Sally Beauty Holdings Inc (SBH) 2015 Q1 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Sally Beauty Holdings conference call to discuss the Company's FY15 first-quarter results.

(Operator Instructions)

Now I would like to turn the call 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, or 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 the Sally Beauty Holdings SEC filings, including its most recent annual report on Form 10-K for September 30, and its most recent quarterly report on Form10-Q being filed today.

The Company does not undertake any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation of reconciliations of [its adjusting] items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are Chris Brickman, President and CEO, and Mark Flaherty, Senior Vice President and Chief Financial Officer. Chris?

Thank you, Karen, and good morning, everyone. I will briefly share my perspectives on the quarter and then provide an update on our strategic initiatives. Mark will then discuss our FY15 first-quarter results.

As we mentioned on the last call, we anticipated that our first-quarter results might fall below our full-year expectations, as we continue to invest in, and drive improvements, in support of our core business. We continue to believe that subsequent quarters will show steady improvement as our strategic initiatives are fully implemented.

Consistent with these expectations, SG&A expense was higher this quarter than we anticipate going forward, due to the final quarter of incremental health care expenses, additional Management transition costs, and investments made to lay the foundation for our strategic initiatives. As a result, we do not believe this quarter's deleverage is indicative of how the remainder of the year will progress and we remain committed to delivering on our full-year plan.

Now I would like to provide an update on the progress toward our strategic initiatives, starting with Sally Beauty. For Sally Beauty, many of initiatives are centered around creating points of difference in our stores, our merchandise, and our marketing. We have already begun to talk to consumers in a way that is more relevant to them and highlights the unique offerings that are only found at Sally.

Our new slogan, Discover Beautiful finds at Beautiful Prices, is intended to convey quality products at affordable prices, exclusive brands not found anywhere else, products that are carefully selected to meet consumer needs, and trained beauty experts available to assist. These key points will be at the core of all of our messaging to existing and prospective customers.

I am very pleased with the progress in our CRM initiative. We are reaching out to our consumers in new and relevant ways that we have never done before. We have seen nice results from the pilot CRM group, with average ticket and number of transactions higher than they were in the non-pilot group. In addition, we are testing new advertising techniques, such as digital display ads, digital video, and social media ads, as well as radio advertisement through Pandora Radio and inclusions in POPSUGAR subscriber box.

While I don't believe all of these channels will be a home run, we do know our customers today better than we ever have. So test marketing in ways that are new and relevant to them makes sense. Overall, we remain optimistic that the early results of our marketing initiatives, and we believe that the CRM program will be completely rolled out by the end of the second quarter of 2015.

Next, our store refresh initiative was completed in the last quarter with 139 US stores in three regions. As a reminder, the capital spend per store was approximately $20,000 and included hardwood flooring, LED lighting, and updated signage. These remodeled stores have thus far shown a lift in comps when compared to the relevant to benchmark stores.

Although these are early results, we believe this investment will provide a positive return over the long run. As a result, decided to move forward with an additional 376 stores to be remodeled over the next five to six months. We will continue to monitor performance of the completed stores to determine how quickly and broadly we want to move forward with additional stores.

The new nail studio is now installed in virtually all of our [US Sally] stores. We have already begun our marketing campaign to promote the nail studio to our customers, with full page ads in fashion magazines, including ELLE, Teen Vogue, and Cosmopolitan. The customer feedback and buzz around the nail studio has been terrific.

We are planning to move forward with a solution studio for hair care over the next 12 months. Hair care in the US Sally stores represents 22% of our sales and is the second largest category next to hair color. We believe this will be another exciting way to distinguish ourselves from the competition.

The packaging and label refresh for our largest-owned brand, Ion, is now underway and is being integrated into the stores on a product-by-product basis. The new package is modern and appealing, and I am confident it be well-received by our professional and retail customers.

In BSG, we continue to have success in our initiative to increase brand distribution and we recently picked up a [couple of] key brands in new territories, as well as extended contracts with several key existing vendors. The BSG team is also making steady progress in their new CRM initiative to make BSG the obvious choice with the professional stylist community.

In addition, we are very pleased with momentum in our B2C e-commerce site, loxabeauty.com. The team continues to sign up new stylists and increase awareness and adoption with retail consumers.

Finally, during the quarter we repurchased approximately 243,000 shares of our common stock for an average cost of about $7.25 million. As of December 31, we had approximately $993 million remaining on our $1 billion authorization. We've said before that the cadence of stock buybacks may not be as consistent as they were with our prior authorization.

However, our stock buyback philosophy has not changed and our Board of Directors remains committed to using excess cash flow to buy back stock. We will work diligently over the next several quarters, at the direction of our Board, to allocate cash to the highest return investments, including growth in the Business and share repurchases.

To summarize, we are very pleased with the early results of our initiatives, including CRM, marketing, the nail studio, our store refresh program, and the acquisition of new brands and territories for our BSG business. We will continue to work on these initiatives for the remainder of FY15 and I look forward to sharing the results with you.

Before I turn it over to Mark, I would like to comment on our announcement regarding the CEO transition. During our most recent Board meeting, Gary Winterhalter, our Board, and I agreed that, with the new fiscal year well underway and our strategic initiatives taking shape, it was the appropriate time to transition the CEO role to me, and for Gary to assume the position of Executive Chairman of our Board of Directors.

I am very grateful for Gary's leadership during this transition period, and I look forward to building upon the strong foundation he fostered over his 26-year career at Sally Beauty Holdings. Now I will turn it over to Mark to provide more financial detail for the first quarter. Mark?

Thanks, Chris. Consolidated net sales for the first quarter was $965 million, an increase of 2.6%. This increase was primarily driven by same-store sales growth of 2.3% and 187 new store openings. The unfavorable impact of foreign currency exchange rates was $12 million, or 120 basis points of growth. Consolidated gross profit was up 2.9% over the prior year. Gross profit as a percentage of sales was 49.1%, up 10 basis points, driven by both business segments.

First-quarter SG&A expenses, including unallocated Corporate expenses and share-based compensation, were up 5.5% and were 34.9% on a percent sales base. SG&A expense growth was higher this quarter than we anticipate going forward. A few of the larger expense items include $3.5 million from the final quarter of incremental health care expenses, $1.5 million in connection with our ongoing Management transition plans, and $1.1 million from incremental investments made towards new business development. Unallocated Corporate expenses, including share-based compensation, were $41.5 million, or 4.3% of sales, versus the FY14 first-quarter expenses of $36.6 million, or 3.9% of sales.

GAAP consolidated operating earnings in the first quarter decreased 4.6% to $116.2 million. Operating margin was 12.1%, down 90 basis points, primarily due to higher SG&A expenses versus the prior-year quarter. Interest expense, including the amortization of debt issuance cost, totaled $29.2 million, up 2.6%. For the FY15 first quarter, our effective tax rate was 36.9% versus 37.8% in the FY14 first quarter.

We continue to believe that our annual effective tax rate for the FY15 will be in the range of 37.5% to 38%. GAAP net earnings was down 5.3% to $54.9 million, with earnings per share of $0.35, that was flat compared to the prior year. Adjusted EBITDA for the first quarter was $144.8 million, down 3.2% when compared to the $149.6 million incurred in the FY14 first quarter.

Turning to our business segment performance starting with Sally Beauty Supply, same-store sales growth was 1.6% versus an increase of 90 basis points in the year-ago quarter. Net sales for Sally reached $587 million, an increase of 2.3% over the prior-year quarter. Sales growth was attributed to new store openings and same-store sales growth. The impact of unfavorable foreign currency exchange offset the sales growth by $9.3 million or 160 basis points.

Beauty Club Card sales increased 6.6% for the quarter. Sales from our list customers, or non-Beauty Club Card customers, improved sequentially for the fourth quarter in a row and contributed to our year-over-year improvement in total retail sales growth. Club membership also grew 8.7% to reach 8.3 million members. Membership renewal rates increased to 63.1% versus the 54.2% in the prior year.

Gross profit margin for Sally in the first quarter was 54.4%, up 10 basis points, primarily due to a shift in customer and product mix. Operating earnings for our Sally business was $101.2 million, slightly down compared to the prior year, due to higher SG&A expenses related to health care, advertising, and costs associated with our strategic initiatives.

Now turning to the Beauty Systems Group segment. BSG had same-store sales growth of 3.9%. Net sales grew 3% to reach $378 million. Overall sales growth was attributed to same-store sales and new store opening. The unfavorable impact of foreign currency exchange rates impacted sales performance by $2.8 million, or 70 basis points.

In looking at the sales growth by distribution channel, our sales from our store business grew 4%, while our direct sales consultant business was up 1%. BSG's gross profit margin was up 20 basis points to reach 40.9%. Operating earnings at BSG increased $1.8 million, or 3.2%, in the 2015 first quarter. Operating margin was 15%, up 10 basis points, primarily due to the gross margin expansion.

In looking at our balance sheet, inventories were $838 million, an increase of 2.9% when compared to ending inventory on December 31, 2013. This year-over-year increase was primarily due to sales growth from existing stores and additional inventory from new store openings. Capital expenditures for the first quarter for FY15 totaled $19.4 million, and reflect expenditures to open new stores, expenditures on existing stores, and IT-specific projects.

As Chris mentioned earlier, we intend to refresh another 376 Sally US stores over the next few months, and expect the associated capital expenditures related to this project to be approximately $9.2 million. At this time, we continue to believe the capital expenditures for the FY15 will be in the range of $95 million to $100 million. Chris?

Thank you, Mark. Overall, I would characterize the first quarter as a step in the right direction. Our top line was somewhat dampened by unfavorable currency exchange and a soft November, while SG&A was negatively impacted by expenses associated with incremental health care expense and Management transition costs. Nonetheless, we are on the right track with our strategic initiatives and I believe that strong execution of these initiatives will drive continued improvements in our results.

Finally, it goes without saying that I am very pleased to assume the role as CEO. I strongly believe that our Company is well-positioned for growth and that we have a strong team in place. I can assure you that my priority is to remain focused on the execution of our strategic initiatives to drive long-term shareholder value. Now I will turn it over to the operator to take your questions.

(Operator Instructions)

We will begin with the line of Simeon Gutman with Morgan Stanley. Please go ahead.

Good morning. It is Simeon.

Hi, Simeon. How are you doing?

Good. Good morning. First question, just big picture, Chris. You are fixing up stores, you said another 376 more remodels. You are advertising in channels that I am not sure are very traditional for this segment. And it makes sense to have the stores ready for when all these new customers come and to have the CRM initiative in place. Can you just talk about how you look at the risk and reward of going down these routes, which for a business, I don't think that, again traditionally moving was in this direction. What is the opportunity for it going forward?

Well, I want to emphasize that we are not doing any radical move, no giant bets. We are moving dollars and resources and time slowly to test new channels. We are testing them thoroughly, getting feedback, and understanding whether it is working, what the response rates are, and then shifting more dollars if it works and not shifting more dollars if it doesn't.

So although there is a substantial amount of experimentation going on, I don't want you to think that we've suddenly abandoned our core direct marketing techniques or anything else. We haven't. It still represents the vast majority of our marketing budget, but we are going to also be experimenting in a very rapid way with other channels, and as those prove fruitful or not, we will shift dollars according to payback, not based on gut feel.

Okay. My follow-up, I will just make two parts and then I will jump off. On the international business, curious how you look at that. Do you look at it any differently from when you were sitting on the Board? The other part of that question, totally unrelated, your L'Oreal contract with BSG expires the end of 2015. Can you comment what your plans on it are with?

I'll do the second one first. The L'Oreal contract was extended through the end of 2018. Moving on to the other question, no, I don't think international has radically changed. What I would say is we are making leadership changes in Europe, continental Europe, because we felt like we needed to improve our operating discipline. I still feel very excited about the foundation that has been built. It is a great store base, there is some terrific owned brands there, but we needed better operating disciplines in terms of our marketing and merchandising pricing and other things in order to get our profitability up. So, we are making those changes as needed and there may be a little transition period while we do that, but we will get it done.

We are resetting our store base in the UK, in terms of shifting some stores that were branded Sally, but were really trade stores, we're going to shift them over to Salon Services and really clarify that the retail business is Sally and the B2B business is Salon Services. So there is some transition going there. Mexico continues to chug along and do fantastic, but it's going to obviously face some currency challenges in the coming year or so. And South America continues to grow rapidly. So, I don't see radical changes. It is more about, just let's improve our execution, get the formula right, and then we will drive growth from there.

Okay. Thanks.

And next we will go to the line of Oliver Chen with Cowen and Company. Please go ahead.

Hi, guys. Congrats on great solid results. Chris, from a bigger picture perspective, as you continue to innovate across these disciplines of products, store experience, and CRM, what do you think is -- how would you prioritize what may happen with near-term impact? As you do elaborate on the remodels, which look great, I've been in some of them, which aspect of the comp is getting lifted? Is it conversion or units? If you could elaborate there, that would be great?

On the second part, it may be a little too early for us to tell. What we are seeing, though, is we are seeing improvement in the list and BCC customer. The list customer is the one I am most interested in and concerned about, which is I want to win her back. I think we all do. The fact that we are seeing both customer groups respond to that refresh is what we wanted and that is why we are moving forward more aggressively. We will continue to track that to make sure that continues to deliver on the promise.

It is very hard, on your other question, to just aggregate what is having the most impact, but they all really work together in concert, right? You need to create points of difference. If your goal is to win back the list customer, but at the same time hold onto your BCC customer who really gets the model and is very loyal. CRM has the greatest impact on the BCC customer. Things like the nail studio, the store refresh and alternative marketing channels has the most impact on the list customer. That is how we are thinking about it, but it is very hard to just aggregate and say, the nail studio should have this much impact, the store refresh should have this much, that is hard to do.

In general, what I have seen in focus groups, because I have spent a lot of time with consumers in the last three to six months, is that the BCC guest really gets the model. She has bought in, she loves our brand, she loves the service in the stores. What we want to do for her is really use CRM to give her ideas, and inspire her to come back more often with great ideas. What we want to do with the list customer is improve the look and feel of our store and create points of difference in store, as well as reach her through alternative marketing channels, so that we give her new reasons to come visit us and give us a second shot at her business, which seems to be working.

Okay. Just as a follow-up, Chris, where are you in the journey with respect to marketing to the non-BCC customer? Are you guys happy with where that is? And you have elaborated on this, but what should we pay attention to as we continue to monitor your efforts, which has good momentum on the non-Beauty Club Card customer?

I'd describe it as early in the game. We are second or third inning here, right? The reality is we are still learning which mediums work. We are still learning which points of difference really get her back into the store. We are still learning the most efficient ways to reach her and talk to her. We think we've got the message right now, which is great. We have got a message that works both with the BCC, as well as the list customer and we are really in the experimentation stage of what is the most efficient and effective way to reach her.

So I describe it as very early in the process. We will continue to refine that model. We have a great team in place now, which I am really excited about. So, we are just going to keep building that muscle. It is going to pay off more and more as we go over the next subsequent quarters.

Okay and just [a final] question on our models, should we also think about the gross margin sequentially improving throughout the year? The compares get a little bit easier, as is product and customer mix shift going to be the primary driver here? Thanks.

It is a combination of product, obviously is more -- as you drive owned brand sales obviously and mix shift. Clearly, also narrowing the gap between the growth in the BCC customer and the decline in the list, if we are successful with that. That is a bit of a negative drag and we want to change that. So, I think that is right. We are looking for a gradual expansion, but our guidance overall for the year remains the same, which is about a 20 to 30 basis point improvement for the full year.

Okay. Thanks. Congrats on all the innovation. Best regards.

Thank you very much, Oliver.

All right. Next we will go to the line of Simeon Siegel with Nomura Securities. Please go ahead.

I need to thank Simeon Gutman for the help of the pronunciation there. Good morning, guys.

Yes, she did much better on yours, than the other Simeon.

Second time is a charm. It is not very often you get two Simeons on a call.

I think this is -- we are unique in that.

Can you guys talk about the cadence of SG&A dollar growth for the rest of the year, just given the comments regarding the discrepancy between this quarter and the upcoming quarters? Then just a quick one, in light of the 120-basis point comment. What is right way to think about FX going forward, whether it's translation, transaction, mix shift, hedging offsets, anything you could help there would be great?

Sure, Simeon. Let me answer the last first. We typically, and saw this as well in the first quarter, is that it is more of a translation adjustment impact than it is a transaction adjustment impact to our financials. If you look at the overall impact on sales it was about $12 million. When you look at gross profit, if you look at proportionately our P&L, roughly [50%] of the sales impact was a gross margin impact, so that was about $5.9 million. Then when you look at SG&A, SG&A is roughly three-quarters of the gross margin impact, so that was up $4.6 million. When you net all those down, you get to about -- even when you get to an EBIT level, you get less than $1 million pre-tax.

So, again, it is predominantly a translation adjustment impact and not a transaction adjustment impact and that is how I would view certainly FX going forward. It has been very consistent when we have gone through headwinds. Even in 2009, when we saw an unfavorable FX impact on sales of almost $86 million, our EBIT impact was less than $2 million. So you are seeing a very consistent cadence in terms of how the headwinds of FX are affecting us today.

Overall, when you look at SG&A, certainly over the next couple of quarters, you should start to see a little bit more of a positive leverage impact, very modestly over the next succeeding quarters. Certainly, we had the unusual items that we called out in some of our prepared remarks where we had some of the Management transition costs. You are seeing still the calendar year impact of health care. Impact is from the first quarter, where the overall delta going forward into 2015 versus 2014, you shouldn't see that kind of an impact. We feel that we are getting through some of the investments that Chris has mentioned and through some of the Management transition costs, so some of those -- we should be getting to the downside of those types of situations.

Perfect. Thanks a lot, guys.

You bet.

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

Chris, can you talk about the delta in the comps on the stores were refreshed versus the base, perhaps quantify the spread between those two. Also, I know it is early days, but can you point to any other metrics that may have shifted for the refresh stores, an uptick in list customers, better renewal rates of Beauty Club Card holders, or perhaps better conversion of list customers to cardholders?

I am not get into details of how much better it was. Suffice it to say it was better enough that we felt we could a very solid payback on the investment we are making and it fits with our overall marketing strategy. What I will say is this, which is the most important thing I was zeroed in on was the growth in the list customer. If you look at the overall business, we have been running with the BCC customer in the high single-digits consistently, even in some of the worst of times. That customer is quite loyal. You see it in focus groups. If you talk to her individually, she still loves the business and loves the business model. It works for her.

The concern was with the list customer who we were at one time losing in the high single-digits and now are losing in the low single-digits. We wanted to win with the list customer, whether that be through our marketing, the nail studio, or the store refresh. What we saw very quickly with the refreshed stores was that this actually worked even better for the list customer than the BCC customer. It makes sense because the BCC customer liked the store anyway; the list customer needed to be convinced.

So what I will say is just that, which is it is working very well. It is driving a return that will more than pay back the investment we are making. And most importantly, it will help us with our core strategic goal, which is to win back the list customer, get her back into the stores so that we have the ability to convert her back to a BCC customer, which we have proven successful in doing over time.

Got it. Thanks. That's really helpful. Then on same-store sales, can you talk about the cadence for the remainder of the year, given that comps are particularly easy in the March quarter, but you've got quite a few initiatives that I assume would build as the year progresses. So, as we look at last year versus this year, should Q2 be the strongest in terms of comps and then it decelerates a little bit from there or are the initiatives that will build as the year progresses keep that comp pretty consistent for the remainder of Q2 to Q4?

The reality is I hate trying to predict quarter-by-quarter comps. I do think you are right. The comparisons for the last year were the softest in this quarter, but also a lot of our initiatives are still rolling out. So we'd go back to the original guidance, was we just expect slow and steady sequential improvement throughout the year. That is what we are shooting for. If it works out a little different than that because one quarter spikes up or down, that is fine, but our goal is to get back to that long run comp level with Sally that is a 2.5% to 3% same-store comp. When we are getting close to that we are starting to be at the objective and really the components of that would mean BCC customers in the high single-digits and the list customer in the 0 to minus 1 or 2. Once we get to that, then we are starting to hit on all cylinders. So, I don't think it is good to predict quarter-by-quarter comps. We are committed to the slow, steady improvement.

Great. Thanks, Chris. Appreciate it.

Next we will go to the line of Jason Gere with KeyBanc. Please go ahead.

Congratulations, Chris, again. Following up on Olivia's question, would you expect to see Sally Beauty stores deliver in that 2.5%, 3% [for] this year? That is what you were initially talking about, but I just wanted to make sure, on an annual basis, that, that is still the target?

Secondly, I was just wondering if you could give an update of how January is starting out. I know you are anniversarying some of the bad weather from last year so I am just wondering if you can talk maybe a little about how traffic trends are from the beginning of the calendar year?

To the first question, I would say yes that, remains our target for the full year. And we always expected that the first quarter would be the slowest of the four, so our target remains unchanged in terms of our forecast for the full year. I am not going to specifically talk about January yet, as the numbers are very fresh, but what I would simply say is that we continue to remain committed to that full-year target and January supports that commitment.

Okay. Then lastly, I was just wondering if you could talk maybe a little about BSG and other maybe acquisition opportunities, territory, exclusivities, that -- what is opportunity out there? And would that take a higher precedence? I know you are talking about investing in the Business with your free cash flow, the core business before share repurchases. I was just wondering where acquisitions fit into that play, as well?

First of all, BSG is obviously continuing to be successful in acquiring new brands, and brands in terms of new territories and exclusive contracts, and they have done a very good job of that. We continue to roll those out in this quarter and the next, so that will help our sales and comps in BSG.

In terms of brand acquisitions, there are some opportunities out there. They are small to modest in size, but there are opportunities out there that we are actively looking at, but none are at a point now where it is appropriate to talk about them specifically. If they are within an affordable range, as well as we see a strategic fit, we will definitely bring those forward, but it is too early in the process yet to identify them specifically.

Okay. Great. Then the last question is clarification of one of the Simeons' questions. On FX, when you talked about the $12 million hit in the first quarter, we should expect to see a continuation, from a transition as that plays -- you use current spot rates? I want to make sure that, that is correct?

Yes. That is a fair assessment. You see a lot of revisions by a lot of financial institutions' forecasts in terms of where they think currencies are going right now, but I think certainly using that type of thought process would be very appropriate.

Okay. Fair enough. Thanks a lot, guys.

Thank you.

And next we will go to the line of Ike Boruchow with Sterne Agee. Please go ahead.

Hi, everyone. Congrats and thanks for taking my question. Chris, for you, when you think about the margin profile of the Business and you split it between the US and international, I believe you guys have talked about international being significantly lower margin business. Can you give us the drivers and the initiatives to maybe how you will bring those margins closer to the US? Do you think the international margins over time can actually reach where the US profitability levels are today?

Let me just correct one thing or add some context to that.

Okay.

If you look at the businesses that are truly retail businesses, such as Mexico and South America, actually the margins are not lower than the US; they are quite comparable to our US retail business. Then you have got your businesses in Europe, in the UK and in continental Europe, that are more in majority trade businesses. And they are actually fairly comparable to our US B2B business in terms of margins. In fact, the Pro-Duo business in Europe is higher margin than our [straight out] B2B business. So it is a mix of businesses would be my point.

We are trying to grow the retail business in the UK and have a clear Sally brand that is retail, which will be higher margins, as well as than a Salon Services brand, which will be B2B, which will be more comparable to BSG's margins. Pro-Duo, I think the margins there are already in the high 40s, which is substantially higher than what our US B2B business is. The issue three is getting the operating disciplines right to make sure that we can actually deliver bottom-line profitability with top-line growth. Then for the South America and Latin America business, honestly the margins are already where they need to be, and it is really about getting the scale so that we can leverage the overhead associated with those businesses.

Got it. The follow-up to that would be specifically within Europe, where there seems to be the biggest opportunity, can you just talk about the some of the specific initiatives that you are focused on right now, whether it be the ERP system or the like?

Yes. Those all fit together. The reality is the ERP system gives us great insight and visibility into our business there. We have got cost control opportunities and reduction of overhead opportunities. We have got opportunities to get our pricing right across the markets and be more consistent with that. We have got opportunities to get the marketing more consistent across the markets. Merchandising and mix is a great opportunity. Then finally driving owned brands, which the team has been very successful at, we want to just continue that. That is why we made the leadership changes.

There just seemed -- there is a lot of great ideas and a lot of innovation, but there also was a lack of some of the operating disciplines we felt were necessary to drive long-term profitability. So, we made a leadership change there in order to drive that. Then, obviously, over the time as you open up stores, you can really leverage scale in the business, because we are sitting there at just under 200 stores today. We think the long-term population can be 500 stores or so. If you really can get to that scale, you will leverage those overheads across a much bigger base and that will drive profitability over time, but we wanted to put the operating discipline in first and then drive the scale.

Got it. Thanks.

Next we will go to the line of Chris Ferrara with Wells Fargo. Please go ahead.

Good morning, guys.

Good morning, Chris. How are you doing?

I'm good. How are you?

Very good.

First, getting a simple one out of the way, is the SG&A guidance -- last quarter you guys had said flat, slight up as a percentage of sales for the full year. Is that still the case?

Yes. As we said, certainly at the beginning of the fiscal year, is that we are continuing to make investments in the business. Not only just the investments that Chris has talked about, specifically related to Sally and the marketing efforts that we have made, but also we are making investments in new business developments as well, particularly Loxa, as well as South America. Those are still very actionable and will still continue throughout the year. We should start to see improvement over, certainly, the overall leverage profile of what you saw the first quarter versus the second succeeding quarters, but overall the guidance that we gave is still very appropriate.

Perfect. And then, Chris, the move to revamp the next tranche of stores, 300-plus. How should we look at that? Is that a confident move forward based on strong data you saw, or is it an in-the-middle type move, where you are still not exactly sure how this is going? How do we interrupt that?

Listen, I don't think it is a bold move one way or the other. It is the right thing to do to get our stores to a level that allow us to win back the list customer. That being said, we are seeing good response to the actions we have taken thus far. Listen, putting in nice new flooring, lighting, and graphics in a store, it's hard to argue that -- it is a nice low-cost way of making stores more attractive. And if our main goal is to win back the list customer, and we can make our store more attractive in a low-cost way, it is a no-brainer.

So, I don't think we should expect that it is going to change the world; I just think it is a logical thing to do as part of your overall strategy to win back the list customer, and honestly, it is more deferred maintenance than really something radical. That being said, it is part of an overall program, including creating points of difference like the nail studio, trying new marketing mediums and low cost ways of reaching that consumer. And then finally, refreshing the store to make it look a little more attractive so that when she walks in, she feels more at home in the location.

Appreciate that. Then last one on marketing. I know this is trying to pin you down on something, but when do you expect list to go positive? Because everyone's thought process around this is the new marketing channels, they are clearly different for this model than -- I think your point in the past has been that there is more list customers now, right? And you need to be a little bit different than you have been before, but what are you using as sign posts? When would be too long for a list to remain negative?

Listen, I am not sure list will turn positive because we are all stealing from list to drive BCC. The reality, though, is if it was minus 1 and BCC was still growing, not only in terms of sales, but also in terms number of customer, then I'd feel like we were making huge progress because then you are bringing in enough people to convert.

When it is minus 5, 6, or 7, you are worried it is bleeding -- that whatever you are taking out of it, you are also bleeding additional customers and transactions and you're not recruiting them back enough. At this point in time, that is our goal is to get as close to zero as possible so that, that means we are bringing in enough customers to give us the opportunity to recruit and grow the BCC population, which then gives us a much more intimate conversation with her through our CRM initiatives and other initiatives.

Thanks a lot.

You bet.

Next we will go to the line of Joe Altobello with Raymond James. Please go ahead.

Congrats, Chris, on the promotion. First, in terms of the refresh, I am just curious of the genesis of the idea was. Did this come up in focus groups that some of your non-Beauty Club customers did not like the look and feel of the store and that was the biggest impediment to them coming in?

There was a combination of things. The team had tried some various refreshes. They looked good and they were low cost. We knew that we had deferred some maintenance of the stores, and that the look of the stores, if you go out, in cases has got tired. Then we heard that in focus groups. We heard it from all customers, but by the way we especially heard it from the list and lapsed customers. They told us that the store got a little dark, a little crowded, and a little tired.

So, it is a combination of walking into stores myself and having that reaction, as well as our customers telling us they have had the reaction, which makes us want to make those investments. Then, of course, getting some positive response to it in the data, just solidifies that view.

Okay. Then in terms of November, you mentioned that it was a little bit soft. Was there any reason for that or was it just random?

Which one, November?

Yes.

I think we missed reading the marketplace, like a lot of other retailers. We put a little too much emphasis on Black Friday and the reality is the consumer behavior around that holiday has clearly changed. It broke down beginning last year, it has completely broken down now. It is really more of the second half of November and the first half of December is all one big event as opposed to the single day. So we are going to change our marketing next year around that. I think we misread it this year, and made a little too much big of that day, and I don't think we will make that mistake again.

Okay. Great. Just one last one in terms of the SG&A, you mentioned that you had a little over $6 million in expenses this quarter, but most of that goes away. But even if you exclude that from SG&A, it was still up 30 bps or so. What comp number do you need to see on the Sally side to get leverage on that line?

We are shooting for a long-term comp line where Sally is 2.5%, 3% and total comps are around 4%. If we get to that level, we should be getting leverage in the business and it is a little above 4%. But anyway, the point is, our long-term annual guidance, that should deliver leverage for us over time.

The reality is we have done a really good job of rethinking how we manage our health care programs going forwards for the rest of the year. We are past most of the transition costs, I'm not going to say all, but most. So we should be more at reality of what our long-term SG&A growth is going to be at in the upcoming quarters. So, if we can get Sally back growing again, we will be fine.

Great. Thank you.

Next we will go to the line of William Reuter with Bank of America. Please go ahead.

Good morning, guys. On the last call, you guys had touched upon an expense savings initiative and you said it was too early to figure out what the goals of those might be. Do you guys, at this point, have a sense for how much you might be attempting to save?

We do. There is different pieces of that. Some of them we know more about and others we don't. We have one initiative, which around indirect spending, where over -- next year, we would like to see that reach above $4 million a year. My guess is we will get maybe one-third of that this year, but that is directionally going to happen. We have got a global sourcing initiative, where we are bringing together the sourcing of all of our business units and narrowing our vendor base in terms of what we buy and buying more globally. My guess is that could be probably even larger, but we will get very little of it this year. We will get most of it next year.

The bottom line is we have got a couple initiatives that we are hoping to use to free up dollars to make some of the investments and cover some of the investments we are making back in the business. They are on track. We are delivering as we expected. We won't get a whole lot of that this fiscal year. We will get some of the direct spending initiative, maybe a little bit of the global sourcing toward the tail-end of the year, most of it will really hit next year.

Okay. Then you provided CapEx guidance for the year and given some buckets like the BSG, point-of-sale, your DCs and some IT. Have you guys broken down by dollar amount what the different project are going to be spent on or what that money is going to be spent on?

No, we haven't. We have given a little bit guidance around the store refresh, but as far as actual line item guidance, we haven't really broke that down. When you look at our overall guidance that we have given, we've certainly looked at, from a timing standpoint, some of our IT initiatives, and with respect to our international ERP and the POS installation at BSG, and some of the additional enhancements that we are doing on the POS System for Sally, but we haven't given specific dollar guidance around those items.

Okay. Then lastly for me, the last time you guys have updated on one of your calls your leverage goal it was 2.5 times. Is there any update to this guidance or are you still on the same range?

No. There is really no change to our view of the overall guidance. We are certainly very comfortable operating above that. We are currently operating above that right now, but we certainly are not -- we haven't really changed our overall view of our leverage targets. We are very comfortable. We have certainly, arguably we have, a lot of liquidity to grow the Business, as well as to continue the cadence that we have with our share repurchase efforts, so I am very comfortable with where we are at right now.

Okay that. That's all for me. Thank you.

Thank you.

Next we will go to the line of Taposh Bari with Goldman Sachs. Please go ahead.

Hi. Good morning. Just had a big picture question on competition [spots]. That comes up often on these calls, but what are you seeing, Chris, just in terms of mass, food and drug, internet? Are you seeing any changes on the competitor front or is it effectively status quo?

Well, what I would say is they all have raised their game over time. If you go into a Target or you go into a Walgreens or a CVS, you will see a better beauty section than you may have seen five years ago. It will be better merchandised, it will be more assortment, and more selection. Yet there are still some areas where we believe clearly we can win. You are unlikely to get much help or support or assistance or advice in any of those stores or locations.

We can win in some key categories, hence the reason we wanted to roll out the nail studio quickly. We felt we could put a dominant assortment in front of the consumer at the front of a store, and make hay with, it in terms of saying that we have more selection and more opportunities for the consumer to find the unique color and shade product that is right for her. We are going to extend that to other categories, whether that be hair care, hair color, and others, where again, we want to emphasize the points of difference of having more selection, more assortment, and brands and choices for her than anybody else.

So, again, I would say is they are going to continue to invest in the overall category. It's a high-margin category, which warrants investment. They are going to up our game, which means we have to up our game. That being said, we have the opportunity to emphasize the fact that we can provide better solutions, better advice, and better assortment in key categories than anybody else and we need to get laser-focused on making sure that message is clear to the consumer and that is our winning strategy over time.

I also think they are going to spend a lot more money going after -- and this is what you see Ulta doing, in my mind -- going after department stores with both the cosmetics, fragrance, and make-up sections, that, that becomes a big investment for them. That is really less of a category we play in. It is a very small category for us. I think it's department stores that are potentially at risk, as they grow those brands, and probably more so than we are. So our value proposition is pretty clear. We are well-positioned within the category. We just need to emphasize those points of difference and the reasons why she should come back to our store.

That is helpful. Anything on the online front in terms of e-commerce players out there?

What I would say is that for ourselves, we have been upping our game in e-commerce dramatically. I am excited to see what's happened. We refreshed our Sally sites and CosmoProf [sites]. We are going to do that again. They will also have responsive designs, being able to have it on your mobile phone and iPad soon.

We saw immediately an increase in traffic. We didn't see an increase in sales right away, and now we are starting to get follow-through on an increase in sales to go with the increase in traffic, which is great. But I don't see anybody necessarily winning uniquely in online. The Loxa bet is a unique bet in terms of a way to put professional products in front of the customer. The number one thing I'd point to is, it's going to be an investment area for everybody and everybody is going to be getting better at it, so we have got to move faster than them.

Great. Thank you. Best of luck.

You bet. Thank you.

Next we will go to the line of Mark Altschwager with Robert W. Baird. Please go ahead.

Great. Good morning and congrats on a solid start to the year. I just want to start with the bigger picture question, looking back at 2014, just any updated thought on the growth of the underlying hair care and beauty markets? Any big surprises from an industry perspective? Do you anticipate any change in the industry growth dynamic heading into 2015?

Honestly, we don't see much of a change, Mark. Our core categories continue to outgrow the rest of the store and we are seeing continued growth across the business as a whole. I don't think we are getting any huge benefit from the gasoline effect or anything else like that. I don't see something that's extraordinarily high. But at the end of the day, our core category is -- take hair care, [hard] hair color, as our two biggest categories, were up 5.8%.

We see that as exactly what we want to see in the business, which is that our core categories continue to be distinguished and grow faster than the rest of the business. The reality is, we said business as usual around overall GDP and economic growth, and then what we want to do is win in the categories where we are truly distinctive.

Thanks. Then in terms of the structural shifts with booth renting, what inning are we in there, both in the US and in Europe?

I would say, it's very different between the two. I'd say, we are well down that path in the US. So, I'd say US six or seven maybe in the US. Europe might be more like three. That is one of the reasons why we are excited about the tailwinds that can support our business there, because as the business moves out of the big salons in Europe and more and more toward either smaller salons or independent stylists, those are more likely store customers than direct customers for either major brands or ourselves.

So the reality is, we see long-term tailwinds in Europe as that picks up trend there, which it is happening, which gives us the confidence of that 500 store, long-term store base is possible, but we are much further down the path in the US. Probably just very different situations, but going the same direction.

Thank you and best of luck.

Thank you.

Next we will go to the line of Steph Wissink with Piper Jaffray. Please go ahead.

I'll add my congratulations, Chris, officially.

Thank you very much, Steph. I appreciate it.

Three questions, really short actually. One is just with respect to the store improvements that you are doing. We've had a chance to take a peek at some of those and quite nice. I am just curious what your vendor support has been for some of the fixturing. Are you getting any subsidies on some of the brand fixturing that we are seeing in the stores?

Then separately, related to that, as you look at continuum of performance across your fleet, particularly in the retail business, talk a little about the high to low. Is that gap starting to narrow, or that range starting to narrow, where you are feeling like you're more control over that range of performance on a comp basis and productivity?

And then lastly, just with respect to the product mix, I thought it was intriguing that you talked about using the hair emphasis as a point of differentiation. Just talk a little about what your customer insights have shown about your permission to expand into other categories and really capture greater wallet share? Thank you.

Steph, I am going ask you to clarify your second question in the end, because I didn't fully understand it, but let me get number one and two answered and then we will do that. On the store improvements, on the basic improvement where we do flooring and lighting and graphics, we don't really get vendor support there. On something like a nail studio or a hair solutions studio, we would definitely work with our vendors to support that, as they want their brands to stand out in our stores just as much as we want those categories to stand out. So, we would get substantial support from them. We are also going to be launching a new lash studio. Again, the vendor would play a role in that, as well.

In terms of mix, again, for us, in terms of which categories we emphasize, as an example why go after the hair solutions studio, is it comes down to what questions and concerns does the customer typically bring to us? Honestly, one of the biggest questions we get is clearly around hair color. Usually it is because they messed it up using box color and now they want advice on how to do it right. But another place they would get it would be, as an example, I have damaged hair, oily hair, or a unique hair type or issue, and they want advice from our associates on how to solve that problem. We want to be their solutions place for those problems.

It makes sense for us to be providing solutions and a dominant assortment in nails, a dominant assortment in hair care with varied solutions focus, which is what we are going to do in the next year here. And then obviously, a dominant assortment in hair color with lots of advice around that category because it's the major category for us and for them. Then another type really like appliances and some unique places where we're destination categories like extensions and such. But other categories, such as fragrance or cosmetics and things like that, we are not destinations for those categories. They are not our core competency. So we may sell some products within those categories to drive impulse purchase, but you are not going to see the same level of investment from us around those categories as you will see in our core categories.

Then I just didn't understand your second question there around the range. I didn't know whether you were talking about products or stores or what?

Yes. Good question. More with respect to the comps and the productivity. In our -- perhaps in a discussion with you before, you've talked about this range of performance from the top-end to the bottom-end being very wide across your fleet. Are you starting to see that narrow or do you feel like you have a better grasp on the tails of the curve with respect to the quality of the fleet? Are you looking to rationalize some of the lower performing units--?

Honestly, I don't know if that was off a different call, but we don't really have that kind of variance. I know, as you can image, as a new CEO, one of the first things you ask in retail is are there any stores we can shut that are losing money, that we can suddenly improve the financials? And the answer is, there really aren't.

We don't have the bell curve that perhaps other retailers have. Virtually all our stores are EBITDA positive and so shutting stores is not a -- it would be a nice easy strategy to deploy but it is not one that really works at Sally. We have a much more consistent productivity per store and I don't think we will see any major changes in our store base.

Okay. Thank you, guys. Very helpful.

You bet.

Next we will go to the line of Jill Caruthers Nelson with Johnson Rice & Company. Please go ahead.

Good morning. If we could talk about, just on a sequential basis, Sally Beauty comps did moderate somewhere in the first quarter. If you could just talk about that again, the underlying multiple initiatives you've got going on -- the nail studio, you had OPI for two more months versus last year. Just some things, how that factors into the sequential decline?

Listen. We expected that. Part of it is, as you mentioned, some launches, whether that be both OPI, as well as we had the MiraCurl product in the stores in a very big way last fall and it had fallen off dramatically by this fall. Once we are past January, that really becomes less of an issue or impact. So we expected some of that. In addition, a lot of our strategic initiatives we are still beginning, whether that be CRM, whether that be the nail studio, whether it be the store refresh, or even the upgrade in packaging in our products, or even changing some of our marketing approaches.

We knew that we wouldn't have a whole lot of benefit from those going into the first quarter of this year versus what we will see in the second, third, and fourth quarter of this year. We expected this. This was about what we planned and predicted in terms of results and we still remain committed to the full year impact of what we are working on and expecting you will begin to see that both right away and here in the second quarter.

Okay. And then just looking into the Sally Beauty segment margin, I know EBIT margins have fallen into the low 17% versus we've seen 20%-plus for this segment in the past. Could you talk about -- I know you referenced you are getting some leverage as you have see comps go to 3% or higher. Just on a segment basis, would you need a higher comp on the Sally Beauty side to see EBIT improvement, given the pressures you see ongoing with the international growth?

I think the reality is that where we predicted our full-year estimate on comps and sales, we should get leverage at those predicted levels. We will start seeing a much more moderate increase in SG&A. Our expectation is that we will, in the coming quarters here, and as that moderates and comps improve, you will start to see some leverage there, and obviously we will also get some improvement in gross margin, and that will start to translate down to EBIT and EBITDA margins, as well.

And just clarification, that is on a segment basis, as well as consolidated?

Correct. Yes.

Thanks so much.

You bet.

Next we will go to the line of Linda Bolton Weiser with B. Riley. Please go ahead.

Thanks. Hi. Chris, can you maybe comment on your view toward the strategy to continue to drive sales from private label, store brand, exclusive brands on the Sally side? And related to that, there is some speculation out there that you could consider buying Procter's Wella brand, which could be up for sale, but to me that seems counter-strategic because that is a not really a private label exclusive brand, that's a different animal. Can you just theoretically talk about your philosophy on the strategy with private label on Sally side?

Let me start by saying, we never called them private label because we don't brand them Sally for the most part or brand them through our store brands. They are just owned brands: Ion, Mystic Divine, Silk Elements, Beyond The Zone. We have [terrific] brands the team has developed over many years. The number one thing we want to do, by the way, is make them compelling, competitive brands that are as good as any professional brand that can be purchased out there and then really solve the problems of our customers.

We continue to invest in those brands. We're going to update the packaging. We're going to be spending more money on marketing for those brands to make them more distinctive and more known, both inside the Sally community and outside the Sally community. I see owned brand as a core part of our strategy long-term. Not just in Sally, but over time in BSG, and over time obviously, in our markets like Europe, where we have got a substantial base of owned brands built of [Linda Vibes], XB100, XB200, Jean Moran and others, as well as in the UK. And in Latin America those brands make up a huge part of our sales base. So one, we are fully vested in the strategy. We will continue to build those brands, we're going to continue to professionalize them and make them look great and obviously continue to deliver on the value proposition.

In terms of buying brands, I'm not going to comment on any specific target. Though, acquiring brands that obviously bring us new solutions for customers does make great sense for us over time. Obviously, it has to fit our footprint, it has to be within the range of something we can fiscally afford, so there may be some out there that are just too big for us to swallow, which is fine. There are other ones that aren't and we will be pursuing those over time, and if the valuation is appropriate, we will act.

But none are right in front of us, or none that we should be talking about right now. There are some smaller opportunities that we are interested in and we will look at, but honestly, they are not at a point where we should be coming forward and talking about them publicly. In summary, I would say owned brands are a core to our strategy, they absolutely will be core to our strategy going forward. You are going to see more investment around that strategy, in terms of marketing and package design and development, but there aren't any big acquisitions right now that are in front of us but we will continue to look at them over time.

Thank you.

You bet. Just to close and to summarize, we are pleased with the early results of our initiatives, but we are absolutely not content. The team and I know we have a lot of work ahead of us. But we remain extremely motivated by the progress we have made and the positive results the initiatives are showing and we are excited to get after it and go get it done. Have a great afternoon. I look forward to seeing all of you soon. Thank you very much.

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