Sally Beauty Holdings (SBH) Q2 2019 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool
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Sally Beauty Holdings (NYSE: SBH)
Q2 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

[Audio gap] given at that time. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Jeff Harkins, please go ahead.

Jeff Harkins -- Vice President, Investor Relations

Thank you. Before we begin, I would 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; and Aaron Alt, chief financial officer and president of Sally Beauty Supply.

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Chris will provide a brief overview of our performance for the quarter and give you an update on our second quart accomplishments as well as what we are working on in the second half of the year in terms of our transformation plan. Aaron will then provide some thoughts around our full-year guidance, an update on our capital allocation strategy and supply chain modernization plans and then discuss our second quarter consolidated and segment financial results. Now, I'd like to turn the call over to Chris.

Chris Brickman -- President and Chief Executive Officer

Thank you, Jeff and good morning, everyone. During the second quarter, we continued to make solid progress on our transformation plan as we completed the launch of Sally Beauty's new mobile first e-commerce platform, brought new brands to market, had success against our supply chain modernization plans and reduced our debt levels all as promised. While the second quarter was impacted by an Easter calendar shift and a cautious retail environment in February, we continued to see good momentum in our largest business, Sally Beauty Supply's, U.S. and Canadian retail business, which is on the leading-edge of many of our transformation efforts.

beauty systems group and our international operations are learning from the successes at our Sally U.S. and Canadian business relative to our transformation efforts, and they are showing progress as well. In summary, we are on track with our transformation plan for the year. Now I'd like to highlight some of the steps we took in the second quarter and so far in the third quarter as it relates to our transformation plan as well as what is expected in the second half of the year.

First, playing to win in our differentiated core of hair color and care. As we have stated in previous quarters, we are investing to build on our category leadership and deep expertise in hair color and care. These categories represent over half of our sales, allow for greater differentiation, have a higher penetration of owned and exclusive brands and generally have higher margins. We're constantly looking for additional opportunities in this area.

As an update for the second quarter of fiscal year 2019, owned and exclusive brand comprised of approximately 45% of Sally Beauty Supply's revenue with the majority of those sales being owned brands. Similarly, owned and exclusive brands comprised approximately 53% of beauty systems group sales with the vast majority of those sales being exclusive brands meaning popular third-party brands for which we have exclusive wholesale distribution rights within defined territories. Earlier this year, and in partnership with our largest supplier Henkel, beauty systems group wants the prestigious hair color line Pravana. During this past quarter, we followed-up with the launch of Pravana's hair care line.

Pravana is known for its innovation, particularly around its vivid colors and has a loyal following among stylists. We continue to see excitement from our customers and we are tracking significant new customer wins as orders for Pravana shift to us from the competition. We expect this brand to drive significant incremental business for beauty systems group. In addition, late in the second quarter, beauty systems group launched exclusive distribution of the Swedish vegan hair care brand, Maria Nila.

This is an important assortment gain for beauty systems group as Maria Nila is a rising premium brand that appeals to recent industry trends around natural products. The launch has been a success and we will continue to build awareness and education around this key brand to route the next several quarters. We are excited about the potential Maria Nila has for our beauty systems group professional distribution business. While we could discuss a number of other new assortment choices as we refill our innovation pipeline, I will close on this point by calling out five other important additions during the quarter.

Coty's new Wella KP assortments, Olaplex's fast growing hair care and hair treatment products, Joico's Defy Damage hair care products, the expansion of the Arctic Fox color line and the expansion of Good Dye Young, all of which have demonstrated great results thus far. We are expanding our partnership with all of these brands to reinvigorate newness and choice within our business. In addition, on the own brand side, we added ten new color shades to our Ion box color lineup which should give us a more complete color palette to serve our customers as we work to grow this category at Sally. Before continuing, I should pause and call out what I hope is becoming understood about this part of our transformation effort.

We need to provide our clients with differentiation whether through innovation, assortment or value. We are always searching for newness and our driven to partner with brand developers whether they be established professional experts with which we have a long relationship like John Paul Mitchell systems, larger global beauty enterprises like Coty or Henkel, or influencer-oriented brands like Arctic Fox which is backed up by Kristen X Leanne. The reality is that we have 5,000 points of distribution in 12 countries, we serve both the professional channel and the retail customer, we have associates who are enthusiastic and early adopters and we are investing in both product and retail technology. We intend to leverage that asset base to build innovative and differentiated brands with our partners and we will invest aggressively with partners that bring us distinctive innovation.

Retail fundamentals. Now I would like to provide an update on our efforts to improve our retail fundamentals. On this call, I'm going to highlight our work against loyalty, store experience and technology and then Aaron will touch on supply chain later in the call. As an update, Sally Beauty Supply completed the national rollout of its new loyalty program, Sally Beauty Rewards to all U.S.

and Canadian stores back in October. The new program allows customers to enroll for free and to accumulate points for a $5 reward certificate for each $50 of spend. Results have, after two quarters, continue to be promising. The transition continues to be smooth with no noticeable disruption to our national business.

In addition, approximately 63% of transactions and 71% of sales in the U.S. and Canadian stores are now tied to a Sally Beauty Rewards membership and total active membership surpassed 14.5 million. We are pleased with these initial results and we'll continue to focus on using our closer connection to our clients to drive more traffic. Now retail fundamentals focused on the store experience.

As previously mentioned, we are designing and testing new store concepts and update packages for both business segments in the Las Vegas market area. At the end of the second quarter, we completed the construction of the Sally Beauty Supply stores which included changes to assortment, store layout, marketing and technology. Construction in the CosmoProf stores is expected to be completed shortly. Importantly, by targeting one city, we will be able to assess synergies between Sally Beauty and CosmoProf.

If the results prove out, as we expect they will, we will launch the next market quickly. Finally, as part of our guest experience improvements, we are rolling out a new in-store feature called color view. This consumer facing technology is showcased on a kiosk within the store that houses a built-in iPad that walks the customer through questions about the characteristics of their hair as well as the goals they want to accomplish with their hair color. The kiosk will then make specific color product recommendations and use the iPad camera to create an image of the customer and simulate how the color will look on the customers head.

In a limited test, customer feedback has been positive and we are finding that it is driving both conversion and trading up. We are planning to roll out this technology aggressively across our network of stores for both hair color and cosmetics. We are also seeking additional technology enablers from our product suppliers, our technology vendors and from our customers for use in our stores. Now, enterprise technology.

We have moved from concept to reality as part of implementing a new Oracle point of sale system in both business segments. As of the end of the second quarter, testing in the stores has been completed and we have triggered the national rollout of the new point of sale system and expect to be in well over 1,400 stores by the end of the fiscal year. Once we complete the rollout of the new point of sale systems, which is expected in fiscal year 2020 and mobile apps in combination with our CRM implementation, our loyalty program and our new digital commerce websites, for the first time, Sally Beauty and beauty systems group, will be able to identify our customers regardless of channel, we'll be able to serve them on an individualized basis and we'll be able to remove friction from the shopping experience for them. Lastly, I'd like to provide a quick update on our JDA implementation.

During the second quarter, we completed and went live with two more modules as part of Phase 1 of the JDA merchandizing and supply chain platform implementation. We are now up and running on the first four modules which include product setup and maintenance, store spacing and planning, EDI and demand planning. Now on to our third objective: building a robust digital service platform. It was a big quarter for us on the digital side of the house.

In late March, we deployed our new mobile first e-commerce platform, sallybeauty.com. The new e-commerce platform includes features such as shop by solution, personalized recommendations, educational content and videos for both retail and pro customers, tracking of loyalty points and many other features. We also just added an additional feature called the hair color selector quiz which will walk customers through customized hair color recommendations and act very similar to the color view kiosk being used in our retail stores. Lastly, the new site already includes the infrastructure to support the future goal of offering buy online, pickup in store and ship from store capabilities.

We will quickly follow the e-commerce launch with the launch of the Sally Beauty app which will allow customers to track their loyalty activity, view educational and product offering content as well as make purchases. We expect to launch the app later this month as testing has now concluded. The launch of an updated website and a commerce-based app are also on track for beauty systems group by the end of the fiscal year. These new user experience and platforms will be game changers for us.

To summarize, the second quarter showed solid progress on our transformation plan but we recognize that we still have work to do. With our key accomplishments from the quarter, we are confident that we are moving in the right direction. In addition, our cost optimization efforts, over time, will permit us to make necessary investments in the business and provide us with additional flexibility based on the needs of our business in the transformation plan. Now I will turn it over to Aaron to discuss a couple of topics in more detail.

Aaron Alt -- Chief fFnancial Officer and President

Thank you, Chris and good morning. I would like to start by thanking our global associates for their hard work during the quarter. With a long list of transformation initiatives this year, the team is doing a great job of getting it done. I have four objectives today to comment upon our full-year financial guidance, to provide an update on our capital allocation strategy, to offer an update on our supply chain modernization efforts and finally, to review the second quarter consolidated financial details and segment results.

Let's start with our guidance. In November of last year we offered full-year guidance that our same store sales would be approximately flat, that our gross margin would be approximately flat, that our adjusted SG&A rate would be up slightly, that our adjusted operating earnings would decline slightly and that we would accomplish all of this while both making significant investments in technology, stores, supply chain, labor and talent and executing against an aggressive schedule of transformation initiatives. We are six months into the fiscal year and after taking into account our considerable progress to-date, we are confirming our full-year guidance for fiscal year 2019. We see solid momentum from our transformation efforts at the enterprise level and from our efforts in our largest business, for Sally U.S.

and Canadian business. We also see progress and positive results from new brand launches and other initiatives within BSG, the benefit of which should become more apparent in the back half. Finally, in the second half of the year we are also lapping last year's vendor-based supply chain disruptions. The European business has been a failed headwind in the first half.

However, we are taking steps with respect to that business and are working to overcome the impact of its challenges by being more aggressive in other parts of our consolidated portfolio. It is important to note the progress made against our cost savings initiatives across the business as reflected in our SG&A line. While we have reinvested some of our savings, as planned, the early and aggressive effort against cost has helped us to weather some of the challenges in the first half. On that basis, we are maintaining our guidance.

As part of our guidance for the year, we also rebased our capital allocation strategy. We have consistently said that we will prioritize needed investments in our business that we believe will deliver value for shareholders then focus on measured debt repayment to move our leverage ratio closer to 2.5 times, as defined by our credit agreements, and only then will we consider returning capital to shareholders. We have been investing heavily in the business and we are on track to invest 120 million in capital expenditures during fiscal year 2019. We have a full plate of transformation initiatives and we are focused on executing against them during the year.

We are also making progress against our leverage levels. During the second quarter we initiated a debt tender offer for a portion of our senior notes. A transaction was completed in March as the company repurchased approximately 60 million of its outstanding senior notes. The debt repurchase was funded from our strong cash flow, for operations as well as the proceeds generated from the sale of a facility in Texas.

At the end of the quarter, the outstanding balance on the asset based revolving line of credit remained at zero and the company's leverage ratio had a slight decrease to 2.8 times. As we move through the remainder of fiscal year 2019, we will aggressively explore efficient opportunities to further reduce our debt levels and associated leverage ratio. We expect to be in the area of 2.5 times leverage sometime in Q4. We have not repurchased any shares during Fiscal 2019.

Once we reach our targeted leverage ratio, likely in Q4, we will revisit opportunities to return capital to shareholders. Next, I'd like to provide an update on our supply chain modernization efforts. As discussed during our last earnings call, our supply chain is the product of acquisitions conducted over many years. At the start of the year we had 15 distribution centers across the United States and Canada.

Our network is overly complex and inefficient. We did not have common processes, technology or talent across our U.S. and Canadian businesses. We had too much inventory in the wrong places.

We are making fast progress. We have closed and exited two distribution nodes and we'll close another one during Q3. We are already seeing financial benefits. We expect to begin operations in our new Texas distribution node and to start cross-banner store replenishment and e-commerce fulfillment operations by the middle of Q2 2020.

We are making progress and lowering our distribution costs and improving our on-time delivery to stores as a result of new pooling delivery arrangements in key cities. We will expand this tool and distribution model over the remainder of the fiscal year. As you know, we have suffered from poor vendor performance in the last 18 months, with their supply chain issues impacting our ability to make the sale. We are aggressively targeting those unproductive inventories, built in part to avoid out-of-stocks triggered by the vendors and dealing with continued auto-stocks in some areas from some of our vendors.

We have launched better forecasting, EDI ordering and vendor compliance programs, frankly, similar to other retailers. Our expectations that vendors should deliver what we order, when we order it in the right amounts and partner with us when their product does not sell. This is an ongoing conversation with our vendors. Some of them have embraced the opportunity to work productively with us and will be rewarded.

Others have not been as productive and will have their orders impacted over time across both beauty systems group and Sally Beauty and across both North America and Europe as we move to a global negotiation approach. Finally, we are working hard to upgrade our supply chain technology capabilities to install a new order management system and a new warehouse management system all in an effort to give us better visibility and allow in-store inventory to be accessed by digital clients as product testing buy online and pick up in store, and buy online, deliver from store. We expect these delivery options will be tested in our beauty systems group business before the end of the year. Now the numbers and some context.

Second quarter consolidated revenue was $945.9 million, a decrease of 3% versus the prior year, driven primarily by 69 fewer stores as compared to the previous year; a decline in consolidated same store sales of 0.5%; full-service brand losses; and an unfavorable impact from foreign exchange translation of 110 basis points. Notwithstanding a calendar shift as Easter moved into our third quarter and we faced a challenging February, we continue to see encouraging trends in our U.S. and Canadian business within Sally Beauty Supply. In addition, our global e-commerce business delivered solid growth which was up over 30% versus the prior year.

Conversely, we continue to experience headwinds in Europe with the uncertainties surrounding Brexit, civil protest in France and the impact of consolidating our global European operations. Moreover, while our beauty systems group business has, for the most part, seen the supply chain issues that were so disruptive last year fade away, it will still require some time to rebuild our relationships with customers who were disappointed in the process. Our consolidated gross margin for the quarter was 49.5%, which we acknowledge represents a decrease of 40 basis points in the quarter compared to the prior year. Increases in the bigger and higher margin U.S.

and Canadian business of Sally Beauty Supply's were not enough this quarter to offset the combination of gross margin challenges in Europe and within beauty systems group. I will comment more on this shortly. Telling general and administration expenses including depreciation and amortization expense, were $361.6 million in the quarter, a decrease of $6.8 million or 1.9% from the prior year. A drop in SG&A dollar cost reflects the benefit of our transformation efforts and tight control over discretionary expenses particularly at beauty systems group and at Sally in Europe.

As expected and planned, we used some of our bucket of savings to make investments in technology, store wages and talent. As a percentage of sales, selling general and administration expenses were 38.2%, up 40 basis points over the prior year in the quarter driven by the deleveraging impact of lower sales. This will be addressed over time as we both return to growth and find additional savings. We have excluded restructuring charges which includes the gain from the sale of the secondary headquarters and fulfillment center in Texas from both adjusted operating earnings and adjusted diluting earnings per share.

We have also excluded the loss on extinguishment of debt from the prior year's adjusted diluted earnings per share. Adjusted operating earnings and adjusted operating margin were $106.7 million and 11.3% respectively, compared to $117.9 million and 12.1% respectively in the prior year. Adjusted diluted earnings were $0.51 per share, a decrease of 5.6% compared to the prior year's $0.54 per share driven primarily by lower sales and gross margin in February, partially offset by favorable selling, general and administration expenses across the quarter and a lower consolidated effective tax rate. Our company continues to generate strong cash flow from operations which was $59.9 million in the quarter.

Net payments for capital expenditures in the quarter, excluding 12 million in proceeds from the sale of the facility in Texas, totaled $22.7 million which is mainly spent on information technology products related to the launch of the new Sally Beauty e-commerce platform, the new Oracle-based point of sale systems and the JDA merchandising and supply chain platform as well as store remodels and maintenance. Operating free cash flow, including the proceeds from the sale of the Texas facility was 49.2 million in the quarter. These figures reflect an intentional increase in investment of our free cash flow to fully capture cash discounts from our vendors which will benefit our gross margin in future quarters. Inventory was up 1.9% from the prior, to $953 million driven primarily by the impact of new product launches, the expansion of distribution rights for beauty systems group and safety stock to deal with vendor product conversions, partially offset by a stronger U.S.

dollar and reported inventory levels. Of note, the inventory did decrease $29.5 million in the first quarter. We expect to continue to make smart progress on our inventory levels over the course of the year. Turning to segment performance.

For the second quarter, Sally Beauty Supply's same store sales decreased by 0.3%. The segment generated a revenue of $565.6 million in the quarter, a decrease of 2.5% compared to the prior year driven by 64 fewer stores, Europe's continued challenges and Easter shift into the first quarter of the fiscal year and the U.S. and Canadian retail business experiencing a challenging February. Foreign currency translation had an unfavorable impact on the segment's revenue growth in the quarter by approximately 150 basis points.

We also continue to make meaningful progress with Sally's U.S. and Canadian e-commerce business in the quarter which helped deliver e-commerce revenue growth of 37.5%. We expect to continue to invest aggressively in improvements to the overall online customer experience. Gross margin for the segment was flat at 55.6% with improvements in the U.S.

and Canada offset by weakness in Europe. Segment operating earnings were $86.7 million in the quarter, a decrease of 4% versus the prior year driven primarily by the decline in total revenue partially offset by favorable operating expenses resulting from our cost saving efforts. Now turning to our beauty systems group segment. Same store sales declined 0.9%.

Net sales were 380.2 million in the quarter, a decrease of 3.8% compared to the prior year driven primarily by the continued impact of brand and lifecycle transition impacting the full-service business. Foreign currency translation decreased the segments revenue growth in the quarter by approximately 40 basis points. BSG's gross margin was 40.4% of the quarter, down 100 basis points from the prior year. BSG's gross margin decline has been a key focus area for us and we have just completed an assessment which highlighted the reasons why and our opportunities in pricing, promotions, cost of goods and negotiations, vendor allowances and operations.

Many of the recommendations highlight that the margin decline issues are not structural or industry challenges but are rather the result of significant change within Sally Beauty holdings and its merchant and field teams, complicated by our need to transition to modern technology and data practices. Addressing BSG's margin has become a preeminent pillar of our transformation efforts going forward and we're on it. Segment operating earnings for BSG were $56.5 million, down 5.7% from the prior year driven by lower revenue and gross margin partially offset by lower operating expenses from our transformation efforts. In conclusion, I want to repeat something I said last quarter which is equally true today.

We have a plan. We are pleased with our initial success against the plan. We have a lot of work yet to do but we remain on target for the next several steps of the plan and we are maintaining our guidance as a result. Thank you for your time, now I'd like to turn the call back over to the moderator.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question is from the line of Mark Altschwager from Baird. Please go ahead.

Drew North -- Baird -- Analyst

Good morning. This is Drew North on for Mark. Thanks for taking our question. It sounds like you had solid momentum again in the Sally North American business.

Maybe apart from the challenges in February. First, can you quantify how much of a drag February was and then discuss the other drivers to the comp from a traffic or AUR perspective? And then how should we think about the drag from the European business as we look at the second half?

Chris Brickman -- President and Chief Executive Officer

We don't release quarterly results or monthly results, obviously, so we're not going to specifically release February. That being said, we did hear from a lot of other retailers that February was a challenging month and I'm sure you'll hear that from them in their earnings reports as well. In terms of Europe, you know, obviously there's a lot of disruption there. It was -- or same store sales were negative for the quarter and as a result it was a drag.

We do see that, them, making some progress in their promotional activity and hopefully we see that stabilizing in the back half but at this point in time I'm not going to quantify the change we expect between this quarter and next quarter. It will be a continuing challenge but we think it can be better than it has been in the first half of the year.

Drew North -- Baird -- Analyst

Great, that's helpful. And then I just wanted to ask a higher-level question on the back half margin outlook. I guess, can you discuss some of the drivers or the key drivers that give you confidence in the pace of margin improvement in the second half to reach flat for the full year? And then any moving pieces between Q3 and Q4 that we should be aware of, other than the easier comparisons in the third quarter?

Aaron Alt -- Chief fFnancial Officer and President

Sure, let me start with the second half of the question which is that we don't provide quarterly guidance. As I look at the year-to-date, we are about spot on where I expected we would be from a business performance at the consolidated level for the year. As we think about the back half, as I talked about during our Q4 earnings release last year, we are investing heavily against the business, not only in technology and talent but also in process in our conversations with our vendors and a lot of what we're doing was frontloaded in the year so that we could start reaping the benefits of the investments as we moved for the year. As Chris highlighted in his comments, the Sally U.S.

and Canadian business has been, you know, leading the curve, if you will, more aggressively on many of the elements of how we talk with our vendors, how we partner, how we bring innovation to play. We will continue to benefit in the Sally U.S. and Canadian business on our speed so far there and we're seeing good progress now within BSG as well relative to the refill of the pipeline and our ability to drive progress on both the sales line and the gross margin line in the back half of the year.

Drew North -- Baird -- Analyst

Great. Thanks for the color. I'll let others jump in.

Operator

And next, we move to the line of Rupesh Parikh with Oppenheimer. Please go ahead.

Rupesh Parikh -- Oppenheimer -- Analyst

Good morning, and thanks for taking my question. So I wanted to start out with full-year guidance. So you guys still expect operating earnings to be down, I think slightly for the full year and first half it declined, I think, around 5% per month, for my calculations. Just curious, you know, where are the key drivers that's going to help to drive that improvement to be down only slightly for the full-year?

Chris Brickman -- President and Chief Executive Officer

Well, Rupesh, let me take a first cut at that and I'll let Aaron step in after that. So, you know, first of all, as you know, BSG has been going through what is a normal lifecycle in terms of brands leaving the pro channel and moving to retail. That's been going on for decades but when there's more brands leaving than coming in you end up with headwinds. We're seeing that begin to shift where the number of brands that are later in their maturity phase and as a result are tapering down, that decline is slowing.

Meanwhile we've got a lot of innovation that's coming in that's also high margin. So we see stronger performance in the back half for BSG especially and that's probably the biggest single shift in our financial performance between first half and second half. After that there's a whole bunch of other things going on in terms of just the -- you know, getting payback on the initiatives as -- Aaron mentioned, that we've been making in the first half, most of which are going to pay off in the back half of the year. Obviously, we'd like to see improved performance in Europe and we're working on that but I'm -- that one I think we have to be a little bit more skeptical of.

In addition, I think we've got additional SG&A savings we can drive in the back half as well. So Aaron, if you want to pile on to that at all?

Aaron Alt -- Chief fFnancial Officer and President

I would. Hi, Rupesh. I guess, I would observe that what has become clear to me is that as expected, we have opportunities across the -- sorry, across the portfolio for the rest of the year on pricing in select areas, on continuing to drive promotional efficiency particularly within BSG. We have cogs, negotiations with several of our vendors under way, some of whom are on this call.

We are in the process of introducing higher margin mix products to the portfolio as well and then there are a variety of other initiatives we have under way. A lot of them are coming. We've seen the proof points in parts of the business already and we expect that continued progress will help us to get there. The BSG team in particular is going to be very aggressive in addressing the gap that exists in this quarter as we push ahead.

Rupesh Parikh -- Oppenheimer -- Analyst

Great, and then if I could slip in just one more question. Just on the cash flow, I know you provided some of the color in terms of some of the headwinds in Q2, as we look out for the balance of the year, I mean, do you expect the cash generation to decline to moderate or is there any more color you can provide in terms of how you --

Aaron Alt -- Chief fFnancial Officer and President

I might tell you, we are going to aggressively bring our inventory down, both from a cash generation perspective but also as we seek to increase our turns and drive newness. We're clearing out some of the old stuff in favor of new stuff down the path. We won't reinvest all of it so that will be a cash generator for us. Similarly, as we've been talking to our gross margin, it's been the case that over time the company has allowed their terms to lag and we haven't been paying vendors and we have invested this quarter some of our cash to bring vendors current with terms as we discuss new terms with those same vendors as we carry it forward.

And so, I remain confident in the cash generating capacity of the company. I'm not at all concerned and, like I said, we are going to pull multiple levers to set us up for success as we carry forward.

Rupesh Parikh -- Oppenheimer -- Analyst

OK, great. Thank you.

Operator

Next, we go to the line of Oliver Chen with Cowen and Company. Please go ahead.

Oliver Chen -- Cowen and Company -- Analyst

Hi, thank you. Good morning. Regarding the new loyalty program, how has that interacted with traffic and number of sign-ups relative to how you thought that would? And then a modeling question, as we model free cash flow, it looks like free cash flow declined at a faster rate than EBIT. What are your thoughts on the full-year guidance of free cash flow and some of the items that led to the year-to-date free cash flow results? It sounds like inventories were up more than you expected.

Thank you.

Chris Brickman -- President and Chief Executive Officer

Why don't you take cash flow first here?

Aaron Alt -- Chief fFnancial Officer and President

Couple thoughts. We gave cash flow guidance earlier in the year as well and we remain on that guidance. We are pulling all the levers and so whether it's bringing inventory down, as I just alluded to, or taking other steps, we are confident in both the profit generating capacity of the business as well as steps that we can take to generate more cash, you know, as we carry it forward. So I guess that's all I can tell you with respect to the cash.

The second question was --

Chris Brickman -- President and Chief Executive Officer

On the loyalty program, Oliver, you know, what I'd say is a lot of retailers have struggled as they've implemented new loyalty programs with disruption in the first couple of quarters. We have not seen that. It's been a pretty smooth transition as I indicated in my comments and we continue to see, you know, a growth in the overall program and accelerated sign-up. So, from our standpoint, it's working as well as we expected or better in the first six months and you're right, the next -- now the next step is to take that larger database of customers and more intimate knowledge of them and translate that in to -- into better traffic in our stores which we expect we'll be working on in the back half of the year.

Oliver Chen -- Cowen and Company -- Analyst

OK, and the testing and innovation you've been doing around new stores. Does that alter or give you more contemplation about your overall store base at either division and where that right number is? We'd love your thoughts on what you're thinking for what's a great idea for the long-term on the store base?

Aaron Alt -- Chief fFnancial Officer and President

Sure, a couple of observations. Using just the Sally portfolio for a second, the average -- our average is 17-year age on our stores so that means that we know we have need to invest over time. Las Vegas is proving useful to us in both how fast can we move and how do we keep the cost down as we do that. That's a key part of what we're assessing as we carry it forward.

Too early to say, given we've just completed the market and just launched the market in testing there as well as to how many of the components we'll roll out across the portfolio but we do expect, over the course of the rest of this year as well as, as we move into the long range plan to invest both in the digital experience and the store experience, pushing forward. I thought I heard maybe indirectly a question around how do we feel about the size of the portfolio and the short answer is that as we promised at the start of this year, we are cleaning up elements of the portfolio this year and then you will see a pivot from us that we will talk about more as we get to the end of the year.

Oliver Chen -- Cowen and Company -- Analyst

OK. And our last question is just related to the second half initiatives including there's technology and product and the point of sale. Which -- how would you prioritize which ones would be stronger or you would prioritize them in terms of traffic drivers or would they be, you know, somewhat equal weighted? I'd love your thoughts on prioritization.

Chris Brickman -- President and Chief Executive Officer

Well, I mean it depends on what you're prioritizing Oliver but if you're thinking about what one is going to have the greatest financial impact in the back half of the year, it will be probably the new product launches at BSG and the tapering off of some of the products. The decline in the products that have kind of reached the end of their pro lifecycle. So that will be the biggest change financially. In terms of long-term, obviously, we believe the changes we're making in our e-commerce platforms as well as our core technology platforms and POS probably have a greater or longer-term impact on the business and -- we won't see as much of that this year.

It's going to be something that will build over time given we're building off a small base but those are the more important longer-term investments.

Oliver Chen -- Cowen and Company -- Analyst

Thank you very much. Best regards.

Operator

Next, we go to the line of Olivia Tong with Bank of America. Please go ahead.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. I wanted to first ask you about some of the announcements by Regis, you know, talking about refranchising and in doing so, requiring some of their franchisees to buy a portion of their private label professional project, products, from them instead of other guys like potentially you. So could you talk about the potential impact that that decision has on your sales?

Chris Brickman -- President and Chief Executive Officer

Yeah, Olivia, this is not a major impact for us. We don't have, do, a lot of volume with Regis and the reality is, we already have that. They're already in a franchise situation. There are some chain accounts that we do serve through BSG and those chains continue to do quite well.

It's not a highest margin business for us but it's something that we absolutely do on behalf of our customers but, no, I don't expect much of an impact associated with Regis changing their purchasing or their approach to products.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Got it, that's really helpful. And then just sticking on the retail, you know, obviously Amazon announced that they are moving to one-day shipping which clearly rattled a fair number of retailers. How do you think that that potentially impacts you? I know that, you know, the stylist, particularly the booth renters, are always looking for product immediately which, you know, has always been something that's benefited you because they need to go -- they need to have that relationship, they need to have that known factor and that immediacy. If there is -- if Amazon starts moving to an ability to move to one day, do you -- like how do you think of that impacting you? Is that enough for, in your view, for the stylist to kind of bridge that gap?

Chris Brickman -- President and Chief Executive Officer

Well, you know, first of all, let's make it clear that a lot of the investments we're making are specifically for us to be able to ship from store and get to same day. So, down the road, we expect to be there, certainly in key markets. And so, I don't see that -- I think that's the bar given the fact that many stylists are very hand to mouth in terms of how they buy product. Second is, you have to have the full array of brands, especially color brands, available within that timeframe.

You can't just have a few products available there because it really comes down to what's the services they need to provide on their customers during that day or two days that they want the product for. And so as I've mentioned before, many times stylists come in with their schedule book in hands, walked into our BSG stores and walked the color aisle picking out specific colors and products for specific customers and services they're going to perform in the next couple of days. And so, the reality is that that suits our model very well and it will suit us when we move to same-day delivery capability over the next 12 months.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

And then just lastly, in terms of the BSG lifecycle and the brand lifecycle impact that you talked about. From what you can see, when do you think that starts to lap and things start to turn back to either normal or better relative to the number of brands that are coming in versus the ones that are sort of maturing and coming out.

Chris Brickman -- President and Chief Executive Officer

Yeah, and let me make sure I make it clear. It's on us to constantly be refilling our pipeline and I -- we take full accountability for the fact that we didn't get aggressive enough in doing that. We think we've done it now and we've got a lot of great innovation launching in BSG but we still -- we have to be accountable for always being prepared to refill the pipeline as brands move out of the lifecycle. That being said, there -- we do see a significant tapering that's going to happen here in terms of the headwinds as we go in the next two quarters and I won't get specific about which brands by quarter but some of that happens in Q3 and some of it happens in Q4 and we'll be lapping that those brands reached kind of a more retail focused stance and then that result is that, the headwinds will start to subside and the tailwinds will build and that's the shift we're seeing for BSG in the back half.

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Thank you so much.

Operator

Next, we go to the line of Simeon Siegel with Nomura Instinet. Please go ahead.

Steve McManus -- Nomura Instinet -- Analyst

Morning. This is Steve McManus on for Simeon. Thanks for taking our questions. Just wanted to see if you can give us an update on how planned wage investments are trending versus initial expectations heading into the year and maybe give us a little bit more color as to what's baked into the full-year guide.

Aaron Alt -- Chief fFnancial Officer and President

Yeah, what I can tell you is, is that we have been investing in wage rate in key parts of the country as we are watching both the mandatory minimum wage laws as well as the competition, you know, in key parts of the country and we have started -- we invested both at the backend of last year and in the first half of this year in parts of the portfolio where we felt like we needed to, to remain competitive. Our investments in wages are not yet done, we continue to have investment in front of us both this year and next year. I'm comfortable that what we need to invest this year is already baked into our plan and our guidance. I don't think I've broken it up by dollars so I'm not going to do that now but it is absolutely -- you know, we're going to have to overcome and we're going to use part of our cost savings to try to get there.

Steve McManus -- Nomura Instinet -- Analyst

OK, and just a follow-up on the pressure in Europe. Have the headwinds predominantly been within the U.K. or is it more broad-based and maybe if you could speak to how the rest of your international market's been trending, that would be great.

Chris Brickman -- President and Chief Executive Officer

Yeah, it's more broad-based. France specifically in continental Europe has seen some declines as well. It was worse in our Q1 but it was still negative in Q2. We do see the potential to build on that and improve that but, again, we're still cautious about Europe overall.

Steve McManus -- Nomura Instinet -- Analyst

All right. thanks, guys.

Operator

Next, we'll go to the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Xian Siew -- Morgan Stanley -- Analyst

Hi, guys. This is Xian Siew on for Simeon. In diagnosing the transformation initiatives such as marketing e-commerce, we've talked about a lot of, what is going better than expected and maybe what is behind expectation?

Aaron Alt -- Chief fFnancial Officer and President

I think I would answer it this way. The combination of things happening at the same time at Sally has -- we've been able to push that faster than we have anticipated and that has led to more positive same-store sales growth and more positive margin progress than we had planned. And that has helped us to offset some of the trailing elements of the BSG margin profile as well as the headwinds in Europe, so far year-to-date. And of course since we guide at the consolidated level and we don't provide quarterly guidance, you don't have a lot of visibility to the pieces but what I'd tell you is we're managing the full portfolio, and this is one of the other thing that's hap -- gone well is, because of the progress at Sally, we've been able to manage that business to help us to address whatever the headwind of the month or the quarter happens to be as we look at the overall enterprise.

As we think about things that are a little bit behind the curve, it's absolutely clear to us, and to Mark Spinks and the merchants here in Chad Selvidge that we have got to fix the BSG gross margin profile and we're already working hard both internally and with many of our vendors on how do we go about doing that. Right? We have great hopes for that business, we believe we can get there, it's a known problem. We have a plan but we have to -- we have to move faster than we have.

Chris Brickman -- President and Chief Executive Officer

Yeah, I think that's well summarized. I think overall our technology investments and supply chain investments, you, are going on track or ahead of track for the most part and I think we should feel proud about that and the sense that the reality of those can be -- those can trip a lot of companies up. That being said, I personally feel like we should have moved more aggressively to refill the pipeline in our BSG business, we're doing that now which I'm excited about but we're getting -- I think we probably should have done it sooner and, you know, Europe is a bit of a quandary. I do think that there's some systemic issues there in terms of the marketplace but also, we need to get better at kind of bringing the teams together and executing.

Xian Siew -- Morgan Stanley -- Analyst

And can you please quantify the Easter shift and how that kind of reverses in the third quarter?

Chris Brickman -- President and Chief Executive Officer

No, we really don't quantify -- we don't give kind of month to month results like that. It just -- it was a small shift, it does affect the quarter.

Xian Siew -- Morgan Stanley -- Analyst

OK, so it was small though?

Chris Brickman -- President and Chief Executive Officer

Yes.

Xian Siew -- Morgan Stanley -- Analyst

OK, thank you.

Operator

Next, we go to the line of Shannon Coyne with BMO Capital Markets. please go ahead.

Shannon Coyne -- BMO Capital Markets -- Analyst

Hi, thanks for taking my question. My first question I just -- Estee Lauder they reported this morning declining sales in Bumble and bumble, in the salon channel, they gave that as the reason and that coincides with the role on Ulta. I'm just curious to get your thoughts if you think the dynamic is specific to Bumble and bumble or if you think that could deter other brands from going into specialty or what you think is happening there and how can it impact you guys in other brands? And then secondly, I was just wondering if you could maybe help quantify or give more specifics on the impact of the vendor issues and give us a sense how long you expect that will continue to last? That's it.

Chris Brickman -- President and Chief Executive Officer

Well, let me do the first one. Prestige hair care and salon brands, you know, has not been a big category for us historically. We tend to compete at a level below that. Honestly, Maria Nila is our first big venture into it and it's going really well.

So I can't really comment on Bumble and bumble, I don't know where it's at in its lifecycle. It's obviously been around and a very successful brand for many years. But the reality is that as we begin to push more into the Prestige or the higher end, we're actually seeing growth and success in that channel and getting access to accounts that we historically didn't have access to. So, I don't feel that is a headwind.

I actually see that as a growth opportunity for us. I just -- I don't know enough about Bumble and bumble to comment on it directly. And Aaron, I don't know if you want to comment.

Aaron Alt -- Chief fFnancial Officer and President

To answer your question on the quarterly impact of the vendor supply chain issues, we estimated it was a 20-basis point impact to BSG same store sales as a result of a key vendor not being able to ship to us for a defined period of time. The good news is that issue has been resolved and so we're not expecting it to carry forward but it presents the practical reality that we have to bob and weave each quarter as we have key vendors who are also going through their own transformations.

Shannon Coyne -- BMO Capital Markets -- Analyst

OK, thanks.

Operator

Next, we go to the line of Ike Boruchow with Wells Fargo. Please go ahead.

Lauren Frasch -- Wells Fargo Securities -- Analyst

Hi, this is Lauren on for Ike, thanks for taking our question. You mentioned that you're seeing progress at Sally Beauty Europe and at BSG. Could you identify some of the specific areas that are giving you confidence today that comps will be able to inflect in the back half? And as a follow-up, if Europe continues to remain weak for whatever macro factors tend -- do you believe that consolidated Sally Beauty can still inflect? Thank you.

Chris Brickman -- President and Chief Executive Officer

Well, I'll -- let me take the BSG one first. So, as I mentioned a couple of times here, there -- what's really driving our optimism about BSG is the innovation we're launching there whether that be new brands like Pravana expanding the Olaplex line, the launch of the Joico Defy Damage products and the growth of the Maria Nila brand. So it's that acceleration of some of the new innovation that then offsets some of the declines associated with brands that are later in their lifecycle and moving some of their business, especially care. This is not color, this is care into more of a retail channel.

In Europe, I think the primary thing we can do, we obviously can't control the environment, the primary thing we can do is get much better at aligning our promotional strategies with our vendors upfront making sure we hit crisp price points that drive traffic to our stores and making sure we communicate with our customers effectively. Teams have been working on that. It has been a trial and error process of bringing our businesses together there. I'd say we're getting better at it which is why you hear some optimism there.

That being said, I think the marketing -- the market environment will still be challenging to some extent.

Aaron Alt -- Chief fFnancial Officer and President

One thing I would add is, what you're hearing from Chris and I is we're seeing signs of recovery and progress. Keep in mind that our guidance is at an enterprise consolidated level and on a same store sales basis our guidance is approximately flat across the portfolio for the year. We don't give you -- we have not guided and will not guide on the segment level relative to that.

Lauren Frasch -- Wells Fargo Securities -- Analyst

Got it, thank you.

Operator

Next, we go to the line of Steph Wissink with Jefferies. Please go ahead.

Steph Wissink -- Jefferies -- Analyst

Thanks, good morning everyone. I have a two-part question, guys, if I could. If you stepped back and surveyed the landscape and look at the competitive marketplace, I think the hair care market is actually accelerated so maybe talk a little bit about the business trends you're seeing relative to the market specifically within Sally Beauty and I think also the professional division, you have seen an acceleration in the demand takeaway side. Maybe help us reconcile that relative to what you're seeing in your business?

Aaron Alt -- Chief fFnancial Officer and President

I think I would offer a couple of things. Care and color are the two largest parts of our business ad we are seeing strength in our results relative to the focus -- focus strategy that we have there. I'm not going to comment on how much hairspray Ulta is selling, it's not for me to comment on. What I am pleased with in the Sally Beauty side is us continuing to build our baskets both leading with color, adding care to it as well and then driving the basket fill elsewhere as we push ahead.

And the same is true for BSG as we pivot in that business which is it's believed it's approximately 70%, more than 70% actually of the businesses both color and care and so at a higher ticket, higher basket than the rest of retail given -- given who's doing the shopping there, much of the product there is actually going on someone's head in the salon versus being used at home and so it's not a direct compare like some of the retailers. But we're seeing progress.

Chris Brickman -- President and Chief Executive Officer

And just from a category perspective, just to build on what Aaron said, you know, we've -- as our core is in color and care, those categories have been our strongest categories, with some headwinds in BSG as I talk about the lifecycle issue I mentioned for BSG that we're now refilling, the reality is that some of the weaker categories have been categories like electrical appliances where there's been greater price transparency and more on-line competition and we're really working hard right now to reset that category and--and reduce some of the headwind we've experienced from that category.

Steph Wissink -- Jefferies -- Analyst

OK, that's helpful and then the second part of the question, and I think I asked this of you about a year ago, you have a lot of initiatives going on, can you just help give us some comfort that it's not overwhelming your store level associates and your managers? Help us to understand kind of how the cadencing of some of these initiatives is taking place and then as you demonstrated some confidence today in the back half recovery, is that really a recovery at the store level that you anticipate seeing or is it something more around the balance between field level activities and the corporate activities that we're going to see that improvement?

Aaron Alt -- Chief fFnancial Officer and President

Great question and I think I would give you a similar answer to what I gave you when I joined which is this transformation is incredibly complex. There's no getting around it. We have a couple hundred initiatives under way. What I have seen here in contrast to what I've seen elsewhere is just a dramatic focus in the teams both at headquarters and in the field on both sides, actually on all three sides of the business, and they are just getting it done.

That's why I started my comment the way I did. We have -- at the same time we have the technology investments are happening with respect to digital and with respect to our merchandising supply systems, you know, the store leaders in BSG and Sally are rolling out new approaches to hours, new approaches to best practices from a selling technique perspective. You know, new parts are rolling out across the stores and so there's no getting around the fact that we have a lot going on. The good news, and I would point you all to this as well is not withstanding everything we have under way, we have made dramatic progress in the first six months and we're being purposeful in earnings releases of telling you both what have we got done as well as what's coming next and I think if you compare the list, they're pretty consistent where we've gotten done what we said we're going to get done and we're going to continue to take that approach and so teams are focused, the leaders are doing an awesome job of guiding the various parts of the organization and as we sit here today, we are confident that we are where we need to be on the transformation plan for this year and, in turn, that will set us up for the transformation plan, the continuation of the effort and the results of some of the investments as we move into next year as well.

Chris Brickman -- President and Chief Executive Officer

And the only thing I'll add to that is, my experience with our store associates who are incredibly dedicated and are great beauty enthusiasts, they're thirsty for many of these changes. The investments in things like POS and store technology and other capabilities and revamped stores, you know, they've watched a lot of that erode over many years, in some cases, and they're thirsty to get their hands on new technology and new things that that help them serve customers better. So, I'm not worried about the execution at the store level. Obviously, we've monitor it constantly but the reality is, we have some excited people at our stores who are glad we're finally investing.

Steph Wissink -- Jefferies -- Analyst

OK, thanks. And Aaron, one more for you. I just want to make sure I heard you correctly on the free cash flow bridge, relative to EBIT, a significant change in inventory is your expectation but you also mentioned receivables. I'm wondering if you can just help us maybe quantify or force rank where the biggest benefits are going to come from to close that free cash flow gap to what your full-year expectations are?

Aaron Alt -- Chief fFnancial Officer and President

I think I referred to two earlier: one was that we're bringing our inventory down aggressively for unproductive inventory in particular, right? On the other side of the equation, we have been using cash to pay our vendors faster and we will, first of all, always look at our receivables and where we can bring it down but my answer to the question earlier was focused on payables and inventory. But I think our models do confirm the cash flow guidance that we gave for the start of the year. We expect to be about where we said we would be.

Steph Wissink -- Jefferies -- Analyst

Thank you.

Operator

And ladies and gentlemen, we have time for one final question, it's from the line of Karru Martinson with Jefferies. Please go ahead.

Karru Martinson -- Jefferies -- Analyst

Good morning. When you look at your average store age at 17 years, you know, what is the percentage of your stores that are strip malls, stand-alones and you know, how do you see that tenor changing as you go forward with these remodels?

Chris Brickman -- President and Chief Executive Officer

Almost all of our stores are strip mall based. There are some that are in -- especially BSG that are in some more unique real estate that I described is anywhere from light industrial to light retail but for the most part, we're in strip mall locations. I don't think that's going to change right away because there's a lot of stores that are sitting in that footprint. We will see how we -- what we learn from Las Vegas and some of our other store concept tests to see if we want to modify the type of real estate we go into.

So I'd say that's a decision that hasn't been made yet in terms of how much it might change in the future but we're certainly open to it if it needs to change.

Aaron Alt -- Chief fFnancial Officer and President

A couple of important -- a couple of important talks about the portfolio. First is, you have to keep in mind that the Sally stores are generally below, or if not well below, 2,000 square feet. BSG stores are 3,000 square feet or below as well. Our asset -- our store asset base is productive, right, we have very few stores which are not cash flow positive, right, in the stores and we are incredibly flexible because we have leases that are five years or less virtually across the entire portfolio.

And so, while prior management teams have purposely taken the approach of it's all about the supply and keeping it a very more warehouse supply feel, we are investing our stores but we don't aspire to be Ulta, right, in that respect. It's not the real estate we're looking for, it's not the guest experience we're after. That said, we do know that we need to freshen elements of our portfolio, we need to serve the guest better from a guest experience at the same time that we're delivering value and differentiation to them from an assortment perspective.

Karru Martinson -- Jefferies -- Analyst

OK, and then just in terms of the portfolio, do you have any -- what other remaining owned assets do you have that you may consider selling and then just given that you're undrawn on your ABL, how do you look at paying down debt this year?

Aaron Alt -- Chief fFnancial Officer and President

Fair question. So, I would be a bad CFO if I said anything other than we look at our assets all the time, to look at what's productive or not. The supply chain is a key area of focus for us and we took our first steps there. We'll continue to look at all of our assets for the benefit that they bring to our overall operations and whether or not they present us with an opportunity to generate some cash.

I don't want to be -- I don't want that -- too much to be read into that though given that our store portfolio is almost entirely leased and many of our distribution centers are as well. And so, we're going to be smart about that, is really what I would say. From a leverage perspective, you should take me at my word, what I said in my introductory comments that we expect to be right about 2.5 times at some point in Q4. When we started this journey, at least when I started this journey nine months ago, it was where are we going to get to? And we promised to get to that leverage ratio, if we get there by Q4 as our models are predicting then we'll again have the conversation of do we need to invest more in the business or not consistent with our long-range plan.

How do we feel about our debt or is it time to return capital to shareholders, and that's all I can really say.

Karru Martinson -- Jefferies -- Analyst

Thank you very much guys. Appreciate it.

Operator

And I'll turn the conference back to the CEO, Chris Brickman for closing comments.

Chris Brickman -- President and Chief Executive Officer

Thanks to everyone for your questions today. To summarize, we are playing to win by refocusing our business around our differentiated core of hair color and care, improving our execution of basic retail fundamentals and advancing our digital commerce capabilities. We are executing as planned against an aggressive transformation plan and we are maintaining our financial guidance for the full fiscal year. Thank you for joining us today.

Operator

Ladies and gentlemen, this conference is available for digitized replay after 9:30 A.M. Central Time today through May 8 at midnight. You may access the replay service at any time by calling 1-800-475-6701 and enter the access code of 465851. International participants may dial 320-365-3844.

Again, those numbers are 1-800-475-6701 and 320-365-3844 with the access code of 465851 and it is available after 9:30 A.M. Central Time today through May 8 at midnight. [Operator signoff]

Duration: 68 minutes

Call participants:

Jeff Harkins -- Vice President, Investor Relations

Chris Brickman -- President and Chief Executive Officer

Aaron Alt -- Chief fFnancial Officer and President

Drew North -- Baird -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Olivia Tong -- Bank of America Merrill Lynch -- Analyst

Steve McManus -- Nomura Instinet -- Analyst

Xian Siew -- Morgan Stanley -- Analyst

Shannon Coyne -- BMO Capital Markets -- Analyst

Lauren Frasch -- Wells Fargo Securities -- Analyst

Steph Wissink -- Jefferies -- Analyst

Karru Martinson -- Jefferies -- Analyst

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