Sally Beauty Holdings Inc (SBH) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings' conference call to discuss the Company's FY14 first quarter results.

(Operator Instructions)

I would like to turn the conference over to Karen Fugate, Vice President of Investor Relations.

Thank you. Before we begin I would like to remind you that certain comments including matters such as forecasted financial information, contracts of business, and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934.

Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters 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' SEC filings including its most recent annual report on Form 10K.

The Company does not undertake any obligations 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 will Gary Winterhalter, President and Chief Executive Officer; and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our FY14 first quarter earnings call. I'll begin today's discussion with a high level review of our financial results and business initiatives. Mark will then take you through the quarter in more detail.

Overall our FY14 first quarter results were solid. Sales growth in our Sally business showed improvement from the last several quarters and our BSG performance resulted in strong top and bottom line growth.

On a consolidated basis, same-store sales increased by 2.2% representing the best comp we have achieved in several quarters. Consolidated gross profit margin in the first quarter was 49% versus 49.1% in the prior year quarter. This slight decline was principally due to product mix in the Sally US business.

Turning to Sally's performance, same-store sales growth for Sally Beauty was a positive 0.9%. I am pleased with the sequential improvement when compared to the FY13 third and fourth quarters, which were down 0.8% and down 1.5% respectively. The improvement over prior quarters was primarily due to better traffic trends. I am confident that the return to our targeted marketing approach and the introduction of new brands will continue to gradually drive improved traffic results.

Net sales for Sally Beauty Supply reached $573 million, an increase of 2.6% over the prior-year quarter. Sales performance at Sally was due to new store openings and same-store sales growth.

Beauty Club Card sales increased 6.7% this quarter. Club membership grew 10.6% to reach 7.6 million members. Membership growth was boosted by BCC renewals, which topped 55% for the quarter.

Gross profit margin for the Sally segment was 54.3% a 10 basis point decline from the 2013 first quarter. This decline was primarily driven by a higher percent of appliance sales coming from new brands such as CHI and Curl Genius. These appliances were popular gift items during the holiday season and offset some of our higher-margin exclusive brand sales, which contributed to gross margin dilution.

Sales from the recent launch of OPI were also strong. We have sold over 400,000 bottles of OPI polish since we launched in December. The gross margins on OPI are comparable to our nail category; and therefore, did not contribute to gross margin dilution.

Our international business performed well this quarter. Same-store sales were strong, which led to gross margin expansion, SG&A leverage, and EBITDA growth. Just last week we opened our first store in Peru. We continue to believe South America represents a growth opportunity along with our continuing expansion in Europe.

Sally Beauty operating earnings were $104 million, down 2.4% when compared to last year's first quarter. Operating margin was 18.1%, 90 basis points lower than last year.

However, earnings in the 2013 first quarter included a $1.2 million pre-tax credit related to a reversal of a litigation settlement accrual. Higher SG&A expenses and lower gross margin in our Sally US business also contributed to the operating margin decline. Store count for Sally Beauty ended the quarter at 3,444, an increase of 112 stores over last year.

Now turning to BSG. BSG had an excellent quarter with same-store sales growth of 5.2% and net sales growth of 5.9% reaching $367.1 million. This growth is attributed to same-store sales, new store openings, and our sales consultant business.

BSG's gross profit margin was up 30 basis points to reach 40.7%. Operating margin at BSG improved by 80 basis points to reach a record 14.9%. This strong performance was primarily due to sales growth, gross margin expansion, and SG&A leverage.

Store count at BSG ended the quarter at 1,249, an increase of 56 stores. Our sales consultant count is 992, a decrease of 43 over the prior year.

BSG is preparing to launch a new website called loxabeauty.com. loxabeauty.com is a highly customized website that allows a retail consumer to find detailed information on the latest recommendations in hair and beauty and includes a directory of salons and stylists in their area. The salon or stylist has the ability to set up a virtual salon landing page, which allows them to post pictures, advertise, and sell professional hair care products to their clients.

loxabeauty.com is the online solution that offers a way for consumers to buy authentic professional hair care products online while contributing to their salon and stylist's bottom line. For every product sold through Loxa Beauty, a salon or stylist receives compensation.

Loxa Beauty is authorized and endorsed by our leading brands such as Paul Mitchell, Joico, and many others. We expect to have over 3,000 professional hair care products available on the website in the next few weeks. Loxa Beauty fits well with our strategy of maximizing growth for our customers, our brands, and our distribution.

To summarize our first-quarter, we had solid sales growth across the Company marked by traffic improvement in our Sally business and strong execution in our BSG business. And although gross margin performance in the Sally business was below our expectations, we believe we can still achieve consolidated gross margin expansion for the year.

Now I will turn it over to Mark to provide more financial detail for the first quarter. Mark?

Thanks, Gary. Consolidated net sales for the first quarter were $940.5 million, an increase of 3.9%. This increase was primarily driven by 168 net new store openings and same-store sales growth of 2.2%.

Consolidated gross profit was $460.5 million, up 3.6% over the prior year. Gross profit as a percentage of sales was 49%, down 10 basis points compared to the FY13 first quarter. This decrease was primarily due to product mix shift in the Sally US business.

First-quarter SG&A expenses were $319.5 million, growth of 4.5% from the prior year. SG&A expense as a percentage of sales was 34%, an increase of 20 basis points over the prior year. We anticipated higher SG&A expenses this quarter due to expanded marketing initiatives at Sally, increased healthcare plan expenses, and investments in Peru.

Unallocated corporate expenses including share-based compensation were $37 million or 3.9% of sales versus the FY13 first quarter expenses of $33 million or 3.6% of sales. This increase is primarily due to the increase in healthcare.

Consolidated operating earnings from the first quarter decreased 10 basis points to $121.8 million. Operating margin was 13%, down 50 basis points primarily due to the lower gross margin and higher SG&A expenses in the Sally business. Interest expense including the amortization of debt refinancing costs totaled $28.5 million, up $1.8 million or 6.6% due to a higher principal balance. The blended interest rate for the FY14 first quarter was 6.2%, approximately 10 basis points lower than the prior year.

Adjusted EBITDA for the first quarter was $149.6 million, an increase of 1.2% compared to the $147.7 million in the prior year's quarter. For the FY14 first quarter, our effective tax rate was 37.8% versus 38% percent in the FY13 first quarter. We continue to believe that our annual effective tax rate for the FY14 will be in the range of 37.5% to 38%.

Net earnings were $58 million, a decrease of 1.7% over the FY13 first quarter net earnings of $59 million. Earnings per share was $0.35, a growth of 9.4% over the FY13 first quarter GAAP earnings per share of $0.32.

At December 31, 2013 inventories were $814.2 million compared to FY13 year-end inventories of $808.3 million, approximately 1% increase. Inventories increased $61.8 million or 8.2% when compared to ending inventory on December 31, 2012.

This year-over-year increase is primarily due to additional inventory from new store openings and new product offerings. We expect inventory levels to slightly increase in the second and third quarters due to the Sally US 50 Years of Beauty event this spring. We have partnered with our vendors to be able to offer special products and promotions just for this event.

As of December 31, 2013, our debt excluding capital leases totaled approximately $1.8 billion. Capital expenditures for the FY14 first quarter totaled $13 million and reflect expenditures to open new stores, expenditures on existing stores, and IT specific projects. We continue to expect capital expenditures for the year to be within our previously stated range of $85 million to $90 million.

During the quarter we repurchased approximately 2.4 million shares of our common stock for an aggregate cost of $66.2 million. As of December 31, we had approximately $390 million remaining under our $700 million authorization. Gary?

Thank you, Mark. Our overall financial execution this quarter was good. With consolidated sales growth of 3.9%, same store sales growth of 2.2%, and earnings per share growth of 9.4%. Our BSG and Sally International businesses had a strong quarter. And in the Sally US business, we are pleased with the improvement traffic. We believe the return to our targeted marketing program is on track.

I want to briefly comment on January same-store sales in our Sally and BSG US stores. Ordinarily I do not call out unfavorable weather as a contributing factor; but in January, we had a significant number of store closures resulting from severe weather.

While I won't get too specific, I will say that our January sales were below expectations due to these store closures. We are hopeful that February and March will offset January's under performance. Operator, please open the lines for questions.

(operator instructions) Our first question comes from the line of Meredith Adler with Barclays. Please go ahead.

Thanks for taking my questions.

I would like to start just to talk a little bit about sort of the promotional side. Promotion is not really the right word, but the advertising you did and to what extent do you think that that was a key driver to sales. And now that you are talking about the 50 Years of Beauty event this spring, presumably there will be continued advertising.

But I guess my real question is whether you see that the potential to drive profitable sales is really gone up as a result of what you saw in the fourth-quarter?

I am not sure I understood the last part. Are you saying that the potential to drive profitable sales has gone up?

Yes. I mean, they were profitable; but not as profitable maybe as one would've liked, in aggregate.

First of all, hello, Meredith.

Hello. How are you?

Good, good.

I will say on the promotional front, we really didn't do anything differently in the first quarter.

We did, as I said in our prepared remarks, we sold a lot of those Curl Geniuses, which were not into normal margin of our electrical appliance category, primarily because we had to be at $99, which is where the market was. So that was probably the biggest single factor.

And then CHI also -- those two items are good gift items. Appliances are good in December, and they were down -- the margins on both those were down. Now, conversely, OPI, which really is doing well for us, was not margin dilutive because it's about the same margin we get on the nail category.

But getting back to, if you want to call it promotion, our customer acquisition mailings, we did increase those. Relative to last year in the first quarter, there were 3.5 million more mailed.

Now, keep in mind that last year was when we were heavily doing the shared mail that we believe was a mistake. So when you are comparing, the cost was not too much more this year. It was just the quantity that was mailed to that specific targeted customer was much more this year than last year.

And so -- but advertising as well? I guess that's really what I was trying to ask, is it did look like SG&A was up. And there were a bunch of reasons for that, but some of it was clearly advertising and marketing. Do you need to continue that to continue to drive the sales?

Well, we are going to continue the targeted marketing, the customer acquisition program. But like I said, the dollars versus last year are not significantly more.

It is the method in which we are mailing. We were actually mailing more pieces last year, but it was to a much broader what I would consider unqualified customer.

So the answer to your question is, we are going to continue that program.

We are going to continue advertising in People Style Watch. However a lot of that has and will be in the future shared expense with our suppliers. But other than that, we really did not do any advertising differently than we have done in the past.

Okay. And then maybe just switching to BSG, maybe talk a little bit more about this website; it's very interesting.

And then also, just kind of curious if the number of sales reps did go down. And do you see that continuing to happen?

Well, we will continue to right-size that sales force as sales dictate. B6 And the other thing that we are trying to do in some cases where we still have sales consultants from acquisitions that somewhat overlap existing sales consultants, when we have turnover there, we are trying to consolidate those sales routes so that the person that is left has a higher revenue sales route and can make more money.

This quarter being down like 43 -- that is about 4% -- is probably a little more than normal. But like I said and we have said all along, we will just continue to right-size that sales force.

One thing that you asked last quarter, Meredith, that I wanted to respond to.

You were concerned about BSG's margin in the fourth-quarter gross profit margin. And we had said to you that a lot of that was coming back to the way of allowances during the first quarter this year. And I just wanted to point out that that did happen in the way that we told you that it would.

That is super, and then just the website?

Yes, the website. This was an acquisition we made last fall, and it is a really neat little company that we're going to leave based in Indianapolis.

They have this really unique website that they have spent years developing, and it is the only one that I know of first of all that can even think about compensating salon and stylists and tying the sale to the salon and stylists, which is why the suppliers are pretty excited about it because they want their product being sold through salons. That is the proper channel.

I don't believe any of them -- I shouldn't say any of them -- but I don't think the majority of them really like the diversion market on their product. But this will be so significantly different than buying diverted goods in a couple ways.

First of all the, the price will be what it is supposed to be because of not going through 10 different hands to get to a retail shelf. And secondly, the whole lot will be available, for example, on Paul Mitchell.

Now, when I say the whole lot, obviously I'm not talking about service products like hair color and so forth. But if you go into any other retailers that might have six or seven or eight SKUs of Paul Mitchell on the shelf, that is not even 10% of the SKUs that they manufacture for retail sale through the salon.

So this is going to be offered on the entire line, offer education on the entire line. And the nicest thing about it, we believe, is that you are able to go in there -- and actually you have to go in there -- and select a stylist. And if you default on that, if the consumer defaults on that and does not select one, there is a stylist in that area that is going to get paid on that sale anyway.

And then we will be communicating to try and help that stylist or salon actually turn that consumer into a customer for the salon.

That is very, very interesting. Thank you.

You are welcome. Thank you.

Our next question comes from the line of Chris Ferrara with Wells Fargo. Please go ahead.

Hey guys thanks.

Hi Chris.

I know it's hard to do, but is there any way you could try to put context around what the drivers of the improvement was in Sally? I understand your traffic is a big piece, but the new brands versus the targeted marketing program. Can you sort of put some context around each of those?

Are you bringing in new customers from different walks of life from having PG and OPI? Is it material at all, or is it really more just the targeted mailers that are the major driver?

You are absolutely right; that is really difficult to determine. I do believe that, particularly with OPI, that we are bringing in a new customer. As I said, I think the last two quarters that we've talked about this, it was the most highly-requested brand in our stores for several years.

So there is no question that when a customer sees our window manner that basically says we now carry OPI, or on our customer acquisition mailings we have obviously been using that as a big call out as well.

I think there is no question. If I were to rank them, OPI is by far the strongest in bringing us a new customer.

I would say the other three being CHI, CG, and -- well, actually, it's the other two. We also have Mazzotti.

But the Curl Genius is -- it's a new product, but it's not a new brand. We have carried Conair BeLiss in the Sally stores for very long time, and that was a great Christmas item; and we got a nice run out of it during the fall. And I would say in December, it generated some extra traffic.

The interesting thing to me though is the OPI for example took the nail category for the first time in a while and actually got it positive a little bit. So that tells me that it was not all customers just switching from an existing brand to OPI. We did get some new customers there.

The Curl Genius did get the appliance category slightly positive, but not to the degree in either case that you would think it was where you could say it's all incremental sales.

So I am not telling you that it's all incremental sales. But I do believe, particularly in the OPI case, that over time as more and more potential customers realize that we carry the brand, it is going to be very helpful for us.

Now, Curl Genius, I think the business is going to continue. But I will be the first to tell you that after the holidays, sales on that are dropping off, which you would expect.

It is a bit of a fad item, but I do not think it is totally faddish where the businesses is just going to dry up and go away. But I do not expect it to maintain the kind of velocity that it had in November, December.

Thanks, and I guess any insight into the behavior of that new sort of OPI-driven consumer?

It may be way too early, but are they as sticky do you think that consumer will be as sticky as a typical Sally Beauty Supply consumer? Or is there potential that this is someone who has been shopping at Target for beauty needs and really is just coming in temporarily, checking it out? How do you think about that?

One thing I can tell you that is really encouraging to me, is the average ticket for the customer that is buying OPI is almost 50% higher than our normal average ticket. And they are buying multiple bottles of OPI in that sale. So that kind of tells me that at least that customer is probably a new customer.

One of the things with OPI, and one of the reasons that they wanted to start selling the product through our stores, is one of their frustrations is, if you go into the average salon, they do not carry all 90 shades, which is understandable.

And since that was pretty much their only legitimate distribution, they never had a real good way of getting to the consumer with their full assortment. Obviously, BSG carried the full assortment, but BSG does not sell to the consumer.

So it was a difficult thing for them. And they saw us as being 2,500 doors where they could put the full assortment displayed in a proper way, priced properly, and all of the ancillary products that they want have sold with it.

So I do think that that customer -- well I certainly hope that that customer -- since they are buying things other than OPI, will become just as sticky as a normal Sally customer.

Got it. And just one last quick one on the comps -- were up 2.2%. You said you thought 1% to 3% was a good range for the year. You know then you talked about weather in January being weak.

So the 2.2% this quarter was higher than the midpoint of the range, and you're expecting improvement through the year. But the weather was sort of an offset, so the where do you stand on that, that sort of one to three range that you talked about?

You know I would not change that, Chris, at this point in time. And I think we did all of ourselves, including you, a favor when everyone kind of lowered their guidance last quarter.

Obviously, I would much prefer to under-promise and over-deliver. That's sort of been the history of this company prior to the last couple of years.

I do, as I have said for two quarters now, this is going to be a gradual return. I believe we got pretty much what we expected in Sally North America.

Now, our comps on the Sally side were nicely helped by our International business this quarter. And conversely, they were lapped a bit in December with some bad weather.

I have said to several people, I wish we could have ended Q1 at the end of November because between the condensed holiday season, with Thanksgiving following late, and some really difficult weather on the first two weekends of December, it certainly did not help comps; and I think they would've probably even been better.

But I also think you are going to start hearing that from a lot of retailers. And man, when January comps come out, look out.

I would encourage the whole world to look through some of this weather because and when I look at geographies that did not have this ridiculous weather, our comps actually did not look bad in January but the areas --

I'll throw a crazy number at you. Last year in January we had 240 stores approximately through the month that were closed -- 240 store days, you know what I mean? And this year, on the Sally side alone, we had 2,200 -- almost 10 times as many stores closure days.

Now, that only measures the stores that were actually closed. And when we look at that kind of number, we say -- Okay, well, there are a bunch of stores in the area that probably were open but did not do much business. So I like I said, it's not going to be us alone.

I mean I am sitting here in Dallas in February looking at about an inch and a half of snow. It's coming down like crazy. This is February -- almost the middle of February -- and it's just ridiculous.

But, we will get through it. All the other people out there that have the same situations that we do as far as customers trying to get to them will get through it as well.

Thanks a lot guys.

You're welcome, Chris, thank you.

Our next question comes from the line of Olivia Tong with Bank of America. Please go ahead.

Thanks, just one quick follow-up on weather.

In years past, do you end up making up a lot of weather-related weakness? Because my sense is your business is a bit more resilient.

I mean, just because there is snow outside, women aren't going to walk around with white hair. So kind of wondering if you do end up making up some of it, or does that consumer -- they're already going to Target or Walmart, and they are maybe not making other trips. So if you could comment on that first that would be great.

I think it's yes and yes. I do think that sometimes when a customer has to go out -- no matter what the weather is, you've got to get out and get groceries at some point. But you certainly do not need to make other stops.

Now, if it is a Beauty Club Card customer or a Pro customer, and they are really looking for the specific product that they use from us, they are either going to delay that shop or they will fight their way in. B6 So I do believe you get some of it back. But unfortunately, where it hurts us the most is a customer that we are trying to get as a new customer; in other words, a retail customer who has never been a customer.

They are not going to make that extra stop. They really don't even know who we are at that point. They might have our invitation to stop with them but they are not going to make the stop.

Now, when you look at the BSG side, the compounding factor there is obviously the salons have the same issue we do. And a lot of people simply just canceled their appointment. And they may come back two weeks later, depending on when they can get in. So a fair amount of that just wash and set or style business in a salon, I am not sure they've recaptured that.

They obviously do the hair color and some of the services. But you know, people can put off a haircut a couple of weeks if it's really bad out. Or the people that come in pretty much weekly for a shampoo and set, if there's anybody that still does that, they can put it off.

Got it.

And then on the Beauty Club Card customers, can you tell us what percentage of sales came from BCC customers?

And then also, in previous quarters you had attributed some of the slowdown in traffic to the overall environment. So can you give us an update on what you think about the state of the industry and basically how much of your improvement do you think is a result of you fixing your traffic and marketing issues, as opposed to whether underlying macros play a part.

That is a loaded question. First of all let me try to address the BCC. Where do we have that, Karen? The BCC percentage was up nicely, Olivia. Hang on just a second.

That is the renewal. Percent of retail?

Okay, the percentage of our retail business for Beauty Club Card business that quarter was 55%, which is an all-time high. But again, that sort of makes sense. If you made that call at the end of November, I think it would've been less than that.

So it's what I said a few minutes ago. When the Beauty Club Card customer is much more sticky, obviously, than a retail customer that is just wondering in, even though we need that retail customer to convert, which we actually also did an excellent job of in the first quarter.

As you heard me say, we were up almost 11% in membership to over 7.6 million. And our renewals were at an all-time high coincidently, also at 55%.

So that part, we are very pleased with. Beauty Club Card sales were up almost 7%, and traffic was up very nicely.

I apologize. What was the second part of the question?

About the state of the overall environment and how much you think that played a part.

Yes, I just got the professional 2013 numbers. And again, this is from really the only source that follows this. And it was down to 2.8%,coming off of 2012 of 4.8% or 5% or something like that; so it was soft.

I think in general what you are hearing from most retailers regarding their beauty and cosmetic business is it is also soft, particularly it was in the fourth quarter. So given all of that, I feel even more encouraged about what our first quarter looked like.

Got it. And then just one last question. Switching topics to the buyback.

Can you talk about what your thoughts are for this year in terms of pace and cadence because it looks like you're off to a bit of a slower start than in previous years.

Yes, we are.

And if you look at the previous years, and we kind of had reiterated this a little bit in our outlook for 2014 at the end of the fourth quarter, which was the beginning of our share buyback cadence back in the early part of 2013 was very opportunistic.

And we were going to get to more of a very steady, very measured cadence that was very consistent with our financial policy, which was is that we would like to be kind of in that two to two -and-a-half times levered range. And we are very comfortable operating at the very high end of that range.

Currently, we're at about 2.7 right now. But that is kind of the range in which we would operate at. And our share repurchase program we were kind of looking to go into the second year as being more of a consistent cadence. So I think that is what you will see in the quarters that will unfold over fiscal year 2014.

Thanks, guys.

If you're hearing a loud buzz, it's on our end. We are not quite sure what it is yet. (Indiscernable - multiple speakers)

All right thank you.

Sorry about that. Did you catch all of that?

The next question comes from the line of Taposh Bari with Goldman Sachs.

Hey, guys, good morning.

Good morning, Taposh.

I wanted to ask you a follow-up on this whole appliances phenomenon in the first quarter. So clearly, a giftable item every first quarter, but it sounded like it was more so this year and at the shortage of gross margin because it's mixed.

But if I heard you correctly, you said that your appliances business was close to flat. So it does not sound like mix would've really driven that big of a deal.

Can you help me better understand what's going on there and if it actually drove your comp at all? Because as we transition out of the holiday period, I'm curious to know what kind of impact that may have on the comp going forward?

Hang on just a second. I am trying to get you a number here. Yes, what you heard me say is correct. And that is why I do not think that that business was just incremental.

I think a lot of people that were coming in and were looking for a curling iron, for example, saw this thing and bought it instead of a curling iron. So that is why I do not think it had a huge impact on our overall appliance category, which actually I think is a good thing because if it was all incremental business, it would be very difficult to anniversary that.

So I think a lot of people heard about it, saw it, either saw it on the website, saw it advertised someplace, came in and thought it was a neat item as a gift; and as opposed to buying a curling iron, they bought that instead of an iron.

Are the gross margins on the Curl Genius lower than a regular curling iron?

Oh yes, absolutely, that's what I said earlier. The Curl Genius -- we basically were at $99 on the Curl Genius because the retail version of it being sold by Ulta and Walmart and everybody else was $99. So we really had to be at that price point, and that is not nearly that kind of margin that we would get normally on a curling iron or even on an item like that if it was under our private label brand.

The same thing with CHI, the flat iron. It wasn't nearly the impact as Curl Genius, but it was an impact. And the margins we make on CHI are not nearly as good as our appliance category in general and, in particular, our private label and exclusive label brands.

Okay, and is the first quarter the fiscal first quarter --I know that appliances are roughly 10% of the Sally business on a full-year basis, but is it materially higher during that first quarter holiday period?

Yes, sure it is higher. I mean, December is the highest month for electricals of the year. It is not like -- a lot of retailers would tell you that 50% of the business is in one month. It's not that at all. But it is higher; it is the highest month of the year.

Okay, and then just a quick follow up on the gross margins guidance. I think last quarter you had said 30 to 40 basis points of expansion for the year. I think you're saying still up.

Are you still committing to that 30 or 40 basis points for the year, or do you care to kind of provide a more precise view?

We are still targeting that range.

And the 50 Years of Beauty celebration that we are talking about, we have a lot of cooperation from our suppliers in coming across with some very attractive offers that we'll get the better from that March, April and May. Those are the three months that we are celebrating the 50 years.

And the good news is these promotions are not going to hit us on the margin line. They are very aggressive, very good promotions; but our margins are good on them. So we actually expect to see a little healthier margin, which is why I am hoping that over the course of the year we can offset the slight decline we had Q1.

Okay. Thank you very much. Good luck.

Thank you.

Our next question from the line of Oliver Chen with Citigroup.

Hey, guys, congratulations on a great quarter.

Regarding the +0.9 comp, could you help us break that out between traffic and ticket, just for us to understand the traffic trends?

And then, how should we think about what's sustainable going forward in terms of the next few quarters? Like which comp levers are you most encouraged about as we forecast that business?

First of all, obviously there is ticket and traffic involved. And when the BCC sales are up 6.7% and that customer spends roughly 20% more than the average retail customer does, that is going to take your average ticket up.

Actually our professional average ticket was also up slightly, and we do not really have it well broken down that way. But I would tell you, as I think we have said in the past, that it is pretty much 50/50 traffic and ticket.

Okay, and do you expect that trend to be the one we should extrapolate? We have had the jitter with the weather, but what is kind of the sustainable run rate? Do you feel comfortable that there is a restoration in terms of what you hope to achieve in the revision in the marketing program?

Well, if you can tell me what the weather's going to do for the next two months here, I can better answer that question.

You know, what we have said for the last two quarters is we did not expect much improvement in Q1; and we got what we expected. It was slightly better.

I would have fully expected for this quarter to build on that. But I really do not know what to expect, given the situation we have with some of this weather.

I think once we are out of the weather, we will, number one, we'll be a little further along in the customer acquisition program and going back to the old marketing program. So I would hope that our Q3, since we should not have any weather issues or anything else come Q3, should really start telling the story.

Okay, and it's encouraging that it did not sound like you needed to be promotional; but the industry environment was heavily promotional in certainly other categories.

What are your thoughts on what you're seeing in the promotional marketplace? And if your inventory is outpacing your sales for some reason, is there an opportunity for that? It really sounds like you're pretty optimistic.

First of all, regarding inventory, as Mark mentioned in his prepared remarks, a little bit of that inventory is still we are not running at the sales rate particularly in December here in January; but that is probably the smaller part of it.

The bigger part of the inventory, and it's primarily in the Sally segment, is the buildup or the 50th Years of Beauty sale, which is why Mark said that we really do not expect much to happen with inventory in a positive way or coming down until later in the year.

Okay, and when we do our modeling for the gross margin upside, which quarter might that be? And you are saying the merch margin mix is one of the main drivers here versus occupancy leverage?

Yes, but keep in mind, we only have one month of this promotion in Q2; that is March. What we see benefit-wise from the margin that we should see on a positive side because of the 50th sale will be primarily in Q3.

Thank you very much. Best regards.

Thank you.

The next question comes from the line of Ike Boruchow with Sterne Agee. Please go ahead.

Hi, everyone. Congratulations on a great quarter.

Thanks.

I guess, Gary, when we take a step back and look at the quarter, it seems to us like fundamentally the Sally Beauty Supply business seems to have turned a little bit of a corner and the marketing is picking up and the new products are resonating. And there's one big issue; its weather. So I guess two questions to that.

You kind of commented jokingly that you wish the quarter could've ended at the end of November. I'm just curious, could you tell us Sally Beauty Supply comps, maybe the monthly cadence or what you were kind of running before December when the weather started to become a headwind?

And then second to that, in January, if you exclude the weather affected areas or if you exclude the where the store closures are, is the rest of the business that's not being impacted by weather still performing well?

Well, we really don't get into monthly comps. And again, one of the reasons we do not do that is were not on a retail calendar; we're on a calendar month calendar. So you get a lot of distortion there.

And if I start reporting that, you will want it all the time. And even if we had no impact from weather, it varies just due to the calendar. So I really do not want to get into that.

But I also said earlier -- and I am sitting here looking at January by geographic region. And if we could pull the weather out of this thing, I would actually be pretty pleased with January's performance.

So it sounds like while you won't give specific numbers, it sounds like in the areas that aren't impacted by the snow and the weather, you are very pleased with where the business continues to trend?

Let's not get carried away. I said pleased, not very pleased. And I really do not want anybody to take this 2.2% comp in the first quarter when we gave a 1.3% guidance for the whole year, and start running this thing up and start adjusting your estimates to 3% and 4% and all that sort of thing because it's doing what we expected it to do. But it does not come back in a wave.

And like I have said for a couple of quarters, when we ramped up this customer acquisition program back in 2008 and 2009, even though we were in the depths of a horrible economy, it worked for us. And it slowly has worked better with time. And I expect the same thing to happen here.

You know also, I have talked about CRM in the past, which no one has really asked about yet; and we have not even started cranking that up. We are just in the process right now of starting to be able to use that.

We have not filled the CMO slot yet, but I think we are close. So there are a lot of things coming that I think will help enhance our efforts in this whole Customer Acquisition program.

And just a follow up. Could you break out -- if you did, I missed it, I'm sorry -- the international Sally comps and the US comps in the quarter?

No, we really don't break those out. But I can tell you the international comps were very encouraging in Q1. They looked very good.

Okay, and non-Beauty Club Card member performance versus the past couple of quarters, anything to call out?

No, not really. Like I said, I think we got some extra non-Club. And I think we did a pretty good job of converting them, which is why our memberships were up 10.6%. We had a membership drive back in November or December that we did a nice job with.

We do those probably twice a year, and that is just a promotion to try and get people over a fairly short period of time to join up.

Great, congrats.

Thank you.

The next question comes from the line Joe Altobello with Oppenheimer. Please go ahead.

Thanks, guys. Good morning.

Hi Joe.

Just a couple of questions. First, wanted to clarify, Gary, something you mentioned earlier or at least alluded to earlier. In terms of the 0.9% comp growth for Sally, traffic was about half of point and ticket was about a half a point. Is that a fair assessment?

Gosh, yes, if that's really -- when you throw all the different departments together, it's hard to break that down. Let me see if I've got anything that is a little more accurate.

I just did not think that ticket was positive, but --

Joe, I think that you will find for the first quarter is that although given the fact that we did have some new product launches and there was some promotional activity that certainly centered around that, that the real driver here and the real headline was more traffic than it was from a ticket perspective.

Okay, that's what I figured.

In terms of margin, you mentioned the gross margins hope to be up 30 or 40 basis points this year. SG&A was up; it sounds like a lot of that was sort of temporary. Is that a fair way to look at that? And would you expect to get some leverage on that front in the second half of this year?

Yes, when you look at particularly the Sally segment, there is certainly a leverage story there, particularly as their comps start to gradually improve over the year. There is a leverage story there, and that is pretty consistent with our guidance that we gave at the end of the fourth quarter.

You know we expected not to see a real leverage issue here this year, but more of it to be flat. And also some of our endeavors through some of the country entries that we have done, such as Peru, and the continued investment that we are making both in the UK with some of their new store openings as well as in Central Europe with the continued openings of new stores in the countries we operate there.

You know it's more the operational aspect of kind of where that SG&A drag is coming from.

Okay got it. And one last one in terms of square footage growth and your take on the real estate environment. What should we expect for US Sally square footage growth in 2014? Thanks.

We usually don't report that specifically, but it will be about the same as it was last year. And Sally was about 60 net new stores US. About 2.5% new stores US, and then obviously international is a much higher percentage; and when you add SG&A in there, it gets us into that 4%-ish range of new stores.

Okay, perfect. Thanks guys.

Thank you.

Our next question comes from the line of Jason Gere with KeyBanc.

Hi, Jason.

Your line is open Mr. Gere. Are you there?

Yes, I'm here. Thanks. A lot of the questions have been asked. But I want to go back to an earlier question. Thinking about the business and how you kind of think about BSG versus Sally balancing sales versus operating profit, clearly BSG is hitting on all cylinders on both ends. And then Sally, there is the need to kind of lift the comps again.

You've got a little bit of higher cost with some returning to the old mailers. But I was wondering if you could talk maybe on Sally, just about the cost of doing business, how you see that over the next couple of years.

Will that kind of prohibit you from taking that already incredible operating margin of 18% or 19% to something over 20%? So I was just wondering if you could put a little context maybe around the Sally margin and where you think that could potentially go.

Well, I think you have to be a little careful because Sally is being more and more influenced by international.

And we have been saying for years that on an operating percentage margin basis, at some point Sally will start to soften up as far as increases because international becomes a much bigger piece of it. And international, because of the mix of professional and retail and the cost of doing business and everything else, is not going to be accretive to Sally US's operating margins.

Now, my response to that has always been if we look at this, if you look at Sally for example, would you rather have 19% operating margins on a $3 billion business, or 17.5% or 18% operating margins on a $4.5 billion or $5 billion business?

So I think that is the way we have to look at it and you know you cannot just keep -- unfortunately, there is no market like the US, especially for us.

Now, we do see those kind of operating margins and we are getting close to that Mexico. But the bulk of our international business is still coming out of the UK and Europe.

And we continue to grow that business. And those operating margins are significantly less, primarily because of the gross profit line where we have 80% of our business going to the professional. But also because it's just the cost of doing business in Europe and the UK is just much higher.

Okay, that makes sense.

And just going back to the question on square footage in the US, and obviously you are talking about that 2.5%. Can you talk maybe a little bit about where -- are there still markets out there that there are still opportunities to fill in? Are you starting to see some areas where there might be saturation?

I was just wondering. It's a topic that I don't think has come up in a while, but I was just kind of wondering when you think about the retail landscape.

Well, you know we still believe that we can have somewhere around 3,100 stores in the United States. We are approximately 2,500 or 2,550 or something like that on the Sally side. And like I said, earlier we're adding about 60 a year.

Obviously, there are some states that are more saturated than others. And obviously with the shift in population that continues, we continue to see opportunities in states like Nevada and Arizona and Florida and even Texas where you see some of the northern states that are losing population that you struggle to find places to put new stores when you have declining populations.

But overall, the population in the US continues to go up. And for us, the Hispanic population in the US is going up significantly higher than the overall population; and that is a wonderful customer for us. B6 So one of the areas that we do continually look at as a place to put new stores is some of these states that have a very fast growth in the Hispanic population.

Great, and then just a housekeeping. I wanted to just clarify just on thinking about margin for this year. I think you're saying 30% to 40% gross margin. It sounds like SG&A you're looking at it to be kind of flattish for the year. I guess I just want to make sure I interpreted what you said correctly.

And then the other question, Mark. Did you say would interest expense would be for the year? If I missed it, I apologize.

To go back to your guidance question, your guidance is correct in terms of how you are viewing it; and that is kind of what we reiterated. And then overall interest expense this year is about $116 million, in that neighborhood.

Okay great. Thanks a lot, guys.

You're welcome.

Thank you.

Our last question comes from the line of Jill Nelson with Johnson Rice. Please go ahead.

Good morning.

Hi, Jill. How are you? You changed your name. Did you get married?

I did, I did. Thank you.

Congratulations.

Thank you. I guess not to kill this question, but on the Sally Beauty EBIT margin decline we saw in the quarter, could you maybe parse out just in the range of maybe some of the expense buckets between international investment versus marketing, just so we can figure out kind of what's a one-time and what's an ongoing type trend?

The one thing that we pointed out was the credit last year of $1.2 million, so that is a piece of it.

Mark, do you have any specifics you want get into on international investments?

I would say it's just that the international investment -- we had roughly just slightly under $1 million worth of expense that went through that was not in there last year. And then also our cadence of our advertising as a percentage of sales was slightly higher than what we had in the past.

And it predominantly is that, as Gary talked about earlier, you know we went back to a more surgical approach with our CRM initiatives. And our mailers were about three-and-a-half times more in terms of volume than what we did at the same period last year. So that also had an impact on it.

And that is part of just kind of getting that machine back to normal cadence and to get the cadence of that new, that list customer, back in the door. And as we have said over the last quarter or so, it's just that it's a slow March.

So we have been trying to take advantage of opportunities with some of the new membership drives, some of the other periods of the quarter that we had not done that in the past, and have been very opportunistic in terms of our endeavors. But it has been a little bit of a drag on our EBIT margins.

Okay, and then just a follow-up with that last comment. Just with your marketing approach, could you talk about, I think last call you talked about some incremental investments in the marketing team, looking for new Chief Marketing Officer? If you could give us any update there and how that's progressing.

As I said a minute ago, I think we're close on a CMO. We have filled a couple of those positions.

Our CRM Director position has been filled and a couple of others. But we are holding some of those because we really feel like it should be the CMO's decision to hire some of the people that would ultimately work for them.

Okay. I appreciate it. Thank you.

Thank you. Thanks, Operator.

Our 2014 first-quarter performance was solid. Sales performance in our Sally business showed improvement from the last several quarters, and BSG's performance resulted in strong top- and bottom-line growth.

During the quarter, we repurchased approximately 2.4 million shares of our stock for $66.2 million. We continue to believe this is an efficient matter to reward our long-term shareholders. As always, thanks again for your interest in Sally Beauty Holdings.

Ladies and gentlemen, this conference will be available for replay today after 12:00 PM through February 20 at midnight.

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