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Sally Beauty Holdings Inc (NYSE:SBH)
Q3 2021 Earnings Call
Nov 11, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings Conference Call to discuss the company's fiscal 2021 fourth quarter and full year results. All participants have been placed in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Additional instructions will be given at that time.

Now I would like to turn the call over to Mr. Jeff Harkins, Vice President of Investor Relations and Treasurer, The Sally Beauty Holdings. Please go ahead.

Jeff Harkins -- Vice President of Investor Relations and Treasurer

Thank you. Good morning everyone and thank you for joining us. With me on the call today are Denise Paulonis, our new President and Chief Executive Officer and Marlo Cormier, Chief Financial Officer. Before we begin, I want to 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/investor-relations.

I'd also like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K and other filings with the SEC. Any forward-looking statements made in this call represent our views only as of today and we undertake no obligations to update them. The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.

Now I'd like to talk to turn the call over to Denise to begin the formal remarks.

Denise Paulonis -- President and Chief Executive Officer

Thank you, Jeff and good morning everyone. I'm thrilled to be here with a little over a month under my belt and I'm looking forward to meeting and talking to our analysts and shareholders in the coming months. Having served in the Sally Beauty board since 2018, I'm fortunate to be bringing the first hand perspective and a deep working knowledge of the business on day one. I see a significant opportunity to utilize my leadership skills and retail and finance background to drive the business into a new era of profitable growth, capitalizing on all the new capabilities enabled by the transformation of the business over the past four years.

Virtually every aspect of the company's infrastructure has been retooled across technology, marketing, merchandising, supply chain, HR, finance, and talent, creating a robust platform from which we will grow. I'm incredibly proud of our exceptional team who took on this challenge and helped us evolve into a modern dynamic omnichannel beauty retailer that is now set up for long-term success.

Before talking a bit more about our future, let me share a few highlights from last year. In fiscal 2021 full year net sales grew 10%, gross margins exceeded 50% and adjusted EPS was up over 97%. Additionally, we generated strong cash flow from operations of $382 million. We delivered consistent performance throughout the year and concluded fiscal 2021 with fourth quarter results ahead of expectations, reflecting strong operational execution. We're particularly pleased to see ongoing momentum and consistency across the business despite the various impact of the pandemic.

As we embark on our new fiscal year, our mission to recruit and retain color customers remains a core component of our roadmap and continued tailwinds around self-expression through hair, product sustainability and innovation and the growing number of independent stylists continue to reinforce the strength of our color and care business. Putting the customer first and enhancing their experience with us is critical to our success.

We're continuing to prioritize the customer through personalization, inspiration, education and training. We're also focused on creating the easiest shopping experience for our customers through our robust omnichannel platform and multiple fulfillment options our customers can get product, how they want it and when they want it, faster than ever before. Against that backdrop, we'll be focusing on four strategic growth pillars to drive the top line in fiscal 2022. Leveraging our digital platform, driving loyalty and personalization, delivering product innovation and advancing our supply chain.

First, I'll talk about digital. As we increasingly become the unrivaled forced for color inspiration, education and training, our goal is to create an easy, reliable omnichannel platform for our DIY enthusiasts and stylists. At BSG, we completed a critical set of strategic initiatives in fiscal 2021 that positioned us to become the go-to-platform for stylists. We redesigned the CosmoProf website, introduced new value-added services around ordering and rolled out focus into our delivery.

In addition, we'll be connecting our store network to the CosmoProf app this month to further enhance focus into our delivery. In short, our BSG stylists can now access everything sold by CosmoProf on their phone and within two hours. Bringing together all these initiatives, truly positions BSG as a compelling resource for the stylist community, providing them with the tools they need to run their businesses most efficiently and profitably. At Sally, we've seen a positive customer response to our expanded fulfillment model and we're continuing to gain traction across BOPIS, ship from store and rapid two-hour delivery.

In our most recent quarter, Sally U.S. and Canada stores fulfilled 34% of e-commerce sales as BOPIS fulfilled the 34% of e-commerce sales, as BOPIS comprised 22% and ship from store accounted for 8%. Rapid two-hour delivery was launched in the middle of the quarter and represented 4% of Sally U.S. and Canada E-commerce sales. Additionally, the adoption of these new fulfillment options exhibits our power of scaling our new tools and capabilities to meet the strong desire our customers have for this incredible convenience.

We're also laser focused on improving in stocks across our store and DC network through our new JDA platform. So our customers are able to access our inventory. However, they choose to shop and get most products in just two to three hours. As we continue to scale and optimize a full suite of omnichannel services for both our Sally and BSG customers, we believe e-commerce can reach 15% or more of sales in the coming years. In fiscal 2021, global e-commerce sales penetration was just over 7%. Importantly, we know that an omnichannel customer at Sally U.S. and Canada spends approximately 75% to 80% more with us annually than a brick and mortar customer. So this is not just a sales channel shift, it is a tremendous opportunity for growth.

Moving now to our second growth pillar: loyalty and personalization, which [Technical Issues] directly to our digital strategy. As many of you know, the rise of personalization has changed the table stakes in retail. With our rapidly growing loyalty program and a new push toward personalization, we have a significant opportunity to drive and increase customer engagement in sales. At Sally U.S. and Canada, approximately 74% of our fourth quarter sales came from our loyalty program. At BSG, because stylist have to register a shop with us, we have data on 100% of our customers.

Additionally, approximately 8% of our BSG's sales in the quarter came from our Rewards Credit Card that was launched about a year ago. These are remarkable numbers and we've only scratched the surface in leveraging this asset. In fiscal 2022, we'll be utilizing data science to engage our customers with inspiration, education and personalized offers at every touch point. At Sally, this includes recommendations on product usage, reminders to replenish on time and incorporating DIY an educational component at key moments in their journey.

At BSG, this mean showcasing new product arrivals, reminding stylist to restock their backbar and notifications to replenish key styles products. We believe these actions will drive higher customer lifetime value by minimizing attrition, growing spend per transaction and increasing purchase frequency. Fiscal 2022 will also see us investing further in digital marketing and social media campaigns to drive traffic and sales. Our current marketing campaign YOU by Sally continues to generate a tremendous amount of attention from customers and the trade. Celebrating the transformative power of hair color, the campaign has received extensive coverage from Beauty editors and generated millions of views on social media.

Our third growth pillar is product innovation. Fiscal 2022 will be highlighted by a big infusion of innovation across Sally and BSG and we'll be driving a large part of that ourselves. The pipeline of new products is robust and includes our own and third-party brands across multiple categories. We will continue to emphasize and support sustainable and clean products, which are increasingly being selected and commanding a premium from customers. Importantly, we believe our authority in color and care provides a logical path and powerful platform for standing up new brands that go beyond our four walls.

The first initiative is our new exclusive brand line of vivid colors of Sally called Strawberry Leopard launched to positive response in October, this is a useful Gen Z focused brand that speaks to our ability to increasingly attract younger consumers through value of self-expression. Concurrently with the launch, we created an individual digital platform for Strawberry Leopard that immersed the consumers in the brand ethos, enables a direct shopping experience. As the brand gains velocity, we expect to unlock potential opportunities for expansion into additional distribution channels, including math, beauty and third party e-commerce.

The innovation pipeline at BSG is equally exciting, starting with Olaplex's new toning shampoo that just launched in September. Olaplex is a great example of a high-profile brand that continues to innovate and remains a key partner to us. Looking ahead, we're continuing to focus on being at the forefront of innovation with new product and brand launches to excite the consumer planned for 2022 and beyond. Turning now to our fourth growth pillar, another critical element of our focus on putting the customer first is supercharging our supply chain to ensure that we are in stock in color and care every time.

A great deal of the heavy lifting has been done and we're now executing the final phase of JDA implementation. The system is up and running in all BSG's locations and the majority of our Sally stores. We're currently rolling out JDA to our remaining locations and fully integrating with our North Texas, DC. Once completed, we'll have a highly automated integrated network with the best-in-class capabilities across inventory forecasting, localized assortment, pricing and promotions and in stock.

We believe that our initiatives underneath four growth pillars will allow us to drive top line growth of 3% to 4% and generate strong operating cash flows this year. This reflects our ability to maintain strong gross margins, while mitigating inflationary pressures through careful cost controls, pricing levers and store optimization. To that end, our 90-store optimization pilot remains in progress. We are continuing to gather and analyze data from the sample and I'm pleased to note that we are significantly exceeding our sales transfer targets. In fiscal 2022, we expect to launch a multi-year program designed to maximize the value of our large store portfolio, while offsetting inflationary headwinds.

By rationalizing the fleet, we can improve productivity and profitability, while delivering a convenient omnichannel experience that benefits our customers. We're entering fiscal 2022 with solid infrastructure, a well-defined roadmap for growth and favorable industry dynamics that support the significant opportunity in front of us. In the coming months, I look forward to working with the team to build out additional growth opportunities that will fuel our business and create meaningful shareholder value in 2023 and beyond.

In addition, I'd like to thank all of our associates across our store networks, field operations, distribution centers and support centers throughout the globe for their passion, dedication and hard work, which helped us finish a strong 2021. Thank you for everything you do each day to make us better and for serving our customers.

With that, I'll turn the call over to Marlo to discuss the financials and then we'll look forward to taking your questions.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Thank you, Denise, and good morning everyone. We're pleased to conclude the year with strong fourth quarter performance, which exceeded the expectations we provided on our last earnings call and reflect strong consumer demand coming out of the pandemic. Topline growth, solid gross margins and careful cost control, drove strong earnings and cash flow. Net sales increased 3.4% and same-store sales rose 2.1% reflecting strong consumer demand with only some minor impact from pandemic related restrictions in Europe. Fourth quarter traffic and conversion trends remain consistent with what we've experienced throughout the pandemic. Traffic was down, but units per transaction, average unit retail and average ticket all increased versus prior year. Basically, customers are still shopping less frequently, but are buying more when they transact with us.

Global e-commerce sales were $71 million, representing 7.1% of total net sales as compared to $63 million in the prior year. The year-over-year increase reflects ongoing strength as we continue to scale our digital capabilities and implement our strategic initiatives around fulfillment and customer engagement. Looking at gross profit, we achieved fourth quarter gross margin of 50.6%, reflecting our ability to maintain solid performance above our 50% target level. On a year-over-year basis, gross margin deleveraged by 50 basis points, reflecting a higher mix of BSG sales, which carried a lower margin profile in the quarter.

Moving to operating expense, fourth quarter SG&A totaled $387 million, up 5% versus a year ago, primarily reflecting higher labor costs and planned increases in marketing spend. Looking at the new fiscal year, we anticipate that SG&A dollars will increase and rate will be up slightly on a year-over-year basis. Our expectation takes into account increased labor and freight costs, increased expense planned in our international markets related to a full reopening in 2022, as well as investments across our growth pillars that Denise discussed earlier. We believe our store optimization program will serve as an important offset to wage inflation beginning in the latter part of 2022 and then more significantly in 2023.

Turning now to earnings. We delivered strong profitability in Q4. Adjusted operating margin came in at 11.7%, adjusted EBITDA margin was 14.5% and adjusted diluted EPS increased to $0.64. Looking at segment results. At Sally Beauty, we saw strong consumer demand in the U.S. Same-store sales increased 2.3% and e-commerce sales totaled $29 million for the quarter. For Sally U.S. and Canada, the color category increased 4%, while vivid colors grew 5%, representing 28% of our total color sales as comparisons normalized to prior year. Other categories also performed well. Styling tools increased by 31% and textured hair was up 16%.

Gross margin declined slightly at Sally, which reflected strong product margins, offset by higher distribution and freight costs. Segment operating margin increased to 18.1% compared to 18% in the prior year. In the BSG segment, same-store sales increased 1.7% as salons returned to more normalized capacity levels in virtually all of our U.S. markets. E-commerce sales totaled $42 million for the quarter. The color category grew 9%, hair care was up 5% driven by Olaplex and styling tools increased 9%. Gross margin and profitability at BSG reflected same dynamics we saw in Q3. Specifically, we're experiencing higher sales from our larger volume, full service customers coming out of the pandemic and those customers tend to be lower margin. Segment operating margin was down slightly versus prior year at 13.3%.

Moving to the balance sheet and cash flow. We ended fiscal 2021 in strong financial condition. For the full fiscal year, we generated $308 million of free cash flow and retired approximately $420 million of debt. We ended the quarter with $401 million of cash and cash equivalents and a zero balance outstanding under our asset-based revolving line of credit. Inventories at September 30th totaled $871 million, up 7% versus a year ago as we reinvested in our inventory levels coming out of the disruptions from the pandemic. In addition, we were pleased that our strong performance over the course of fiscal 2021 helped drive our net debt leverage ratio down to 1.69 times at the end of September.

Now turning to our full year fiscal 2022 guidance. We are confident about how the business is positioned heading into 2022 and we expect to achieve the following: net sales growth in the range of 3% to 4%, net store count to decrease by approximately 1% to 2% driven primarily by Sally U.S. stores as we continue to optimize our portfolio. Gross margin expansion of 40 to 60 basis points, GAAP operating margin growth of 90 to 110 basis points, and adjusted operating margin approximately flat to 2021.

The business has demonstrated remarkable resilience during the past 18 plus months and our teams have done a terrific job of navigating the dynamic macro environment. As the business continues to strengthen and generate strong cash flows, you can expect to see us prioritize strategic growth investments, as well as return cash to shareholders through the restart of our share buyback program. As a reminder, during the fourth quarter, our Board of Directors approved an extension of our share repurchase program through September of 2025, which currently has over $700 million remaining under the authorization. Additionally, we are evaluating opportunities to further optimize our capital structure, which could result in incremental interest expense savings.

Finally, I want to call out a housekeeping item related to disclosure. Beginning in fiscal 2022, we will be replacing our same-store sales metric with comparable sales, which will include sales from our full-service divisions and franchise operations including any related e-commerce sales. In 2022, for each quarter. We will disclose both current and prior-year comparable sales under the new definition. We appreciate your time this morning. Now, I'll ask the operator to open the call for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from the line of Oliver Chen and your line is open.

Katie -- Cowen -- Analyst

Hi, there. This is Katie on for Oliver Chen. I would just love to know sort of the trends in the color cycle and what you guys are seeing, particularly in terms of as we see the world reopening and more people going into the office? I would just love to know what you guys are seeing in color?

Denise Paulonis -- President and Chief Executive Officer

Yes. So we've seen some really, really strong trends in the last several quarters in color, certainly on the self-expression side, the vivid, still continuing to see that remain strong, again trending to plus 5% compared to last year and that was a really strong quarter last year as well. So, really excited to see those trends continued. What we have seen now is the styling categories are starting to take hold and gain traction as well. We're starting to see a little bit more comfort I think in people going out, the back to school sessions, all starting to contribute to that. So, not only in the styling elements of our care category, but also styling elements within our equipment categories as well.

Katie -- Cowen -- Analyst

Okay, great. And then just a follow-up really quickly. I would love to know more about sort of the margin profile of your e-commerce channel versus the store channel? And especially if you ramp up the e-commerce penetration, how you expect to get to your margin expectations for that channel? Thank you.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes. So e-com you've heard us talk about this over several quarters. We've been in a -- kind of pivot in the model if you will. As we ramped up e-com through the pandemic, our first order of business is really to make sure that we can get the product to the customer, especially during shutdown period. So, we ramp that up very quickly, really excited about what the team could do on a very short order to be able to turn on a lot of capabilities. We're now at a point where we have a full suite of capabilities. We are in a position now where through this year, we've turned on service ship from store and at curbside. We now have BOPIS and now we have rapid delivery into our delivery on both the Sally and BSG sides.

The other exciting part, this has happened most recently is in Q4, BSG launched there -- they're out and we've seen really tremendous traction there. We're up to about 25% of our e-com sales right out of the gate, are transacting through that platform. If you look at e-com for BSG in the fourth quarter, e-com was up 10% -- 30% actually, really strong growth there. BSG overall was up 6% in the quarter, half that was being driven by the e-com strength, the other half is being driven by full service.

But -- so really excited about the traction we're making there from a profitability standpoint. We are more profitable on the pro side, that is approaching more of what you would expect from store margins. On the Sally side, we have work to do. We've talked about that over the quarters. We did pull back intentionally this last quarter our Sally on site and have repositioned that, just really focused on customer satisfaction. We've seen those results start to take hold and we're starting to see our customer satisfaction scores go up. We're seeing our splits go down, our cancel rates go down and we're also seeing with as Denise commented in her prepared remarks, we're starting to see more of a shift and to take hold on the BOPIS and the the rapid delivery. BOPIS, as you know, has the same store margins and actually has increased profitability profile and that we end up with basket adds most often there. On the rapid delivery that is mostly paid for by the customer.

So with the shift toward those fulfillment options, we're also seeing an improvement in the profitability of Sally and starting to gravitate that more toward what we would expect to see from a store margin. I mean, and the other thing like I say with the splits coming down, the cancel rates coming down that also helps with the profitability.

Katie -- Cowen -- Analyst

Thank you.

Operator

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

Rupesh Parikh -- Oppenheimer -- Analyst

Good morning. Thanks for taking my questions and congrats on the nice quarter. So, I guess the firstly, I just wanted to start with is with your sales guidance. You guys did guide to 3% to 4% increase for the year. Is there any more color you can provide in terms of the cadence either. I don't know maybe by -- on the quarter, probably by the half, in terms of how you guys are thinking about that growth? Just given how volatile the business was even as we lap these comparisons?

Denise Paulonis -- President and Chief Executive Officer

Yes. No. Good question. As for the way that the sales pacing is, we're not that seasonal, but historically our sales are slightly higher in the back half of the year versus the first half and we would expect the same as we look into fiscal 2022 from an absolute dollar perspective. But when you're looking at it in terms of growth rates, the growth rate percentages will be slightly higher in the first half compared to the back half and that's because we're comparing against the prior year COVID disruptions that you just alluded to.

We had some significant disruption from really the November to February surge and that included significant international shutdowns. And then we came out of that with some heavy restrictions, but then as the year progressed, things did get better on the COVID front. So, back half of the year is expected to have more normalized comparisons. We'll also continue ramping digital and e-com capabilities to grow sales as we progress through the year and we also see benefits from what we think is supply chain disruptions that will be tapering and then also as we have growing benefits from leveraging and supercharging our supply chain initiatives that you heard on the call as we have better assortments and our in-stocks will improve as well as we go through the year.

So inventory will continue to build, it will get healthier in the coming months. And when you think about gross margin, that's expected to expand between 40 and 60 basis points. It will ramp over the course of the year, with the majority of the expansion will be coming in the back half. And then as you think about SG&A, those dollars will vary slightly with sales, but the dollars will be a little bit more level loaded when you think about that across the quarters.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay. That's really helpful color and then as you guys look at the top. I mean, pretty positive comment just on the innovation front and your business had a lot of pandemic headwinds in this past fiscal year. Can you just help us frame like how you guys thinking -- within that 3% to 4%, like, is that a conservative guide, just some of the drivers you see there? And then internationally, I know is -- at least I think is not fully recovered. So is there a way to quantify, I don't know, where international is today versus '19?

Denise Paulonis -- President and Chief Executive Officer

Hi, Rupesh you might think the color we gave you on sales as we feel good about the plan that we built. The plan is mostly based upon the four key items that I talked about earlier today around digital, personalization loyalty and innovation. And then the health of our supply chain continuing to improve with in stocks improving behind that and when we think about the role that innovation and product will have is certainly one of the pillars, but it doesn't really stand-alone. It ultimately has to get through the customer, through the channels, with the communication around it.

So, we feel great about our exclusive brand Strawberry Leopart and what's going to be coming through Sally with that and the ability to grow it. And as we talked, thinking about that as an incubator brand that might be able to go outside the walls of Sally over time, but really building it as a digitally native brand in terms of how we're going to cover with this e-commerce channel.

And then on the BSG front, we continue to see good innovation there and we expect to continue to see good innovation come through as well. So, innovation is one of the four pillars that is out there. As Marlo mentioned, we did still see some headwinds in Europe last year with the pandemic that was there. So part of our plan is hinged upon recovery in Europe and to a lesser extent in Mexico, but I would say all the businesses are well poised for growth. And when we think about the numbers that we're putting out there, we think that they're realistic about what we can go and do and the plan is really built to deliver on it.

Rupesh Parikh -- Oppenheimer -- Analyst

Okay, great. And I'll sneak in one quick last one, just on the supply chain. I know last quarter you guys called out supply chain headwinds. There wasn't much mention in that, so is that a significant headwind going forward or do you guys generally feel like you've been able to manage it -- very good position to manage it this year?

Denise Paulonis -- President and Chief Executive Officer

Yes. Rupesh, I think both. It is a headwind. So, there is no doubt that we can't overlook the fact that whether it's ocean freight, domestic freight and you labor to still fulfill and working on both the DCs and drive the trucks that it's a real concern for all of us out there. We feel like we have built a good plan to mitigate all the parts that are within our control to mitigate. So I think as you know, we're not as exposed to some other specialty retailers in terms of overseas markets.

Only about 10% of our business really comes in from overseas. So a little less exposure there. We've been working really hard with our vendor partners and they've been great partners and helping us understand what lead times need to be and when we need to get orders placed to be able to keep things on the shelf. So we're working hard around that as well. We're also working to consolidate our peers. So when trucks and boats arrive, we're able to move them as quickly as possible, as full as possible across the country and manage that as well.

So all in all, working the levers that we can best control and I think we still have a bit of a tailwind from our implementation of a pooling delivery system that we did here in the U.S. and where -- we've just taken a little bit less over the road trucking and going forward and a little bit more localized shipping that seems to be a bit more reliable today. So by no means are we overlooking it as a headwind, but I think that we have a really well thought out plan how to manage as much of that as we possibly can.

Rupesh Parikh -- Oppenheimer -- Analyst

Thank you. Best of luck.

Operator

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

Mark Altschwager -- Baird -- Analyst

Good morning. Thanks for taking my questions and congrats on a solid quarter here. So, the first question is for Denise. As you come in here with fresh eyes, we'd love to just get your initial views on what's left to be done to go and position the company for success and what you see is maybe the top incremental opportunities medium to longer term?

Denise Paulonis -- President and Chief Executive Officer

Happy to talk about that. I was absolutely thrilled with the opportunity to come and join the organization and I started a little bit with what I'm most excited about because I think it's things that we've actually already done or real tailwinds that are going to help drive the business. I think the combination of a strong team and a strong foundation has set us up, so that initiatives we undertake have a real chance of success. And by that, we have a team that successfully navigated through the pandemic and delivered a transformation, changing our ability to execute against CRM, loyalty, e-commerce, merchandising, technology assets at short end of a list.

But when you think about the initiatives that we're talking about today, continuing to propel our digital and e-commerce business, having and building and personalization program in the way that we can speak to our customers, knowing 74% of our sales and where they're coming from customers and the ability to reach that. I am -- I think it is on the biggest untapped opportunities that we have to really leverage our ability to know our customers. I can't say it enough, 74% across Sally and 100% of our customers across BSG, we can have a direct conversation with, which is I think just a fantastic statistic, I'm something very excited about and a big opportunity.

I also think that we're playing in the right space, right. The hair category has a ton of resiliency, good economy, bad economy, everybody still wants to take care of their hair and there's great tailwinds. So tailwinds around self-expression. So some of that is driven, but some of this also just about people feeling great about themselves and wanting to think about their hair as being part of that. Product innovation is probably ramping at some of the fastest rates that I think we've seen in the industry.

And then with independent stylists, it's a very different go-to-business model and we're really set up well to serve them. So another real good point for us to be able to build on and drive growth to go forward. So when I think about the pillars that we have out there, knowing our customers at the top of the list, getting after that customer with personalization, with our digital capabilities, clearly at the top of our list. And then I think some of our most untapped potential remains in leveraging our supply chain, the foundation that we've set up is absolutely phenomenal. We need to finish a little bit of work in JDA, particularly in the fulfillment to our stores using the JDA platform and as we get that going and we get all of our stores in stock as supply chain pressures ease, I think we have a nice opportunity to continue to build customer satisfaction and loyalty, which we hope will build lifetime value of a customer.

Mark Altschwager -- Baird -- Analyst

It's really helpful. Thank you for all that detail. A follow-up for Marlo. I just wanted to ask about the labor backdrop and if you could provide a little bit more color on the level of incremental investment in wages you're anticipating in the coming year? If you're able to quantify that and maybe the levers that you seem to offset that inflationary pressure?

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes. So, we've been talking about this for several quarters as well and even in the last probably back half of 2021, we certainly felt some wage increases. As we look into 22, we know that will be even more intense and so we've certainly planned that in. We've also planned increases in freight and other distribution and supply chain costs. So, we are seeing inflationary pressures. We have planned that in. We've also planned in to return marketing back to kind of more pre-COVID levels as a percent of sales. So you'll see incremental marketing spend in there as well.

So -- and then if you compare the year-over-year, you just don't want to forget that we will have international markets that will be back to fully open and so we'll have to see that there too. But most importantly, we've created capacity to be able to invest in our growth initiatives. We still have more technology investments that we want to make, some that will be about scaling and optimizing and supercharging our supply chain with supply chain tools. We'll be implementing more pricing and promo tools and then we'll continue to enhance and evolve our digital platform. So excited that we're continuing to focus on our priorities, continue to invest in our most strategic initiatives that are going to drive the topline.

As you think about the offsets, we're very focused on offsetting and mitigating the cost pressures. Store optimization will be a key element to that. We'll start to see benefits now and that will continue to gain traction more toward the back half of this year and then further into 2023 and beyond. I've talked about e-com profitability that also helps, but a big lever for us is pricing and we will pull pricing levers. We started to do that over last year. The good news is we haven't seen a whole lot of change in volume or spending behaviors or consumer behaviors there. So, with a differentiated core product and being very strategic about the pricing that we take, we believe that we've already had success and have confidence that we'll have that going forward.

So, with our business returning to a strong top line, we think we're positioned really well to continue to invest in growth. We'll drive leveraging the model, we'll expand margins over time, but in the near-term, we'll offset the cost headwinds. And we'll deliver the operating margins near last year and pre-pandemic 2019 levels, but it'll be strong sales and we'll grow profit dollars and we'll generate a significant amount of cash. So, really looking forward to this year and I think we're positioned really well to deliver some really strong results.

Mark Altschwager -- Baird -- Analyst

Thank you. Best of luck and Denise welcome.

Denise Paulonis -- President and Chief Executive Officer

Thank you.

Operator

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

Steph Wissink -- Jefferies -- Analyst

[Technical Issues] margins. So the fiscal year '22 guidance calls for operating margins to be flat, but guide 40 to 60 basis points of gross margin expansion. So just wondering what's offsetting the SG&A drag and then I have one more follow up afterwards.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes, so, you mentioned gross margins, you cut off a little bit in the beginning, but I think gross margins we're guiding to 40 to 60 basis points expansion. Again, we're going to be offsetting costs both in that line items with supply chain and freight costs that we'll overcome with some pricing levers that will help drive that expansion. In terms of SG&A, I just mentioned some really strong headwinds there when it comes to inflation, both from wage and other costs like freight and then also making sure that we continue to invest in our growth initiatives. So that's where you get the offset. So, again pretty excited about the model. We believe we're set up well to continue to generate really strong cash flows and position ourselves well for long-term profitable growth and then over time, we'll be able to leverage and continue to expand operating margins over time.

Steph Wissink -- Jefferies -- Analyst

Okay, thank you. And then could you just talk about the fleet rationalization. So, what are you seeing in terms of transfer rates pick up in income and your ability to retain those customers when a store closes? Thank you.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Sure. We're really excited about the program and where it is headed. We're still in the very early stages. So, we have 90 stores that we've put through a closure test. We're continuing to evaluate that, it's still a little early for a full read, but early indication is promising that the sales transfer rate is there. Interestingly, the sales are not transferring necessarily all the e-com. We're seeing a good mix of transfers to stores as well as e-com. We're also seeing transfers in our BSG business over to full service. And with the growth of the app in our BSG business as well, yet another vehicle for folks to continue to access the brand.

So, it's not one size fits all and good to see that customers are finding us in different ways. And I'd also say, we've gone through a pretty concerted marketing effort to be certain that our customers know where to find us when we have chosen to close a store. So I think, a really good execution there in doing that. The key to us is now watching this a little bit longer over time, right, to understand if the transfer rate we're seeing is temporary or if it remains consistent at these high levels.

We do have plan to continue to close some stores in fiscal '22, net store count will be down around 50 stores or so, which is 1% or a little over 1%. That's a really a mix of closing about 100 stores across Sally and BSG, but being offset by some opportunistic new store openings. This is a real opportunity for us to position where our customer is and where we think that growth potential is. And so we will continue to open new stores very selectively where it would make sense to do so.

And then as we watched through this year, we'll hope to be able to talk to all of you guys a little later this year about the longer-term program around where we are on a longer-term optimization plan. Like I said, we're just a little early to call the final results, but we have a good batch of stores that we're monitoring now and it's more to come in '22 to be able to make that call. And if we can make all of that work, which I think we're feeling pretty good about as Marlo mentioned, it's one of the key offsets we have in terms of driving some efficiencies into the P&L, while continuing to grow the business.

Steph Wissink -- Jefferies -- Analyst

Great, thank you so much.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. And your line is open.

Simeon Gutman -- Morgan Stanley -- Analyst

Good morning, everyone. Hey, Denise. How are you and Marlo. So I wanted to ask around the fourth quarter and then within the guidance. If you could -- I know you mentioned the transactions and the ticket trends were consistent with the prior run rate. Can you give us a little more color on that? Can you talk about e-com transactions versus SPS and then in particular for the U.S.? And then within the guidance for next year, the total sales guidance of up 3% to 4%, how much is price versus volume?

Denise Paulonis -- President and Chief Executive Officer

Let me start with the last then I'll come back to the detailed questions. When we look at the 3% to 4%, I think Denise hit on the main growth pillars there and so we're coming into the year pretty excited. We have a great foundation that we're going to be able to leverage. We're going to -- we've got a great roadmap going through the fourth -- the four growth pillars. We've really favorable industry dynamics as well. We've got a resilient category. Our categories are in demand. We have trends that are in our favor. So all that's point to some nice tailwinds. I think that it gives us confidence into the topline.

Pricing is an important lever that I've talked about both through margin enhancement, as well as driving topline, but it is not the majority. The majority of our growth is coming from the growth initiatives, whether it be the digital initiatives, the innovative -- innovation initiatives and then also the supply chain and really improving our in stocks and our offerings to the customer.

In terms of the -- of what we're seeing in spending, it's really a lot of the same that we've been seeing. The traffic patterns are getting better, especially as you compare to last year when you're looking at the pandemic periods. But when you compare to the pre-pandemic periods, we're still in the high teens, kind of low '20s, it's gets a little choppy here and there. You get some spikes whether it be stimulus or maybe mid month child care credit check hits. So, we see a little bit of choppiness, but for the most part, say the traffic patterns are fairly consistent. They're getting a little bit more consistent month to month and I would say that they're probably more on the pivot to improving then other way. So, in terms of spending metrics, again, we're seeing reduced trips, but we are seeing more spend per outing. So, we do see our average ticket and average unit retail is going up.

Simeon Gutman -- Morgan Stanley -- Analyst

Got it. Maybe to follow-on to that. Can you -- if you look across the Sally Beauty business, can you talk about the range of inflation across the store? I don't know if you can talk about product categories, but which categories are seeing the greatest versus which categories are seeing the least? And then if you could talk about how well you understand the elasticity there? Because I think we'll be in an inflationary environment, the lower income consumer may be under some pressure at least in the first half of the calendar '22, curious how that could be managed, how you've thought about that into your plan?

Denise Paulonis -- President and Chief Executive Officer

Sure. Simeon I'll start off with a little bit on elasticity and then Marlo can cover off on a little bit of where we're seeing more or less inflation. I think the team has done a great job over the past year. We've had a good chance as we've sort of moved prices across various categories and stores and geographies to be able to look pretty closely at where that elasticity is and for the most part, first, I'd start by saying I think we have the tools to continue to watch it and the team spends a lot of time talking about what unit movement is looking like, particularly looking where we've taken price and where we have it.

To date, we have seen it be relatively inelastic for the most part across the places that we have raised price. I mean at the end of the day, people are still choosing to buy and we haven't necessarily seen a trade away from a specific product or brand. What I would say going forward is it's also the focus for us for this year and being able to be very tuned to what people are choosing and not choosing and the great news is with the basket data that we have, we can actually look at specific customer basket and be able to diagnose for that customer. Are they trading down a brand or they trading away from something or we might have done price. So we're going to be really focused on it as we work our way through the year. I'll turn it over to Marlo just to talk a little bit about were more or less inflation might be coming.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes, I think it's probably -- we do see it coming, obviously, way it is hitting everybody, but as we look to our vendors and as they continue to pass pricing on to us, which is a normal course, there might be a little bit more intense as we hit these inflationary periods. But we have the ability to pass those costs on and we've done that and we've actually now talked about with more inform tools that Denise was just referring to being able to expand on top of that as well. So, we feel like we're in a pretty good spot there.

The other thing I would say is just in terms of the consumer behavior, in terms of tough times, whether it be recessionary, whether it be pandemic, whether it be tough economic times, I think that the priority is still our consumer will finally prioritize their beauty and they aren't going to let their hair go. So, that's been a good thing to see and again to continue through the pandemic that there is such resiliency in this category that gives us confidence that we'll be able to continue to service the customer even when the times get tough.

Denise Paulonis -- President and Chief Executive Officer

And I'd add one final point and that's specifically on the color business. When we think about the color business, whether it be for a retail customer or a pro, they're generally quite loyal to a brand. They figured out what works for them, they know how to use the product, they are comfortable with the outcome and results. So in all places where you think about the stickiness of a customer to a particular brand, you probably see that more in color than you do in many consumer categories out there just because they're -- they want that outcome that they want. So, we hope to see that being a piece of traction in both businesses to be able to mitigate what a bit of price increase might do in terms of how consumers might think about their choices.

Simeon Gutman -- Morgan Stanley -- Analyst

Okay. Thanks everyone.

Operator

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. And your line is open.

Olivia Tong -- Raymond James -- Analyst

Great, thanks. Good morning. First question is actually on share repurchase, which obviously you've got the authorization program in place, but haven't done much in terms of the program of late. Just as you're thinking about next year and sort of recovery in place and a little bit more of a return to normal, vivid still pretty strong, how are you thinking about share repurchase and other decisions on capital allocation? And then I have follow. Thank you.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes, I think we're in the best position we've been. We have $400 million of cash on the balance sheet. We don't have anything outstanding on our ABL. You've seen us pay down over $400 million of debt this past year and we're really pleased about our debt -- our net debt leverage ratio, it's at 1.69 times. And our liquidity is well above pre-COVID levels. So all that said, we are well positioned to deploy excess cash. It has not been our goal to keep cash on the balance sheet. We generally run somewhere under $100 million if you go back to historical pre-pandemic levels.

So, we're pretty excited about our positioning here. We're going to continue to stay committed to investing in our growth priorities. But now we are in a great position to be able to start to add buybacks to our capital allocation priorities. We will restart our share repurchase program in 2022. As you mentioned, the Board did authorize $700 million, which is left on our authorization plan to be extended into September 2025. I mean, the other thing I'd mention is we do have some good options coming up on our debt. So, we'll take a look at further opportunities to optimize our capital structure and look for some interest savings along the way as well.

Olivia Tong -- Raymond James -- Analyst

Great, thank you. And then Denise welcome first and then as you think more about what you might do differently. You mentioned more in technology, but perhaps can you give us bit more color on a few other areas, for example, like stores, just footprint, assortment and then also your thoughts on product mix and your ability to push price points from here? Thanks.

Denise Paulonis -- President and Chief Executive Officer

Sure. Thank you for the welcome. A lot built into that question and I will say there are many, many ideas that we have underway and under discussion and kind of four weeks in, lots of places where I think that we have room to grow and expand. The couple of things that are on my very near-term priority list are around digital and e-commerce. We now have the capability to maximize how we utilize those tools and those areas of our business taking that modernized approach and getting it into the hands of our customers, which is about transacting, but it's also about education and influence in the ways that we can communicate and make things more simple for our DIY customers, but also reach our stylist with more messages about what's more new and different and training opportunities.

I think that the tools that we have today are poised to be better utilized and poised to do more messaging for us and as we can start things like personalized journey. You can think about a customer who for the first time comes in the Sally, they buy color because they want to try to do their own hair. We now have the opportunity to follow-up with them and be able to tell them about how to take care of their colored hair, what the right care products might be, how to think about when it's going to be time to come and repurchase and try again, give them videos to help them make that whole experience easier. We can actually connect to that with people.

And so, as I mentioned in my prepared remarks, one of the things that I'm most excited about and I think we have the most opportunity to push on is how many of our customers we know, how many of them we can talk to. It's a really untapped potential for us to grow in that space. I also think about the opportunity that we've talked about where we are definitely leading with color and care, it's who we are, but we have the ability to expand that conversation with the customer to the more peripheral spaces of how we serve them. Marlo mentioned with people trending back to going out and kids being back in school, things like styling tools are becoming more relevant and there's more innovation there to come to. So even pushing around hair, I think we have some great opportunity and tailwind.

But one of the things that we are working on and we'll have more to come and talk about over the next few quarters is a much broader definition of where our growth could come from and what we are poised and have capabilities to be able to do that others might not be able to do in this space. A lot of it could still touch around hair, but can also be a bit broader than that in terms of leveraging the relationships that we have and more of a teaser of work underway. So, I'd just say more to come on some other growth building opportunities that we are thinking about internally right now.

Olivia Tong -- Raymond James -- Analyst

Great. That's it from me, 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 -- Bank of America -- Analyst

Hi, I just have two. The first is, you've mentioned the wage pressure. I guess, I was wondering if we could try and put that into a little better context. Would it be in the kind of 5% range that you're seeing. And I guess are there stores where you're having trouble staffing where you may be having to operate with reduced hours?

Denise Paulonis -- President and Chief Executive Officer

Yes, let me start. I think overall, I think wage pressures is a universal problem and universal challenge right now in terms of just the labor market. We're not immune to having some of those pressure points and we do have different areas of the country where maybe there's a little bit more pressure than not in terms of staffing. I will say that the team did a great job in thinking about this at a very localized approach. So, you're not going to hear us talk about a standardized increase in wages that you might hear from some of the largest retailers, but looking very locally in terms of what the appropriate wages are for the markets that we're in, thinking hard about what our definition of flexibility means in terms of hours and shifts in our DCs as well as in our stores.

And then, we have, what is a natural benefit to us in our stores in particular, in that many people who work in our stores are tied to larger beauty environment. They might work in our stores part-time and also be a stylist, they might be in school and learning to become a stylist and they have a bit more of a natural affinity to the products that we sell and that also creates a different sense of opportunity when we think about going to market. So, seeing things that a lot of the folks are seeing, but I think managing it very much on a localized basis to be working to keep our stores to kind of fully staffed, our team members developing and I'll turn it over to Marlo to talk a little bit more about overall wages and we've built into our plan.

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Yes, I guess, if you think about it from a P&L structure wages, obviously, one of our largest components of our cost structure, I think we've talked about a little bit in past trying to kind of give some sort of context to size. If you look at it from a segment point of view, it runs anywhere from 35% to 50% of the total cost structure, would be related to payroll. I've talked about -- we have taken some very strategic wage increases to invest in our best talent as we went through this year and saw that intensify a bit in the back half. As we look into next year, it's another probably 6% to upwards a 9% just depending on where you are in this localized grid of further wage cost pressure that we've built into the plan.

William Reuter -- Bank of America -- Analyst

That is very helpful. And then secondarily, with regard to, I think your net leverage target is 2.5 times, you guys are at 1.7, should we kind of assume that these shareholder friendly activities that you'll pursue this year will kind of get you back toward that target?

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

I think what we're going to comment on is we're in a very, very good place with our leverage ratio right now and so with our cash generation and cash on the balance sheet, we have tremendous runway to do it all, to invest in the business, to return shareholder value back through buybacks and potentially other means, as well as continue to look at our capital structure, look at our debt stack and continue to optimize that. So, we think we're in a good place with our leverage ratio, we just kind of leave it there.

William Reuter -- Bank of America -- Analyst

Thank you.

Operator

Thank you. And at this time, I'm showing no further questions. Speakers please continue with any closing remarks.

Denise Paulonis -- President and Chief Executive Officer

We thank you all for joining us today and we are incredibly excited about how we ended our fiscal 2021 year. We feel like we're set up for a great fiscal 2022 as well and we look forward to being able to talk and meet with as many of you as we can in the coming year. And a final thank you to all the teams for everything that they do every day to help us grow our business and serve our customers. So with that thanks for participating in the call today.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Jeff Harkins -- Vice President of Investor Relations and Treasurer

Denise Paulonis -- President and Chief Executive Officer

Marlo Cormier -- Senior Vice President, Chief Financial Officer and Chief Accounting Officer

Katie -- Cowen -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Mark Altschwager -- Baird -- Analyst

Steph Wissink -- Jefferies -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Olivia Tong -- Raymond James -- Analyst

William Reuter -- Bank of America -- Analyst

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