Sally Beauty Holdings Inc (SBH) 2014 Q4 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 fourth-quarter and full-year financial results. All participants have been placed in a listen-only mode. After management's prepared remarks, I will facilitate a question and answer session and initially each caller will be limited to two questions. Additional instructions will be given at that time.

Now, I would like to turn the call over to Karen Fugate, Vice President of Investor Relations for the Company.

Thank you.

Before we began, I would like to remind you that certain comments, including matters such as our forecasted financial information, contractor 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 other 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 10-K being filed today. 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 Gary Winterhalter, Chairman and Chief Executive Officer; Chris Brickman, President and Chief Operating Officer; and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone.

Thank you for joining us for our FY14 fourth-quarter and full-year earnings call. I will begin today's discussion with a review of our full-year results. Mark will then take you through the fourth quarter in more financial detail and, lastly, Chris will provide an update on our Company initiatives and review the FY15 outlook.

Our consolidated performance in 2014 was mixed. Consolidated sales growth steadily improved throughout the year. However, higher SG&A expenses and flat gross margin contributed to EBITDA just equaling last year. Despite this headwind, we generated $316 million in operating cash, which funded our investments and our stock repurchases of $333 million.

Consolidated sales in FY14 reached $3.8 billion for growth of 3.6%. Same-store sales grew 2% compared to growth of 0.8% in 2013. As we anticipated, same-store sales growth in our Sally business steadily improved throughout FY14 from 0.9% in the first quarter to reach 2.1% in the fourth quarter. We are optimistic that this trend will continue into 2015 as we benefit from the investments we've made to strengthen our marketing and brand differentiation to our customers.

Gross profit ended the year at $1.9 billion, also growth of 3.6%. Gross margin was flat when compared to the record 2013 margin of 49.6%. Consolidated SG&A, including the impact of debt of security expenses and management transition costs, was approximately $1.3 billion, an increase of 5.9%.

SG&A as a percent of sales was 33.9%, 70 basis points higher than the prior year. SG&A expenses finished the year approximately $24 million above our original expectations primarily due to an increase in employee healthcare expenses of $12 million, expenses associated with the data security incident and management transition costs of $6 million, and additional investments in Sally marketing of approximately $6 million.

Operating margin was 13.5%. This decrease of 90 basis points was primarily a result of flat gross margin and higher SG&A expenses. GAAP earnings per share were $1.51 compared to $1.48 in 2013. Adjusted earnings per share were $1.53, an increase of 3.4%. 2014 adjusted EBITDA ended the year at $611 million, equaling 2013 EBITDA. We generated 306 -- $316 million in net operating cash and ended the year with cash of $107 million.

We continued to grow our store base through organic openings. We increased our store count by 3.4%, or 159 stores for a year-end total of 4828. Approximately 35% of our store openings were outside the US. We now operate 3931 stores in the United States and 897 in 11 other countries, including our recent entry into Peru. We believe that organic store openings, domestic and international, continue to produce the highest return on our capital.

Turning to segment performance, starting with Sally Beauty Supply. Net sales were $2.3 billion for growth of 3.5%. Sales growth is attributed to new store openings, same-store sales growth, and strong international performance. Same-store sales were up 1.3% compared to being down 0.6% in 2013. Same-store sales in our Sally segment steadily improved throughout the year from 0.9% in the first quarter to reach 2.1% in the fourth quarter.

Gross profit margin at Sally Beauty was 54.8%, a 10-basis point decline when compared to the record high of 54.9% in 2013. This performance reflects a 20-basis point decline in our North American business, which offset 140-basis point improvement in our international business. The margin decrease in our North American business is primarily due to customer mix during the year with professional and Beauty Club Card sales both performing better than non-beauty club retail sales.

Operating earnings were $432 million, down 1.2%. Operating margin was 18.7% compared to 19.6% last year. Operating margin was impacted by higher SG&A and depreciation expense, as well as the slight decline in gross product margin.

We are pleased with the sequential and year-over-year improvement in sales performance from both our beauty club and non-beauty club customers. Sales from our BCC customers reached 9.6% in the fourth quarter and finished the year with growth of 8.3%. Sales and traffic in the fourth quarter from our non-BCC customers also showed improvement.

We ended the year with 8.1 million active BCC members, a healthy 9.2% increase over last year. These loyal customers now represent 57% of Sally US retail sales versus 53% last year. I believe these results highlight the progress we've made in our Sally US marketing and merchandising initiatives.

Now, turning to BSG. BSG had another solid year with same-store sales growth of 3.5%, net sales reached $1.4 billion for growth of 3.8%. This performance was primarily driven by store sales growth of 5.2% as well as an increase of 1.2% in the sales consultant business. We ended the year with 981 sales consultants.

BSG's gross profit margin was equal to last year's record high of 41.1%. Stores now represent 66% of the BSG's total revenue, while the sales consultants account for 34%. Operating margin at BSG improved by 60 basis points to reach a record high of 15% for the year. This strong performance was primarily due to continued operating leverage. Our strategy at BSG will continue into 2015 to expand both organically and through acquisitions, and to increase our brand footprint and penetration in existing geographies.

In summary, 2014 ended with mixed results. The highlights for the year included strong year-over-year performance in our BSG and international businesses, and solid execution through some potentially disruptive periods, such as the data security incident and management transition. Although our Sally US business experienced some expense in gross margin challenges, I'm very proud of the team for the outstanding work they did to improve sales performance. I believe we laid the groundwork in 2014 to realize even stronger results in 2015 and beyond.

Now, Mark will provide more detail for the fourth quarter. Mark?

Thanks, Gary.

Consolidated net sales for the fourth quarter increased 4.2% to $944 million. This increase is principally driven by same-store sales growth of 2.6% and the addition of new stores. Gross margins in the fourth quarter were 49.5%, a 10-basis point decline over the FY13 fourth quarter. This decline is primarily due to lower margins in our European business.

Fourth-quarter SG&A expenses, including unallocated corporate expenses, were $320.5 million, or 33.9% of sales, a 60-basis point increase from the year-ago quarter. The primary drivers of the SG&A deleverage in the fourth quarter include $4 million associated with our US employee healthcare, data security expenses of approximately $529,000, and higher advertising expenses in the Sally US business.

Consolidated operating earnings in the fourth quarter were $126 million, a decrease of 1.5%. Operating margin was 13.4%, a 70 basis point decrease from the prior year. The FY14 fourth-quarter performance was negatively impacted by lower gross margins in Europe and higher SG&A expenses.

Interest expense net of interest income for the fourth quarter was $29.3 million. Interest expense increased $2.1 million over the prior year, primarily due to the effect of higher principal balances on our outstanding debt.

For the FY14 year, our effective tax rate was 37%, a 30 basis point increase over the prior year. For the FY15, we expect our effective tax rate to be in the range of 37.5% to 38.5%. GAAP net earnings for the FY14 fourth quarter were $61.8 million compared to the FY13 fourth quarter net earnings of $64.8 million. GAAP and adjusted net earnings per share increased 2.6% in the FY14 fourth quarter to $0.39 a share compared to the prior year fourth quarter earnings per share of $0.38.

And looking at our balance sheet, inventories increased $20 million, or 2.5%, compared to the ending inventory on September 30, 2013. This year-over-year increase is primarily due to additional inventory from new store openings. Capital expenditures finished the year at $76.8 million, which is below the lower end of our guidance range of $85 million to $90 million.

The shortfall in capital spend is primarily due to a timing delay in some of our projects, including the launch of the BSG POS system, computer hardware and equipment purchases for our distribution centers, and other IT-related projects. We expect to carry over the unspent capital expenditures totaling approximately $10 million into FY15. For the FY15, we anticipate total capital expenditures to be in the range of $95 million to $100 million.

Chris?

Thank you, Mark, and good morning, everyone.

I'll start with an update on our initiatives and then provide an overview of our 2015 guidance, starting with our Sally US initiatives.

As we plan for 2015 and beyond, our goal is to refocus on the consumer. To that end, the Sally marketing team has recently completed research on Sally's customers, as well as non-Sally shoppers. The results from this work help define our 2015 marketing, merchandising, and in-store strategies.

Our research found that her Beauty Club Card and non-Beauty Club Card customers spend only 28% and 15% respectively of their total hair and nail purchases at Sally. We currently have email addresses for over 15 million of these customers. They know us and we know them. And we believe there is a tremendous opportunity to gain a greater share of their beauty spend through more relevant and personal CRM marketing.

Late this summer, we began testing dynamic CRM across email and digital channels to our customers based on their unique beauty regimens. To date, response to this message has been very positive. We expect that our CRM program will be fully automated and operational by the second quarter of FY15 and that it will represent an increasingly important part of our marketing mix throughout 2015 and beyond.

At the same time, our merchandising team has been focusing on introducing new products and creating clear points of difference in our stores. The new nail studio is a great example of creating meaningful differentiation. By the end of this month, the nail studio will be installed in 1500 Sally US stores, and by January we expect it to be installed in all remaining stores.

While it's too early to provide tangible results, our customer and associate feedback suggests the nail studio will be a home run. It presents a channel-leading assortment with 750 shades of nail polish at the front of the store as the consumer enters. We will be marketing the nail studio to Sally customers in Q2 FY15, once all the stores are fully set. Based upon the early feedback we have received, we are already working on additional in-store studios, including a hair color studio, in order to further differentiate our stores going forward.

Another point of differentiation is our unique product selection, including our own exclusive brands. Our largest owned brand, Ion, is in the process of receiving a complete packaging and label refresh. We believe this refresh will modernize the brand and build brand awareness with our customers. We are also working towards adding new and exclusive third-party brands to Sally.

Our store refresh test initiative was recently completed with 139 US Sally stores in three regions. The capital spend per store is approximately $20,000 and includes hardwood flooring, LED lighting, and updated signage. We will decide how broadly and quickly we want to new move forward with additional stores after evaluating the results of the test group of stores.

Now, turning to our BSG business. We've had success in our initiative to increase brand distribution. TG, the maker of Bed Head and Catwalk, has awarded exclusivity to our BSG stores and provided additional territory to our sales consulting business effective prior to January 2015. Distribution deals at this time are extremely accretive to our business and we anticipate announcing more of them in the coming quarters.

In addition, the BSG team is also launching a new marketing campaign and CRM initiative in order to deliver more relevant and personal messages for the 1.6 million stylists who frequent our stores and share their professional challenges and personal information with us.

Finally, we will continue to grow our international business with an intense focus on expanding our margins for the sale of owned brands and better control of our SG&A investments. Overall, I am very pleased with the progress we have made in our recent initiatives and I fully anticipate these efforts will make a positive impact to our FY15 performance.

Let me wrap up by summarizing our expectations for FY15. We expect full-year same-store sales growth for 2015 to be slightly above 3%. The first quarter of FY15 may fall below this full-year estimate, but we expect continued improvement throughout the year as our strategic initiatives are fully implemented. Gross margin expansion is anticipated to be in the range of 20 to 30 basis points. We believe we can achieve gross margin expansion in both businesses through favorable product and customer mix.

Consolidated SG&A as a percent of sales, including unallocated expenses, is expected to be flat or slightly higher than FY15 GAAP metric of 33.9%. This includes approximately $10 million of investments in business opportunities, such as Loxa Beauty, growth in South America, and new business development. Net of these investments, our projection for SG&A as a percent of sales would be slightly lower than FY14.

Having said that, it is our internal goal to do better than 2014. I challenge the team to reallocate spending to the highest return initiatives and rationalize expenditures in areas that are not. We expect organic store growth of 3% to 4%, with almost 40% of our growth coming from outside of the US, including our entry into Columbia and continued expansion into Peru.

Finally, the recent announcement of our three-year, $1 billion stock repurchase authorization underscores our continued commitment to return excess cash to our stockholders. I am very excited about our momentum heading into FY15. We have a very engaged team and compelling initiatives that should benefit us in 2015 and beyond. I look forward to sharing our progress and results in the coming quarters.

Now, I'll turn it back over to Gary.

Thank you, Chris.

I agree with Chris. We have a great deal to look forward to in 2015. I believe we've embarked on the right initiatives and have a strong team in place to carry on the momentum in our Sally US business and continue the strong performance at BSG and our international businesses.

As always, thank you for your interest in Sally Beauty Holdings and now we will turn it back to the operator to take your questions.

(Operator Instructions)

Simeon Gutman and with Morgan Stanley.

Just a quick one, just for Chris, on something that you mentioned on TG; and then I have a main question.

You said they're going to be exclusively distributed in the BSG stores. Does this mean that they're completely getting out of their own self-distribution? Maybe that's happened and we didn't notice. And are there any other rumblings of other manufacturers thinking of doing that anymore? Or is that conversation dead?

Simeon, I might be able to answer that a little better given the history of it. We have been sharing the brand with a competitor in our stores for quite some time. That has ended and we will have it exclusively in our stores; and, you 're correct, they are dramatically dialing back their direct sales forces. They will be covering only some major markets around the country and our sales consultants will handle the balance.

To your second point of your question, Simeon, as I hinted, we do believe there are some other possible brands that will make a similar choice here in the coming months and we expect to be announcing those as well.

Okay. And then my main question, I guess, could be for Gary, Chris, and Mark, just regarding next year. The margin -- it doesn't look like it's going to be up so much and you mentioned some of the reasons. But I have to ask, since, Chris, it will be your first year with the guidance behind you, how much wiggle room is there? Where do we stand with the Loxa investment trajectory? Is that going to come to a head next year? Are we going to see that continue to ramp? Are there any other levers that could be pulled? Or is the upside more better top line next year?

I think the biggest upside is better top line. However, listen, I do think next year should be our peak year at Loxa, and we expect that to either take off and, as a result, reduce the amount of investment we have to make to build it; or we'd be pulling back on some of those investments if we don't see that take off. So, I think you'll see more benefit from that after 2016, but the biggest upside lever for next year is top-line growth.

Okay. Great. Thanks, everyone.

Meredith Adler with Barclays.

I think I'll just sort of follow on to that question; just talk about -- it was mentioned, Chris, about expenses. You specifically talked about international; I think Europe had expenses be higher. Can you talk about where are there opportunities to cut expenses that doesn't impact your customers?

Actually, we're working -- we have a full initiative on that right now. We not committing a whole bunch of incremental savings associated with that, but we're looking under all kinds of rocks right now about where to cut expenses and I do think there's some opportunities there. I think it's too early to commit to them. I think we need to let that initiative flow for a while. And three or four months, hopefully we'll begin to see some of the fruits of that labor. But across all of our indirect spending there are opportunities and we are evaluating them and we've got a whole team working on it right now.

That's great. And then you mentioned very interesting data about share of wallet. Not as much bigger for the BCC members than for the non-members, which is again kind of surprising. Do you have a sense of where the rest of the share wallet goes? And what would you do to drive a bigger share?

Top five customers, or top four, are all the big mass customers you would expect -- Target, Walmart, Walgreens, CVS. That's where most of the other wallet is going. Listen, I think it comes down to both us being more compelling in our marketing, more compelling in the products we offer, as well as finding great reasons for them to come back into our store and create some in-store theater for them. There's all kinds of opportunities there.

I think that's the biggest take away is, there's so much opportunity just within the current BCC customer and the current list customer that, that's the low hanging fruit, if you will. So, let's invest there, first. Drive our same-store sales and improve that based upon that opportunity that's sitting there right before us. And then we'll spend more money on prospecting once we're beginning to see real success there.

And one quick -- I'm sorry, go ahead.

I was just going to add something to that, along with what Chris said, which is absolutely correct. Historically, because so much of our business is referred by a stylist or salon and so much of it is solution-based, that we typically do not have consumer shopping in a lot of different categories. They come to us for a specific solution for a problem. They might buy a little more of this or that and then they leave. One of the things we've always believed is a huge upside with CRM is being able to understand more of what they're buying and then be able to sell them or offer to them products that go along with what they're buying to expand the categories that they shop in, and therefore expand the share of wallet.

Great. Just a real quick question followup.

You are already have a long email customer list, but is there an effort to continue to collect more? Or do you feel like you got enough people to work with now?

We continue to collect more through growing our BCC membership, but also collecting list customer emails as they enter the store. We reward our associates for that and we continue to grow that database. In addition, we use Loxa and e-commerce to do that as well.

Great. Thank you very much.

Oliver Chen with Cowen and Company.

Congrats on solid results.

Chris, your comments on the variety of opportunities ahead in CRM and stores and products -- how would you help us prioritize what might the bigger needle movers as we approach the year? And, also, which levers are you most excited about, whether it be traffic or margin, as you engage in this portfolio of upside opportunities?

And then I wanted you guys, if you could comment briefly, elaborate on the non-Beauty Club Card customer, and where you are on that journey and if you're happy with the momentum you're seeing? And what's ahead? Thanks.

Let me start with the last one first. The answer is, we're not happy with where we're at, but we believe we're making progress. So if you look at the relative growth rates of BCC versus list, they're starting to come closer together, which is what our objective is. And we'll continue to work on that.

In terms of what levers it takes both to attract the BCC customer, the list customer in both -- to me the lever may vary a little bit, depending on the customer base. For the BCC customer, I do believe the CRM initiatives and better marketing -- it's not just CRM, because a great example would be, if we have their e-mail address and we leverage digital marketing to put banner ads in front of them as they go around the Internet that are relevant to their beauty regiments, that's a great way of bringing them back to our stores and raising awareness with them, even though they may be shopping for one category or they may have dropped a basket at our e-commerce site, or they may have not been to our store for awhile.

It's a terrific way for us to reach back out to them to make sure they're aware of us, that they're thinking about, that we are top of mind; and that we can then bring them relevant ideas that help them with their beauty regimen. So, it will effect our digital marketing as well as our CRM as well as our e-commerce, and I think that's a terrific bundle that will help us with our BCC customer.

With our list customer, I think it's going to be more about some of the points of difference we're creating in the store, such as the nail studio, which is a great example of that. And as we begin to market that, we will take that marketing well beyond our current base, to prospects as well as list customers, to talk about something that's really unique and different at Sally that they can only find in our stores, to really drive that traffic back to our stores. So, it will vary based upon the customer base we're targeting. But overall I think we're working on all the right initiatives to drive traffic back to our stores.

Thank you. Best regards for holiday.

Ike Boruchow with Sterne Agee.

Congrats, everyone.

I guess I wanted to ask two things, one on the non-BCC side. Either Christian or Gary, can you talk about the trends you saw in Q4 versus what you had seen in the prior quarters? And what your expectation is for that, that's embedded in the annual comp?

And the second question, just from a modeling perspective, how should we think about FX and the euro and how that should impact the total sales number on a three comp for the year? Just so we can all get our models clean? Thanks.

The first part -- and then I'm going to ask you to clarify the second part of the question, if you don't mind. The first part, what were seeing is the narrowing of the gap between growth in BCC and what had been a decline in list. That's what we're working for. I would love to see list get closer and closer to flat while BCC continues to grow, and that's -- I think we're working toward that trend, we are not quite there yet. But ideally we'd like to be there by second or third quarter of next year. And that's what's going to drive our overall growth model toward those same-store sales numbers that you talked about, which is above 3%, which is what we're thinking about in total for the Company.

Can you repeat the second part of the of the question just so I'm clear on what you asked about?

Sure. I was just asking because of the moves for your international business, on the FX translation, on the top line. Just so -- when we model our comp, how should we think about the total sales in relation to the comp because of the FX translation impact -- which is going to be a negative impact to your revenue, I assume?

It's not that it. Mark, I don't know if you want to take that in terms of disaggregating that?

We're certainly showing some -- we built in some hedging as far as FX being a little bit unfavorable. But overall given the fact that there isn't a lot of transaction impact to our business, the overall impact in terms of operating income is still fairly minimal.

Okay. Can you tell us what your total sales growth should be for the year if you do your comp guidance for the year? Just so we make sure what the sales growth should look like in relation to that, because of the FX?

We haven't really broken that out before, publicly. We continue to adjust that going forward in our projections. I would say it would be fairly consistent with what you saw this year.

Okay. Thanks.

And lastly, on the gross margin in the SG&A, is there any real variance in the first half of your fiscal year versus the back half in terms of how we should think about gross margin expansion and SG&A as a percent of sales?

Not really. About the only issue as we do expect growth to be accelerating throughout the year. So, if you're moving one part of the equation a little bit faster, that will change the ability to leverage it. But the bottom line is, that won't change dramatically.

Okay. Thank you very much.

Taposh Bari with Goldman Sachs.

Congrats on a great quarter.

I was hoping you could provide some more color on category performance at Sally US. I think nails did that as an outlier last quarter. Hoping to get an update there and any other categories that you felt moved the needle versus your expectations this past quarter?

Nails are continuing to perform well for us. We were about 7.5% in this quarter. The hair care, which is kind of the rest of it combined, was over 6%; and, of course, our hair color, which is a big piece of our business, was also strong as well.

Great. Can you maybe help [decompose] traffic conversion ticket during the quarter? The traffic continued to increase, as you saw back in 3Q. And if you could provide any sense of what you're seeing this far in November would be helpful as well.

Traffic continues to increase. Both -- one of the comments I made in my prepared remarks is, throughout the year our professional traffic actually performed better than it has in the last several years, and average ticket continues to tick up slightly. I believe average ticket on the professional side was down a tad for the year, but on the retail side both BCC and non-BCC average ticket continues to increase.

Do you have any comments you'd like to make as far as what you're seeing over the past few weeks?

No. I think it's too early to say, other than we view them as in line with what we expect for the quarter. Great. Thank you.

William Reuter with BofA Merrill Lynch.

My first question is with regard to your new share repurchase program. In FY14, you guys repurchased a similar amount as your operating cash flow. Should we assume that share repurchases will be in line with operating cash flow or free cash flow for 2015? How are you thinking about that?

I think that's the right way to look at it, which is directionally -- unless a major acquisition or an acquisition of some sort comes up, that would be the intent.

Okay. I know this hasn't historically been a big business for you guys, but what you guys are seeing in terms of e-commerce, either as an opportunity or as a threat from competitors -- if there's any changes in that dynamic? And that's all for me.

Well, I would say this, which is we see e-commerce as a big opportunity but not necessarily as just online sales. So, we updated our website first time through in September. We're going to do it again in January; make them much more interactive with a lot more video content, many ideas for the consumers, as well. But the goal there is not necessarily to convert them online all the time. The consumers do a lot of their research online but they may buy in the store. And the net result is what we're trying to do is create richer content for them to do their research, and then whether we convert them in the store, covert them online is irrelevant.

We're agnostic to the channel they choose to buy in. I don't necessarily think we're going to see a huge increase in sales online. What I'm hoping is that we do a much better job at converting consumers who are researching online to come purchase from us.

Okay. Thank you very much.

Jill Nelson with Johnson Rice.

If you could talk about your FY15 gross margin outlook of expansion of 20 basis points to 30 basis points. It appears slightly elevated versus what you put up the last two years, of flat to up 10 basis points. Could you talk about your optimism going into the new fiscal year for the drivers of that expansion?

I don't think it's necessarily optimism. Let me -- I think is a couple of big trends underlying that.

Think about it as, one, we expect the ratio of list to BCC members to begin to narrow, which helps us on margins, since the BCC customer is slightly lower margin. In addition, I think some of the big uptick in professional -- as professionals came back to the stores, as we got our everyday low pricing in place last year, that will start to slow a bit. So, we'll see more retail versus professional.

In addition, some of the big upticks in appliances around Curl Genius and Chi that we had last year, which are lower-margin products, those will begin to slow and we'll see other higher-margin categories grow faster. And, finally, we've got more growth in international retail business, which is high-margin business as well.

So, the combination of all those the trends is really what allows us to believe will get margin expansion next year. Those are trends that are ingrained in our business and they've been there long term.

I would also add to that with a lot of the packaging changes that we're making on brands such as Ion that we expect our own brand sales increases. They were only up about 1/2 point, 2014 over 2013, and I would expect that to begin accelerating a little better than it did this past year.

Okay. And then just focusing on the Sally Beauty operating division. Its EBIT of 18.7%, down from a peak that you hit a couple of years back, around 20%. Could you talk about this bigger picture? Do you see that division opportunity to accelerate back to the 20%? Or has there been a shift in the business or competitive field to skew that?

I think if you look at Sally as a global business, the reality is, as we begin to build out some of these other markets, that will lower our EBITDA percentage, or put a cap on it, because we're growing businesses that are not at scale yet. Mexico is now at scale, but Peru is not. Chile is not. Colombia, we're just beginning. So, we're going to have positive impact in North America, obviously where we do have a very high level of EBITDA, which is far of that average that you're looking at. But we're going to have headwinds in some other areas while we build out those global growth businesses.

It's the right decision to make for the long term of the business, because in the future those will be at scale and will inflect and we'll get great EBITDA out of it. As an example, North America is closer to 25% EBITDA, and some of those international businesses, while they inflect, are far below that. So, we're going to try to strike a balance between the two. The reality is, is that we've got to get Europe over the bar in terms of reaching efficiency and scale. We're close to that. We've got to push it through the inflection point and then we've got to continue to grow these other businesses so that they get to scale.

So, it's really balancing across that global portfolio of markets that's going to drive that. I do think it will increase over time, but there will be a little bit of headwinds as we grow these international markets and get them to scale.

Appreciate it. Thank you.

Mark Altschwager with Robert W. Baird.

Just wanted to follow up on your last comment, just on international margins. Are there specific cost savings opportunities, especially in that European business? Or is the inflection in international margins just more about driving leverage at the top line?

Well, I think there's a couple of pieces. One is getting more standardization in our pricing, marketing, and merchandising approach; so we're working on that. So, we're trying to put tighter reins around how we price, discount, and promote across Europe. We want to get the margin up top.

We've also been investing in ERP systems in Europe, which hopefully will give us back office synergies. And then obviously we've got to have good SG&A control, and most importantly we've got to continue to drive our own win-win brands in Europe to drive our margins up. So, we're working on all those things to increase gross margin as well as operating margin. We're making progress towards it. It's not as fast as we would like, but we're making good progress towards it and we expect to continue to do that.

Great. And do you have any specific EBT margin targets for that international business as we look at FY15?

I won't give you the specific targets, but we look for a 300 basis point improvement a year, every year, is what we're trying to get them on a trend line of; and we think that's achievable.

Okay. Great. Thanks. And just finally, can you update us on the acquisition environment and any opportunity to bring more brands in house this next year?

I don't think we want to speak prospectively about any acquisitions. We do think there may be some opportunities that come along throughout the year, but we're waiting until those are truly available before we did get on them. Certainly, if there's great brand opportunities or distribution opportunities, we will pursue them, but I don't want to talk about anything that's still prospective at this point in time.

Best of luck. Thank you.

(Operator Instructions)

Karru Martinson with Deutsche Bank.

When you guys look at the share of wallet and the customer goes to CVS or mass channel, has there been any thought in terms of the store location? Of moving closer to those channels?

We're actually pretty close to all those channels today. Effectively, we surround those stores today and we're heavily penetrated against every one of those major four, which is of course the logical reason why we end up cross shopping with them a lot. So, I think we're already there, but obviously we have to get them to make the additional trip across the mall in order to come into our store. And some of that is better marketing and reaching them with better messages that are more relevant to their beauty regimens.

In addition to that, part of that is just giving them points of difference, like the nail studio and others that make them want to come into our store to see new things. But a great piece of data: that almost half of our stores in the United States are sitting next to a Walmart or Target, and those are our two largest cross-shop competitors. So, we're already there. We just got to get the message right and the story right, the products right, the assortment right, and we're working on that.

Okay. And then in terms of the lower gasoline prices -- does that have any impact for you guys in terms of more discretionary income for your consumer?

I think it helps retail in general, but we don't really model that in. I don't think we're -- it really comes down to giving consumers great ideas. That's the biggest driver, not really whether they have an extra few pennies in their pocket.

Also, when you take a look at, gosh, about two-thirds of our business at Sally is either BCC or pro, we're a destination for those customers. If gas would have any impact on us at all, it would be with non-BCC retail customer that's come into that or not coming to that center for that reason.

Thank you very much, guys. Appreciate it.

Taposh Bari, Goldman Sachs.

Just had a quick followup.

Chris or Gary -- the idea of upgrading your website, introducing more content, testing remodels, doing the nail wall -- those are all interesting initiatives but obviously coming at a cost. So, I guess the question we have is, usually there's enough opportunity within your expense structure to self-fund these investments. I know that SG&A seems like it's going to be a little elevated perhaps versus some expectations heading into 2015. But how do we think about that line item just structurally over the next few years? Is it going to continue to be a source of -- or is it going to continue to be a neutral direction versus sales? Or do you structurally believe that there's still an opportunity to gain leverage on that line?

No. I do. Listen, let's start with the investments we're making. First of all, these investments are not huge costs. So, redesigning your website to make it more content-driven, a lot of that we're leveraging content we acquired as part of Loxa. The redesign's a relatively cheap and inexpensive and so that's not going to change the amount of -- radically change our SG&A investments. You're correct. Things like the nail studio do cost money to implement, but that's all built within the budgets we presented. And we think there should we a steady and constant stream of innovation that should be built into our SG&A line as well as our CapEx line that's all about continuing to refresh the stores and drive top-line growth.

So, listen, I do think there's perhaps a little more innovation going on right now than maybe a steady state. But the reality is, I don't think it's going to in any way change our overall financial model, because the reality is, there's a little bit of OpEx and a little bit of CapEx that's built into doing any of those innovations. It's not going to change radically the amount of cash we put off for our overall operating model to execute those. So, those are just the right things to do to continue to drive your top-line growth.

Okay. Perfect. Thank you.

With that, speakers, I'd like to turn it back to you for any closing comments.

Thank you, Operator.

I'll summarize by saying that we ended the year with steadily improving results. And looking ahead to 2015, we're going to remain disciplined in our investments for growth and capital management to further enhance shareholder return. Thanks again for your interest in Sally Beauty Holdings and have a happy holiday season.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.