats on managing through the pandemic so far. I guess...
Christian A. Brickman -- Director, President and Chief Executive Officer
Thanks.
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
First, just on gross margin -- on the gross margin line. So Aaron, that's helpful, the color you gave for Q4. I was just hoping you could provide more clarity in terms of puts and takes you see in Q4. And I'm really interested on the e-commerce side, for other retailers, e-commerce has been a negative to gross margins, but I think you guys actually called it a favorable impact. So I'd love to just understand the dynamics with e-commerce as well.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
I think your question is, how are we thinking about gross margin for Q4? If I'm...
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
That's correct.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
And in particular, on e-commerce. And what I can tell you is this, we are benefiting from all of the actions that we took in Q3. As we carry into Q4, our promotional environment isn't changing dramatically and that we are in contrast to prior years running much -- far fewer on promotions than we have historically and the consumer has still been showing up to buy, and so, we've learned from that. And that's true across both the e-com business and the store platform. We're also benefiting from the actions that we took in Q3 and as you heard me allude to in the comment -- in my comments, our merchandising teams do not expect further, more aggressive clearance action in Q4 the way we did in Q3, in part because we took the action in one fell swoop in Q3. So we are feeling pretty good about our gross margin opportunity in Q4. And I guess I would add as well, you also heard me allude to the fact that we are buying into inventory being very careful about we’re buying into it and as we buy into it as well, that will offset some of the diminish in gross margin we saw around vendor allowances and vendor income.
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
Okay. And then, just on e-commerce. I think you mentioned that's been positive for gross margins, if you can explain why. I guess, for other retailers gross margins related to e-commerce have been negative impact, I was just wondering...
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Right, so...
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
If you can just provide some more color there.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
I guess, a couple of thoughts, right. As we look at the business, setting aside shipping costs for a second, right. If you set that aside, our pricing tends to be consistent across both stores and e-com, a vast majority of items. And the P&L is burdened by some additional marketing, which hits SG&A, it's burdened by some additional distribution costs as well. But the only real difference for us is the cost of shipping. And given during the quarter, what we did around minimum free shipping thresholds and our efforts to get the goods to the consumer as fast as possible, while we saw some higher cost and higher variable cost in SG&A tied to that shipping cost, it didn't hit gross margin and we've -- and just given how our P&L structure, we don't expect it to hit gross margin in Q4. If anything, it's a modest positive to gross margin, because with the way our accounts were set up, we take some of those costs in SG&A.
Now, I would observe that e-commerce for us grew exponentially in the quarter and we are really pleased with the effort, with the results of the quick pivot -- the faster -- the future that Chris refers to in that respect. We have more work to do, but we also do believe that by enabling our continent spanning store network to be distribution points to our consumers that we'll be able to deliver increased speed at lower cost, because of course, we don't have to add to the labor -- to labor hours to service the orders that go to our stores, that is effectively sums labor cost already that we're just better optimizing. So it's improving our economics in-store as well as with e-com.
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
Okay, great. And then, just one quick follow-up question. So just on geographical performance, if you look at markets like Florida, California and Texas, when you tend to see these spikes in COVID infections, any color you can share in terms of what you end up seeing in your business, I guess in any -- specially, in these markets given the recent spikes?
Christian A. Brickman -- Director, President and Chief Executive Officer
Yeah. No, Rupesh, it's something we deal with and what we expect we're going to continue to deal with. When you first get the spike, you tend to get a period where consumers are more cautious about going out and that can last for a couple of weeks or so and then it seems like it begins to rebound some but yes, there is a consumer reaction when the spikes occur. We see it in reduced traffic in Sally or reduced transactions in BSG and then it tends to normalize after a while.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
One thing which has been interesting to watch and react to Rupesh is with the different parts of the country being in different states relative to reaction to COVID and restrictions, etc. If we see slowing traffic in Texas and many times for instance, and many times it's offset by increasing traffic in New York, right. And so, we are managing the portfolio on a metro-by-metro, state-by-state basis and the aggregation of -- Though the puts and the takes for the end of Q3 and certainly July, as you heard me reference twice in the script, has been positive, notwithstanding some concerning trends in particular parts in the country.
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
Okay, great. Thank you.
Christian A. Brickman -- Director, President and Chief Executive Officer
Yeah. Thanks, Rupesh.
Operator
Thank you. Our next question comes from the line of Mark Altschwager with Baird. And your line is open.
Mark Altschwager -- Robert W. Baird & Co. -- Analyst
Good morning, everyone, and thanks for taking my question. Nice job managing through these challenging times. So I wanted to start off and just ask on SG&A. With stores reopened, how should we be thinking about the normalized SG&A run rate from here? And I'm wondering if you anticipate any catch-up spending and some shifts from the aggressive cash management back to your broader transformation agenda?
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Mark, it's a great question. We are being incredibly careful, right. We had already been in the process of optimizing our labor, our investments before COVID. And then, as part of bringing the network back up, we've been very careful to focus on number of people in the stores, focusing on our power hours as well as when do we need to be open. And so while parts of our fleets is back at pre-COVID hours for instance, right, that is not true for other parts of the fleet as we are testing where are the consumers coming out and when do we need to be open and what's the return on the labor hours that we're allocating. And I offered that as an example, because it helped to drive the decline in absolute SG&A dollars that we saw and it was $44 million $45 million I believe down. And we expect to continue to keep very careful control over SG&A as we carry forward.
Mark Altschwager -- Robert W. Baird & Co. -- Analyst
That's very helpful, thank you. And then, I just want to follow-up on -- related to just top-line trends. So I'm curious as salons reopened, are you seeing any waning of the DIY trend or just how sustainable is that? And then, kind of separately, but related to BSG, bigger picture, do you think COVID has impacted the growth potential of the professional industry moving forward and whether that'd be a permanent shift to DIY or an accelerated shift to booth renting? Just any bigger picture comments and how you're thinking about the industry outlook. Thanks.
Christian A. Brickman -- Director, President and Chief Executive Officer
So Mark, why don't I take the second question there and I'll turn it over to Aaron to talk about some of the DIY trends we're seeing. Listen, I do believe that we don't know yet, there's going to be a lot of puts and takes in the salon industry here, as we call out there are areas of the country like California where salons still can't operate or have been forced to shut down again. We also are seeing lots of disruption with some of our competitors in supply situations and of course, there is new categories like PPE that we're selling that have grown significantly as a percentage of the spend of a stylist. There are salons that will go out of business, but that doesn't mean the demand goes away. In many cases those salon -- those stylists go on to other salons or they become booth renters or suite renters and they still buy from us. So what I would say is, I think it's hard to predict where this will all settle out, there'll be a lot of puts and takes. We think we're better positioned than most, but I think it's going to be -- well, it's going to take some time before we really fully understand how demand shapes out in the pro channel. And as for DIY?
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
And on the retail side of the house, we are really pleased with both the consumer desire to go DIY and how they're shopping at our stores. And there is an incredible amount of creativity involved, Chris called out earlier, the growth in the vivid color category, which has been across virtually every brand we offer in vivid color and we see that increasingly in nails as well. And from an enterprise perspective, we have the good news of BSG is up and performing well against its competitive set and supporting the stylist and those that aren't going to the stylist and there are many of them still are coming to Sally. Although, I should also point out that Sally is somewhere between 15% and 20% of its sales are also to professionals.
Mark Altschwager -- Robert W. Baird & Co. -- Analyst
Yeah.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
And so as salons potentially break up, as stylists go on their own, they can go to BSG or they can come to Sally and it's driven in part by convenience. So the fact that we have the nationwide network of stores that we do and the new e-commerce options, I think is good news for the enterprise, whether it's BHP or Sally servicing the pro.
Mark Altschwager -- Robert W. Baird & Co. -- Analyst
Great, thanks for all the detail.
Christian A. Brickman -- Director, President and Chief Executive Officer
Thanks, Mark.
Operator
Thank you. Our next question comes from the line of Oliver Chen with Cowen. And your line is open.
Oliver Chen -- Cowen and Company, LLC -- Analyst
Nice quarter. Thank you. Regarding the clearance activities and the strategy there, why was it the right time now and as you look forward, what are the biggest changes in the assortment and how that may apply to how you assort the stores execution and pricing good, better, best? We are also curious about going forward, should we expect the BSG trends to outpace Sally in terms of modeling and what you're seeing with that customer dynamic? Thank you.
Christian A. Brickman -- Director, President and Chief Executive Officer
Why don't I take that last one and then I'll turn it over to Aaron on the gross margin side. I think we don't know. We don't know how this is all going to sort out, we do feel that our both businesses are performing well right now. We'll see how the -- and we think the DIY trend is one that's very much tied to a consumer trend that will last, but we don't know how the competitive market in the pro channel will settle out and how much the economic impact of the virus will impact salon demand. So that part I think is one of the reasons why we want to continue to be cautious and stay focused on serving our customers, focused on conserving cash and focused on driving our digital agenda to make sure we're doing the right things for our customers long-term. But the DIY trend is certainly strong and we'll see how the competitive pro channel settles out over the next few months. On gross margin?
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Sure, three observations. The first is, you have to keep in mind that unlike a lot of retailers, we are at a six-year low at our inventory base and that was -- that is driven by the aggressiveness that we applied in the face of the crisis to turn off the spigot, if you will, and to be relentlessly focused on making all of our inventory, wherever it may be, available to consumers through the e-commerce options if they weren't able to come to the stores. Part of managing our inventory so aggressively also meant that we had a ringside seat to consumer behavior and we got insights that we were not -- did not have as much visibility to before, particularly around switching.
As we brought our inventory down, if the consumer was willing to switch and we saw a lot of switching over the course of the quarter that gave us better insight into the value of various categories or various SKUs, if you will, that we still had them on the shelf, what they were switching to. So in parts of the business it was -- it resulted from the observation of our consumer reaction to the assortment we had there and then, that visibility.
The second thing going on was of course we are in the midst of a merchandising transformation that we've talked about a number of times in the past and having put in place during the quarter in the face of everything else going on, a much more rigorous open to buy process, a much better collaboration between the store's organization, the merchandising organization, P&A, supply chain, etc. Now was the time for us to reset the baseline as we carry forward. And lastly, I would just say it's just focus on what sells and where can we drive the profitability. We did take a write-off on some private label componentry that was frankly driven by the fact that we said as we look to maximize our cash and maximize our operating income, now was the time to switch those suppliers, switch to new lower cost suppliers and as a result, when you do that sometimes you are left with componentry that you have to deal with. And so, we chose to write it off in the quarter.
Oliver Chen -- Cowen and Company, LLC -- Analyst
Thank you. And you've done a great job managing promotions this quarter and during this time. What are you seeing with competition such as Amazon and others that have -- that are more broadline retailers like Target and Walmart in terms of their online businesses and how the overall environment looks and your ability to compete? Thank you.
Christian A. Brickman -- Director, President and Chief Executive Officer
Oliver, I do think in general, it's been a less promotional environment, and I don't know how that will progress. We assume that will slowly work its way back in, perhaps not to previous levels. I think the more important thing to focus on is what does the customer want right now? All right. And they want multiple delivery service models, they want to make sure your stores are safe and that they feel safe in your stores interacting with your associates and they want to make sure that you have the products and the expertise they want as they pursue new things like DIY. So we're very much more focused on that and leveraging our expertise and our strength in these core categories. And so, I think you're going to keep seeing us continue to try and whittle down or keep low the promotional cadence as we go forward and focus more on that. Aaron, I don't know if you want to add that.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
There's no escaping the fact that many of our competitors, particularly in mass continue to be much more promotional than we are, I mean, much more promotional. And we have may -- we have taken the strategic approach that with the differentiation we provide in our assortment, with the differentiation we provide with the advising store, etc. that the consumer will continue to purchase with us even in the absence of a broad promotional calendar. So if you compare year-on-year Q3 to Q4 and I would observe, coming Q4 versus Q4 last year, our promotional cadence is much smaller than it was previously, that's intentional on a strategy, it'll be true in stores, it will be true in e-commerce because I go back to we're using the benefit of Q3 to reset our operations in a number of ways, and that's one of them.
Oliver Chen -- Cowen and Company, LLC -- Analyst
Thank you, very helpful. Best regards.
Christian A. Brickman -- Director, President and Chief Executive Officer
You bet.
Operator
Thank you. Our next question comes from the line of Steph Wissink with Jefferies. And your line is open.
Stephanie Wissink -- Jefferies -- Analyst
Thank you.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Good morning, Steph.
Christian A. Brickman -- Director, President and Chief Executive Officer
Good morning.
Stephanie Wissink -- Jefferies -- Analyst
I just have a few follow up questions. Good morning. I wanted just to close the loop on Rupesh's earlier question. I think his question is one we're getting as well, which is this concept of margin comparability across channels. So I'm wondering if you can just take us through to the operating margin level. I think, Aaron, you mentioned some higher marketing and higher shipping at the SG&A line, but how does the operating margin compare across channels. And then, I have one follow-up on your inventory efficiency.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Sure. It would -- we don't disclose the channels, so I'm not going to provide you with the number. It is fair to say that the operating margin on e-commerce is of course lower than the operating margin on stores because of the delivery cost.
Stephanie Wissink -- Jefferies -- Analyst
Okay, that's helpful. And then Chris, you had talked a lot about kind of inventory as an agenda and it strikes me that with e-commerce you may need fewer weeks of supply to begin with and then, also the omnichannel initiative really creates more dynamicism out of inventory as an asset. So can you talk a little bit about your systems, how you see your inventory? If we may be able to see some improvement in working capital as a contributor to free cash flow going forward from both the channel mix, but also just a hyper-focus on inventory efficiency.
Christian A. Brickman -- Director, President and Chief Executive Officer
Yeah. And I think there is a lot of puts and takes there, right. So as Aaron alluded to, we're changing our open to buy process and putting in a much more professional process there. We are thinking much harder about SKU productivity and making sure we're only buying the SKUs that are really going to turn in our stores and online. We're obviously managing our promotional cadence differently, so we don't have quite the surges in demand and ups and downs in demand. So there is a lot of things changing, which I do believe over time should allow us to continue to improve our overall working capital efficiency, but there's a lot of puts and takes there. It's not just one thing, it's a lot of components. Even the JDA process in North Texas will be part of that as well over time. So Aaron, I don't know if you want to build on that, but in my mind, I think we're -- that this is all the pieces we're working on and there's a lot of work left to go.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Teams continue to be aggressive, they're looking across every element of working capital and we're going to reinforce what Chris said, we're just going to have to turn the dials every day to make sure that we have the right level of inventories in support of the demand, but we're going to be very careful about it. And I observed to someone recently that if you walk into a store and see a gap on shelf for a period of time that's probably intentional because we're being very careful to ramp our inventory up consistent with sales, while maximizing our cash as the number one priority as we look at the future of COVID for the next few months.
Stephanie Wissink -- Jefferies -- Analyst
Thank you.
Christian A. Brickman -- Director, President and Chief Executive Officer
You bet.
Operator
Thank you. Our next question will come from the line of Joe Altobello. Please state your company and your question.
Adam -- Raymond James -- Analyst
Hey, good morning guys. This is Adam [Phonetic] on for Joe. I was just curious from more of a housekeeping standpoint, looking at -- it appears that EPS included that $27 million in non-cash inventory writedown or the $0.17 that you mentioned, but EBITDA seems to back the number out. Is there any reason for this given -- it seems to be obviously, non-recurring? And then, was this charge on the Sally or the BSG side? Thank you.
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Well, look we are remaining loyal to our reporting practices on EBITDA. And so, we did adjust out the $27 million non-cash charge tied to the inventory for which we took a cost loss accounting charge, right. So that is consistent with our historical practice there. And then, remind me what the first part of question was.
Adam -- Raymond James -- Analyst
Well, that was it, how was the $27 million adjusted out?
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
All right. Yeah, that's the way we report it and we view it as —as on cash when we're going to take it out.
Adam -- Raymond James -- Analyst
Got you. Okay,that's what I figured. And then, if possible, I know you guys may not break it out, you gave a lot of good detail on e-commerce, is particularly in cadence by month. But is it possible, that you guys could share how brick-and-mortar comps looked in June and maybe how much e-commerce particularly contributed to that plus 11% for the month?
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
We were -- all I can tell you is, we were positive comp, both e-com and brick-and-mortar in all of BSG, Sally U.S. and Canada and Europe.
Adam -- Raymond James -- Analyst
That's very helpful. And if I can ask one more question. I was curious if you could provide some additional color on Sally international both for Q3 and maybe for just more recently in terms of trends and if things are picking up a little bit in July versus -- versus the third quarter. Thank you.
Christian A. Brickman -- Director, President and Chief Executive Officer
Yeah. So the European business did open at a slower pace, especially, specifically in the U.K. We're seeing good strong demand there as it opens, but it did open later in the quarter and as a result of that, it didn't have a strong of a month, obviously, as we did in the U.S. where we got our stores open faster. And Latin America has trailed Europe and it still has some stores closed, although they are slowly reopening both in Mexico and in South America. So they're trailing by a little bit, but we fully expect they will get up and running here in the coming months.
Adam -- Raymond James -- Analyst
Great, that's really helpful. Good luck. Thanks a lot guys.
Christian A. Brickman -- Director, President and Chief Executive Officer
And with that, I'd like to thank everybody for their questions today. If I could summarize, we executed exceptionally well during a disrupted third quarter. The team aggressively managed costs and cash, drove an accelerated pivot to support digital growth and scale our key digital transformation initiatives and we reopened the store network faster than competitors. Because of the speed and agility of our team, we are well positioned to take advantage of emerging customer trends and gain share in a disrupted environment. As we enter the fourth quarter, we will continue to invest in our digital transformation, take advantage of the strong demands for our key categories and adapt quickly to any new local restrictions or changes in consumer shopping behavior tied to the pandemic and of course, we will stay disciplined in terms of cost and cash management. Thank you for joining us today.
Operator
[Operator Closing Remarks]
Duration: 61 minutes
Call participants:
Jeff Harkins -- Vice President of Investor Relations and Strategic Planning
Christian A. Brickman -- Director, President and Chief Executive Officer
Aaron E. Alt -- Senior Vice President and Chief Financial Officer
Rupesh Parikh -- Oppenheimer & Co. -- Analyst
Mark Altschwager -- Robert W. Baird & Co. -- Analyst
Oliver Chen -- Cowen and Company, LLC -- Analyst
Stephanie Wissink -- Jefferies -- Analyst
Adam -- Raymond James -- Analyst
