Angi CEO Jeff Kip & Sally Beauty CEO Denise Paulonis on Earnings

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2:31Carol Massar:Well, it's sort of like hitting your finger with a hammer. We've all done that. It really hurts. And I'm just pointing this out because we did see shares of Angie dropping 35 % last Wednesday following its latest earnings release. After the online portal for home improvement reported first quarter revenue that missed expectations. They also plan to stop issuing quarterly guidance and outline outlined a major strategic pivot to refocus on AI. I do want to be fair, though. The stock did bounce back the following two days after the earnings share price drop, getting about 21 percent in that bounce back.

3:04Carol Massar:Stock is down, though, another 12 percent in today's session. It's about a 207 million dollar market cap stock. It is down, Tim, about 60 percent year to date. After that intro, I'm going to let you bring in, Jeff. Jeff, if you want to come in, we do welcome you back. We like talking to you. We think it's an interesting platform. Tells us a lot about small business owners. Talks to us about the consumer and about kind of the home market. And then so much more. Jeff Kipp is the CEO of Angie. He joins us from CoHouse at Massachusetts. You guys have a lot going on, Jeff. Since we talked with you in mid-February, got changes to your CFO and COO.

3:43Carol Massar:that happened in March and April. What happened that you guys said, we got to do something different? So we have been working on the same technologies at HomeAdvisor for over 20 years from the Angie's List and Handy Businesses a little less. But we've had three old platforms we've been working on. The older your technology gets, the more code is layered on top of other code, slows you down, makes innovation harder. And we have been plotting a path to a new platform, but we've just decided now's the time we needed to move quicker. The big catalysts are what I would call the biggest changes in technology in a generation, which we really saw February, when you saw things like OpenClaw, Cloud Opus 0.6 released.

4:31And now our engineers are able to move a lot faster and the capabilities we have are a lot greater. And it's time for us to stop fighting the old platform and kind of move into the present, if you will. So what does that look like? Not just from, you know, this is a two sided market. So what does it look like from the provider and the home services professional standpoint, but also from the customer standpoint? So if you think about the homeowner customer, I think we are going to be able to have a more nuanced, more natural language conversation with the homeowner. Homeowners are not natural experts at describing their problems that they need pros to work on.

5:05And we're going to be able to ask better questions, upload photos, and get to a better identification of the details that need work, give the homeowner better estimates. So we'll be going there over the course of the next year. The first stage of our new platform is to put the homeowner experience into place over the course of this year. On the pro side, we're going to build a set of tools for the pro. We referred to it in our release and our letter as the NG Pro Chief Revenue Officer. Pros are very good at doing work. They're not always good at calling the homeowner right away. They're not always good at making sure there's a sales trained technician or a salesperson at the appointment.

5:41They're not always good at following up. They're juggling a lot of balls in the air. We believe that agents really change the game for pros. You can already see it out there. There are startups out there doing pieces of this. We believe we can build a toolkit to make sure that our pros win jobs at a much higher rate, gets more value from the platform. And then if our pros are winning, the homeowners are getting more value from the platform, too, because their jobs are getting done well by our pros. So what are the changes that happen internally at Angie to facilitate something like this? And what can investors understand about how this changes margins, what it looks like for the business and where they actually see differences?

6:22So internally, we need to change the way our teams work and the way they code. What Cloud Opus 4.6 did, and you can read about all over the place, is that now you can not only write code, but you can write more code, and you can check code using AI. Now, you still have to have engineers who understand systems, understand the business, and understand the ultimate product. They also need to understand how to test and spot issues in the code. But there's really a game changer there that it's going to allow our organization to move much quicker. One piece of what we're doing is we were midstream on building our homeowner experience afresh.

7:00We're now writing some of that with AI, but we're going to rebuild our entire pro backend much faster using AI. So effectively, our teams are going to move to AI first coding. So we're going through a really material transition with our product technology, UX and data teams to make sure that we can do this effectively. But we think it's going to double our speed to market. You know, some analysts are out with different views. I'm just going to read from Benchmark's note. They say, we have no idea how much this is going to cost and over what time frame we should expect a return on investment. What would you say to Benchmark?

7:33Mark. So Dan is a great guy. Very, very smart guy. I think that we are going to fund it effectively internally. In other words, we're not going to add headcount. We are probably going to add some token and AI software costs, but not massive. So we're going to fund it internally. I think what we're really talking about is opportunity costs, where the reason we decided to pull our guidance is instead of working away at our old platform to optimize revenue and deliver product changes that deliver revenue, which ultimately are hard to do on the old code, we're going to go fast forward to the new platform and be able to develop from there.

8:11We've estimated it's going to take us a year or so to get to the new platform. And in that time, we're also going to start building our first pro agents, which we don't plan to monetize. We plan for it to improve the experience of our pros and maybe ultimately we'll monetize it if they want to use it for other leads from other platforms. But effectively, what we said is we're not going to talk to you about where our revenue is going for a year. We gave some very rough directional comments. And so that's really going to be the cost.

8:39Carol Massar:Hey, one of the things. Well, and also in that note from Benchmark that we also got Jeff. He said, given the out of the blue nature of the new game plan, we suspect investors are simply going to assume that Angie's core business model just is not working. The strategy could work out, but a lot of questions have to be answered for investors to get even remotely comfortable. Is that the case, that the core business model was not working? And I bring up to the decline in revenue, 56 % drop in network revenue related to the implementation of homeowner choice last year. It was a practice of letting homeowners on the platform select which professionals they match with.

9:20Carol Massar:Was it a strategy mistake, and is the core business not working? Because is this just a case about creating velocity? Yeah. The core business is working quite well. Fundamentally, if you look at Angie over the last few years, we've gone from$1.5 billion to roughly a billion in revenue in the last few years. Most of that is giving up less profitable and lower quality revenue. So we've actually made a decision to move off what you might have termed an inflated model, bring it down so that the quality of the experience is much better for the homeowner and for the pro. You can see that our NPS has moved 30 points over three years.

9:57That is a cataclysmic change in the world of NPS. Our pro churn has come down 30%. We see that our win rate for pros has moved directionally about the same amount in terms of improvement. So we've dramatically changed the experience. We had a bit of an overbuilt revenue base, but we've pivoted. And we still have the strongest band, the best acquisition machine, and the largest pro network of anybody in our space. And we're spinning the flywheel as we go through this change.

10:24Carol Massar:Jeff, real quickly, 20 seconds. How long is this going to take to kind of play, have an impact positively, much more positively, real quickly? We think we need a year to get our new platform in place and build out the first set of agents. But we think we should start seeing good moves by the end of this year and start accelerating our revenue in 2027. Well, we look forward to continuing the conversation with you as you guys evolve. Jeff Kipp, he's the CEO of Angie, joining us right here on Bloomberg Businessweek Daily. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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14:03Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Well, shares of Sally Beauty Holding shares taking a hit today, down 7.5 % as we speak. Earlier, though, sliding the most into today going back to May of 2023. The company gave a weak outlook for the third quarter, and on a conference call, the company said it's seeing pressure in stores that identify as low-income and frugality among lower-middle-income consumers. We've got Denise Paulonis back with us, president and CEO of the$1.2 billion market cap, Sally Beauty Holding. She joins us from Plano, Texas.

14:40Denise, always good to have you on the program. Appreciate you taking the time today. I do want to remind everybody, two different segments. You have your own stores. You also sell to, in the other segment, you sell to beauty salons. You're global, so you have a really good understanding of the consumer. Can you expand on the comments that you made when you were answering that analyst call analyst question on the call a little earlier today, a little bit more frugality out of the marketplace with our kind of lower middle income consumer. What do you mean by that? Yeah. Thanks so much for having me on.

15:13Interestingly, we had a great second quarter. So our overall sales were up 2.3%, comp sales up 1.3%, and real outperformance on the consumer side with our Sally brand up 4.4 % here in the US. But that said, we do serve a lower middle income consumer. And so we watch them be more choiceful in their behavior, which means they don't replace things like blow dryers or flat irons if they don't need them. But they're buying what matters to them right now, which is hair color, it's nail gel, it's press on nails. And those pieces continue to see strength. But as we watch a consumer that continues to get a little bit more pressured by gas prices, we're conscious of the fact that they're feeling a little bit more stretched.

15:57Carol Massar:So if the war continues, energy prices continue, Denise, you think then this trend continues in the current quarter? I'm assuming you're still seeing kind of this restraint, if you will, among some of your consumers. Yeah, to date, we're seeing the same restraint that we've seen the last few quarters. I think we're just a little wary that it could get a little bit worse as we get out of Q2 and tax refunds are fully absorbed into the economy. And if that gas price stays a little inflated, we can be watching for some concern. But what I'd say right now is stylists still have busy chairs. They're still serving a lot of customers.

16:32They're seeing good business come through. And that consumer continues to buy. We saw both transactions and ticket each up 2 % in our US salary business. So good news, just watchful. What are they buying differently? Are they trading down a little bit? Do you offer, at least on the side of where people are buying the consumables, the shampoos, the conditioners, those things that people use on their nails? Are people trading down at price point? I think what they're doing is they're really trading into Sally to some extent. So for those folks who color their hair, a lot of them share between coloring in a salon and coloring at home.

17:11Our color business was up 12 % in the US. And so what does that mean? It means somebody might be going to the salon a little less frequently and maybe doing their root touch up at home or going to a nail salon is very expensive. And so our nail business was up 3 % as people were trading in and saying, I can get a lot of this look at home for a lot less cost. So do you think, are you frustrated then with investor reaction here? You know, I can't predict the market anymore. I certainly think that we've got a strong business with a lot of momentum behind us. You know, we continue to be in the first half of the year.

17:47Our EPS is up 8 % versus last year. Lots of good things to be looking forward to, the right amount of cash to keep investing in the business. So my hope is the market will catch up once there's a little less maybe worry about consumer discretionary. What about geographies? Particular strength in different parts of the country, particular weakness in other parts? What can you tell us? No, we've seen pretty consistent behavior across the U.S. You know, I think what we always watch is we always watch border stores. We watch lower income stores. They might index a little bit lower than what we'll see across the fleet as a whole.

18:24But as the geographies go, not a lot of difference.

18:27Carol Massar:Well, I'm always curious, and we love, Denise, talking to folks like yourself, where you do have a great window into the consumer and different, you know, we say consumer, but there's all kinds of consumers, right? There are wealthier consumers, which can shrug off a lot of stuff. There are other consumers that, you know, middle income and so on that feel these higher energy prices, and it's an impact and you have to make some choices. Is there anything, though, that you're seeing within the different consumer segments that says to you that we could be headed for something more significant in terms of an economic slowdown?

19:01Carol Massar:Or is it just, you think, reactionary to higher energy prices? And if energy prices come down, things kind of go back to, quote, unquote, normal. The best I can see is it feels a bit more reactionary right now. You know, overall, consumer trends are pretty consistent. Transactions are healthy. So it's not as if customers are not coming in. You know, I think what we'd watch for, I watch for is if grocery prices or other things started to tick back up and there was more pressure beyond just gas prices. We aren't seeing that yet. So I'm certainly hoping that this is a period in time. And as we head through the summer, we will see things feel maybe a little bit better for that end customer.

19:41What if they don't? You know, if they don't, we serve our customer well with value. Our save while you skip the salon message can help drive hair color growth. We've got a great promotional offering and value offering for our stylists to be able to shop across color and care. And our business is generally resilient. When we talk about comps at 1.3%, we see good performance. We might not see real high highs, but we don't see real low lows. Because at the end of the day, we participate in categories that customers need. If you start coloring your hair, you generally don't stop. If you love your nails and you want to take care of them, you're going to do that.

20:20If you want healthy hair, you're going to come and get styling treatments. You're going to get serums and masks. And we will keep being there for our customers.

20:30Carol Massar:So top of mind, obviously, you want to watch what customers are up to, what salons are up to. But beyond that, in terms of the macro, what is top of mind for you, Denise, as you look at kind of so many things that are coming at folks that run companies just like you? I'm really looking at the places where we can differentiate and where other companies can differentiate as well. So our e-commerce business is up 28 % in the Sally, a business in the US. We just recently launched on TikTok Shop, a really important place to be because that's where customers are and that's where they're engaging with beauty.

21:04And so the more we can respond to that. Or our licensed colorist on demand program, where once again, if that consumer is pressured and they need to learn how to color their hair at home, we've got a pro right there willing to help them walk along with them and help them have that be a successful journey. So things where we can drive growth while that customer might be feeling a little pinched. Yeah. Denise, talk a little bit more about finding those new customers and bringing them in through these channels. How do you know, you know, how do you follow the customer from that TikTok journey? And then maybe they end up in the store.

21:37Yeah, so with the TikTok journey, you know, they'll definitely start on TikTok shop, but those orders are all fulfilled by us. So our ability to understand that customer and see their journey, we feel pretty good about. You know, we've done work in black box work with some of our other marketplace partners, and we've seen about 75 % of those transactions through places like DoorDash should be incremental business to us, which we think is great news and is bringing a new customer into the Sally fold. Overall, our marketing campaigns with what we can do with performance marketing and then trace those activities back into our customer fold.

22:12Our customer database, customer information management continues to get better to let us watch those trends. And we've seen new growth. We've seen new customer growth. We've seen reactivated customers picking up. And importantly, with our core customers, our good everyday shoppers, frequency is going up. So, you know, feel like all the engines are firing the right way around understanding our customer on the Sally side of the business.

22:38Carol Massar:Hey, one thing I want to ask you, a year ago when you guys reported earnings, you extended your buyback program through September of 2029. What's your best use of cash right now, in your view? Yeah, we really are focused on three things. First and foremost, investing behind the business. So whether that is supporting our marketplaces, digital campaigns, our Sally Ignited store refresh that is starting. that is first and foremost. Secondly, we're managing to a really good debt position. So we have a targeted net leverage ratio of 1.5 to 2. We're at the 1.5 level. So we're still doing a little bit of pay down.