Sally Beauty Holdings Inc (SBH) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty Holdings fiscal 2015 second-quarter earnings call.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Karen Fugate. Please go ahead.

Thank you.

Before I begin I would like to remind you that certain comments, including matters such as 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 and Exchange Act of 1974. 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, belief and similar words or phrases.

These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings SEC filings, including its most recent annual form -- annual report on Form 10-K for September 30, 2014 and its most recent quarterly report on Form 10-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 and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.

With me on the call today are Chris Brickman, President and CEO, and Mark Flaherty, Senior Vice President and Chief Financial Officer. Now, I'd like to turn the call over to Chris.

Thank you, Karen and good morning everyone.

I'll briefly provide an update on our business performance and Mark will discuss our 2015 second-quarter results in more detail.

We made solid progress on our strategic initiatives in the quarter and we're pleased with our financial results. Consolidated same-store sales grew 2.8% and gross margin expanded by 20 basis points, resulting in 11% year-over-year growth in EPS.

SG&A as a percent of sales also improved, with a 10-basis point decline over prior year. We ended the quarter with cash flow from operations of $174 million year-to-date, which helped fund our stock repurchases of $60 million, or 1.8 million shares.

Now, I would like to provide an update on the progress towards our strategic initiatives starting with Sally Beauty. Our store refresh initiative continued during the second quarter and we are on track to complete 520 stores by June 1. These remodeled stores continue to realize improved comps and transaction growth when compared to the relevant benchmark stores. In light of these initial positive results, we believe the long-term returns of our investment will remain positive and we intend to move forward with at least 500 more stores to be completed by the end of November 2015.

The Nail studio has also made a positive impact on the store experience. We fully completed the installation of the Nail studio in all of our Sally US stores during Q1 and we are investing to market this winning category assortment during the spring nail season. Building on this, we will be launching the new Lash and Brow studio and replace the cash rack impulse center in June and July.

In our multicultural category, we reset our brand assortment in all stores to better reflect modern consumer needs. Sales performance in this category had been declining over the last several years. However, with the recent changes, we experienced double-digit sales growth in Q2.

The Sally marketing team finished the work required to get our dynamic CRM program fully operational in April and we are very excited about the early results and future potential of this initiative. In addition, traffic to our redesigned Sally Beauty e-commerce site was up 91%, with sales growth of 12%. We expect that over time, more online visitors will convert to shoppers, as that site becomes a source of information and discovery for the beauty enthusiast.

To that end, we are rolling out our content-rich mobile design that mirrors what our customers had access today via their laptop. In BSG, the new brand integration into our stores is complete and the team is leveraging our Sally experience and functionality in order to extend CRM and improve e-commerce capabilities to our professional business.

In addition, we continue to be pleased with the growth our loxabeauty.com site track. The Loxa team is making terrific progress signing on additional brands and increasing awareness and adoption with consumers.

We have developed a strong list of merchandising and marketing innovations we plan to deploy in both businesses during the coming quarters. I have full confidence in the team to build on the initial momentum so that we can achieve our objectives for this year and beyond.

Finally, we have recently replaced the managing directors for our Sally UK and European locations. We are already starting to identify opportunities for profitability improvement in these businesses and we will share these changes as they become fully developed and ready for implementation.

With these new leaders in place, we believe we have substantially completed all of the necessary leadership changes at SBH. I am very excited about the talent of the team across the enterprise.

To summarize, with our progress and our financial results and towards our initiatives, we are pleased that we have now set ourselves up for success for the remainder of the year. However, despite this progress, we aspire to much more and we clearly have more work left in order to achieve our long-term objectives.

Now, I'll turn it over to Mark to provide more financial detail for the second quarter. Mark?

Thanks, Chris.

Consolidated net sales for the second quarter were $937.8 million, an increase of 2%. This increase was primarily driven by same-store sales growth of 2.8% and 178 new store openings. The unfavorable impact of foreign currency exchange rates was $21.5 million, or 230 basis points of growth.

Consolidated gross profit was up 2.4% over the prior year. Gross profit as a percentage of sales was 49.8%, up 20 basis points driven by both our business segments. Second quarter SG&A expenses, including unallocated corporate expenses and share-based compensation were up 1.5% and 33.9% on percent-of-sales basis, a 10-basis point improvement from the fiscal 2014 second quarter.

SG&A expenses increased $4.6 million, primarily due to expenses related to new store openings, ongoing upgrades to our IT systems, expenses connected with our ongoing management transition plan and a contingent liability related to our data security incident. Unallocated corporate expenses, including share-based compensation, were $32.7 million, or 3.5% of sales, despite comparison to the fiscal 2014 second quarter.

GAAP consolidated operating earnings for the second quarter increased 4% to $129 million with operating margins up 13.8%, up 30 basis points. This improvement was primarily driven by higher gross margin and lower SG&A expenses versus the prior year quarter. Interest expense, including the amortization of debt issuance cost totaled $29.2 million, flat to the prior year.

For the fiscal 2015 second-quarter our effective tax rate was 38.3%. This is comparable to the fiscal 2014 second quarter. GAAP net earnings were up 5.2% to $61.5 million and adjusted net earnings were up 5.6% to $62.5 million.

Earnings per share on a GAAP and adjusted basis were $0.39, up 11.4% and 8.3%, respectively. Adjusted EBITDA for the second quarter was $154.4 million, up 4.3% when compared to $148 million in the fiscal 2014 second quarter. Also, during the quarter, we repurchased approximately 1.8 million shares of our common stock for $60.3 million.

Now, turning to the business segment performance starting with Sally Beauty Supply, same-store sales growth for Sally Beauty was 1.4%, versus 50 basis points in the year ago quarter. Net sales for Sally reached $572.1 million, an increase of 40 basis points over the prior-year quarter. Sales growth is attributed to new store openings and same-store sales growth. The unfavorable impact of foreign currency exchange rate offset sales growth by $17.9 million or 300 basis points.

Beauty club card sales and transactions increased over 7% for the quarter. Sales from our list customers, or non-beauty club card customers, were down in the low, single digits, which was an improvement over the prior year second quarter. Club membership grew 8.6% to reach 8.5 million members. Membership renewal rate was 60.3%, and during the quarter, over 60% of our club members made a purchase.

Gross profit margins in the second quarter were 55.3%, up 50 basis points primarily due to the improvement in the international business and favorable product mix shift in our US business. Operating earnings for our Sally business were $106.1 million, up slightly compared to the prior year. This improvement was driven by gross margin improvement, partially offset by higher SG&A expenses.

Turning to the BSG segment, BSG had same-store sales growth of 5.9%. Net sales grew 4.5% to reach $365.6 million. Overall sales growth is attributed to same-store sales, improvement in our sales consultant business and new store openings. This growth was partially offset by the impact of unfavorable foreign currency exchange rates of $3.6 million, or 100 basis points.

Looking at the sales growth by distribution channel, sales from our store business grew 5.8%, while direct sales consultant business was up 2.1%. BSG's gross profit margin was up 10 basis points to reach 41.3%, as well as operating earnings at BSG increased by $4.7 million, or 9.3%, in the 2015 second-quarter. Operating margin reached 15.2%, up 70 basis points primarily due to gross margin expansion and SG&A leverage.

Looking at our consolidated balance sheet, inventories were up 2.2%, to $838.1 million when compared to ending inventory on March 31, 2014. 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 half of fiscal year 2015 totaled $39.3 million that reflected expenditures to open new stores, expenditures on our solar refresh initiative and IT specific products. At this time we believe the capital expenditures for the fiscal year 2015 to be in the range of $95 million to $100 million.

Now, I'd like to turn the call back over to Chris.

Thank you, Mark.

Before I turn it over to the operator for Q&A, I'd like to briefly comment on the statement we issued yesterday. In the statement, we reported that during the week of April 27, we received reports of unusual activity involving payment cards used at some of our US Sally Beauty stores. Although it's very early in the investigation and difficult to determine the scope and nature of the potential incident, it is our goal to be as transparent as possible throughout the investigation and we intend to provide updates as appropriate.

Now, I'll turn it over to the operator to take your questions.

(Operator Instructions).

Simeon Gutman with Morgan Stanley.

Chris, first question regarding the top line during the quarter. If we are trying to gauge the impact from initiatives, and we know there was some weather, how are you measuring the extent to which they are gaining traction?

And part of that question, you just turned on CRM. I think you now have a better mobile app where the previous one wasn't too functional. Then, you have the store refreshes. If you could put it all together and sequence for us the store refreshes -- what elements are happening, the timing for some of these other initiatives, and understand over what time frame or when we should see the thrust of these efforts?

First of all, thanks for the question, Simeon and great to hear from you.

My thought would be this, which is I don't think there was a lot of positive impact from the initiatives in the quarter, just a little bit. The reality is, the Nail studio really actually got finished in Q2. Even though the walls were up at the end of Q1, for the most part most of the nail chips and merchandising around it and certainly all the advertising, didn't start until, say the middle of Q2 and will be an emphasis here.

The number of stores we had refreshed during Q2 were relatively small, in the 140s, and most in the second tranche really won't be done until June 1. Obviously, there will be more coming throughout the year. CRM did not turn on until April.

The e-commerce website positive did actually have impact for most of the period, although one of the things we're seeing is that the massive increase in traffic we're seeing, which is way up, is mostly coming through mobile devices. Up until another few weeks from now, we won't actually have mobile responsive design.

So, I don't think there was much impact from the initiative, maybe a little bit. We'll see most of that coming, a little bit by the way from also the reset in the multicultural category in the second half of Q2. Most of that we're going to see now begin to hit on a consolidated basis in Q3 and obviously in Q4.

In terms of the weather, we suffered some pretty substantial setbacks in the weather from the end of the first week in February through the end of the first week in March. There was weather the previous year, so I don't think we need to make any excuses about the weather.

The reality was it did affect sales during the quarter. But, our view is the BSG business was able to overcome it and the Sally business fell a little short of overcoming it. That just says we have more work to do and we need to get these initiatives fully implemented and demonstrate, again, consistent sequential improvement.

Okay. My follow-up, one tied to your response. You could put it all together.

Is hair color officially going to be part of the refresh? If so, is it the most impactful and when that timing is?

(Multiple speakers). Go ahead, sorry.

No, you keep going.

Then, my other part of the question is a different topic: SG&A. The performance was much better than the recent trajectory. The incremental margins were strong, as well.

Can you just talk about any changes quarter-to-quarter? Were there any unusual items a year ago? And then the cadence for the rest of the year?

Let me take those separately. In fact, I will hand the second one over to Mark.

The first one, on hair color. First of all, hair color is doing very well in our stores. It continues to grow and that's actually a very big positive, in the sense that color is a great differentiator for us. It's our dominant category. It's where we are highly differentiated. That category continues to grow.

The next category where we will likely change or bring merchandising innovation in, in terms of a big category, will actually be hair care. I think what we'll do is, what we've heard from consumers, is that they are a little confused and overwhelmed by our hair care selection. We may then reorient that more by solution and a little bit less by brand.

That will be the next innovation. I think hair color still will be coming, but it's more likely to be a late 2016 innovation, or early 2017, rather than we'll go with hair care first towards the end of this fiscal year, early next fiscal year.

One of the things that's driving these costs is the fact that while color is growing and we are seeing positive trajectory in multicultural and care and nails, the electrical category is actually shrinking a bit. That appliance category hasn't had much innovation for us.

The reality is that is overall a decent good news in the sense that it pushes volume more towards -- we're growing in the categories where we're more differentiated. But, it's hurting our comps a little bit in the short term, because there's not much innovation in the category. Let me let Mark talk about the SG&A question, and then we'll finish that off, Simeon.

Yes, Simeon. One of the things that you saw was we were about 10 basis points below last year, in terms of our overall performance. But that was pretty consistent with the guidance that we set forth for the year, in terms of we felt that our SG&A as a percentage of sales unallocated in there would be flat or slightly higher for the metric, so we performed right at the metric for the fiscal 2014 year.

We're still reiterating guidance that we set forth for the year. So, I don't know that there's anything terribly inconsistent from one quarter to the next.

We did see a little puts and takes, in terms of what we saw versus last year for the quarter. We saw a little bit of favorable expense -- experience with insurance. Certainly our healthcare insurance was a little bit less than what we expected. Part of that was that is that our overall participant rate is a little bit less than what we had planned, which is certainly impacting us favorably.

Also, we didn't have anywhere near the heavy loss experience from one-off individual claims this year. It certainly has benefited from that. But overall, the puts and takes there, we're pretty well right in line with what we expected and what we set forth at the beginning of the year.

Okay. Thanks.

Oliver Chen with Cowen and Company.

Thanks, congrats on a solid quarter. Chris, in relation to the non-beauty club card customers, could you just help us understand which of the initiatives may have the most impact on this segment, and where you are in the journey to continue to broaden the awareness to the non-beauty club card customer?

And then Mark, I had a question on the gross margins. You said that the product mix impacted the GMs positively.

Is that a trend that we should expect to continue? What kind of products manifested to help that line item?

Thanks Oliver. I'll hit the first part and then I'll hand it over to Mark.

What I'd say is, obviously, as you point out, our mission is to bring the list customer back to the store and make sure we have a healthy new traffic into the stores so we can convert them to BCC, over time. Each of the initiatives is a little bit different. As an example, the Nail wall, as we talk about it, versus our competitors, is designed to highlight a point of difference in which we can then reach out to customers and say here's a reason why to come back to our store. That's one of the initiatives.

Clearly, the investment in refreshing the stores is to take down some of the barriers that we heard through our consumer research. In fact, they felt the store with a little bit dark and a little bit old in some cases and we wanted to take away those barriers. So that should have an additive effect over time as we get more stores converted.

In addition, as we redo the Hair Care studio, toward the end of this calendar year, the reality is one of the things we heard in research was that, in fact, our list customers were confused by the category and found the selection overwhelming. In fact, our brands were -- they didn't know our brands as well, and so that by organizing by solution, as an example, damaged hair or dry hair or oily hair, that was a better way for her to shop the category than by brand that she wasn't necessarily familiar with.

Finally, even though CRM is primarily focused on the BCC customer and has a big focus there in terms of adding to her basket, actually, as we collect more and more email addresses for list customers, it allows us to reach out to the list of customer in a more efficient way in the sense that previously we had to market to her through direct mailings, which were very expensive. And now we can market to her through emails, through text messages, through digital advertising that follows her searches around the Internet. We can do that in a much more efficient way than we could before. We can create the Sally brand for her.

And then one last thing I'll add. In the summer months, we'll be announcing some investments in what I would call general advertising around Sally, that are some sponsorships and some key things that we think will be great for the brand. And, as we do those, we also think that will help us bring the list customer back to the store, as well.

All of these initiatives touch the list customer and we need to bring them all to fruition so we really get her back into the store. Because it's still our primary mission.

Mark, can you handle the gross margin question?

Yes, sure.

All there is, simply put is that, as we talk about our 20 to 30 basis points of gross margin expansion for the year, part of this was the expectation that we'd be anniversarying Che' and Curl Genius in Sally US. And we did that during this quarter and certainly we expect to do it a little bit more modestly into the third quarter on the Sally US business. Which, if you remember, those particular products had a little bit of an unfavorable headwind on our margins last year.

We've seen what we expected to happen in terms of the overall margin expansion related to those events. Also, for the remainder of the year, we still expect that continuation of the modest favorable customer mix in Sally and BSG to contribute to this margin improvement for the fiscal year.

Okay, thanks. That's really helpful. Just a follow-up, Chris, as we do look at our models on the Sally side, the comparisons get a little bit tougher and the two-year stack decelerated a little bit this quarter.

How should we think about the back half, given that you have so many good initiatives for the awareness build with the opportunity for that Sally comp? Is it going to continue in the low single-digit range or will it sequentially improve as a lot of this demand creation and store changes take hold?

Oliver, obviously, our goals and objectives are for sequential improvement. Obviously, we can't say exactly how fast that'll come. But, we're working towards that.

I see all of these initiatives and all the public pieces beginning to fit together, and our expectation is we are going to get sequential improvement in the next two quarters. We will achieve that more longer-term trajectory as we exit the year.

That's been our goal all along. We are a little bit behind that in this quarter, but, we are now just beginning to get all those initiatives together. We believe we should be seeing that sequential improvement from here on out.

Thanks a lot. Best regards.

Meredith Adler with Barclays.

Hi, thanks for taking my questions.

You were talking about changing the leadership in the UK and Europe, and that leaves some opportunities to improve profitability. Can you go into any detail about what those opportunities are?

Yes, it's a little bit early.

Those new leaders are just now in place and I think one has been in place six weeks and the other one is more like four weeks. The reality is, I think they are different in the UK business. I think there's a big opportunity around getting our merchandising and our assortment right, and making sure we are filling our stores, that we have a number of out-of-stocks there we need to eliminate and just putting more discipline around our marketing process.

In Europe, I think we had an entrepreneurial leader there who did a lot in terms of store design, as well as in terms of his own brand development, but didn't do as much as we wanted in terms of what I'll call basic operating discipline, whether that be SG&A control and management, or whether that be appropriate pricing controls, as well as good marketing discipline and merchandising discipline. It's really more about core-operating disciplines that will drive the more immediate profit improvement.

But, there's lots of opportunities. Those leaders are working on getting their agendas straight. Mark and I have been meeting with them on a consistent basis to help them with those agendas, and I expect we're going to see improvement as we go forward throughout this year and certainly into next year.

Great. I have another question, just generally, about international.

Given everything that's happening in the European market, are you seeing the opportunity to bring in new brands? I think you had said that before. Also, is there any shift in the customer mix, more to retail?

You know, not really. For the most part, the European business, especially the continental European business is a professional focused business. That's job one.

We do get some retail customers that are a little bit gravy on top of that, and we get more of those, obviously, when we have locations that have a high level of retail traffic. But for the most part, the primary customer is the professional customer.

Again, the European business has actually done a pretty good job of introducing owned brands into the mix, which has been very helpful in terms of helping them maintain their margins. But if you look at the P&L of that business, it's been the between-the-line spend in SG&A cost, where they haven't been able to either get the leverage yet or manage that SG&A cost in an appropriate way.

The bottom line is, the win-win brands are core for us because they differentiate us from the marketplace. They drive superior margins. They bring those customers back to us as loyal customers, whereas the rest of the professional brands in Europe are mostly open brands that are sold everywhere.

I think we're well positioned in Europe. There's a long-term trend. It's a little bit behind the US in terms of the stylist becoming more of a booth renter or mobile stylist.

Our stores fit that trend well. We have plenty of room to grow and grow our store base and get scale, but we need to put in these core operating disciplines now, shift to profitability so that we can reinvest back into the base and get scale.

Great, thank you. That's very helpful.

Rupesh Parikh with Oppenheimer.

Thanks for taking my question. I just wanted to ask a little bit more about your CRM program. The program now appears to be operational. If you think about, as the CRM continues to be rolled out and you experiment with that, how quickly do you expect that you will start to see benefits from some of your actions?

I think it will build, over time. Because we're going to get better and better at the algorithms that respond to customer behavior. Like anything else, you have an automated program now that's up and running.

Any time a customer buys, you put in an algorithm that says, if this happens, then this. That could be tied to color. It could be tied to hair care. It could be tied to a season or a past purchase behavior and how this relates to it. It could be tied to categories where she tends to purchase and categories where she doesn't.

The first thing you do is you define a set of algorithms that basically respond to her behavior and therefore try and add to her basket size. The reality is, that you will find over time, that some of those algorithms are great and we get a lot of response rate to those algorithms and they help us expand our basket size, and we are going to find that some of the algorithms we initially put in are not that great.

What I would say, is I expect there will be short-term or medium-term impact. I also think you'll get more and more, over time, as you refine the algorithms and get better at understanding what's the right offer for her given the purchase she just made given the time of year it is and given what the circumstances of her loyalty to us, and we'll get better at defining the algorithms, which will drive more sales over time.

So I see it as a building process. I hope we'll get some in the short-term. But, I think we'll get more over time.

I also think that the other part to this, is not just thinking about the BCC customer, but also the list customer. The list customer, obviously, is part of that new traffic that's showing up on the website. We mentioned a 90% plus growth in website traffic.

We want to convert more and more of those customers to more loyal customers as we have mobile responsive design up and running that will help us with that conversion. Whereas today, really, the website itself, from a laptop is quite content rich and engaging it's not so from a mobile device. That will change in the coming weeks.

In addition, we're getting better at following those list customers across the Internet, both with social media ads and digital media ads, and as a result of that, hopefully we'll raise are awareness with her and be able to respond to searches and things that are going on in her life through that.

I see this all building in the coming months and quarters. Hopefully, that will help us continue to improve our position with the list customer.

Great, thanks for all the color. Maybe just switching topics to the non-BCC customers.

So I know on product [growth], you guys have talked a lot about some of the marketing initiatives that you tried to recapture that customer. Anymore color you can provide in terms of the success of some of your marketing initiatives?

I think, as we've said over time, we have made progress with the list customer. If you look a year ago or 18 months ago, the list customer was declining high single digits. We are now into the low single digits.

But that's not good enough. So we need to get back up closer and closer to zero.

By the way, if it's zero, that means it's actually positive because the reality is, we are going to be taking some of those customers and converting to BCC customers. So we are robbing from that pool in order to build our BCC customer list.

The reality is, we have made progress and it's showing up in the data. It's just not enough yet. As we get towards the end of the year, we are really looking for that to be in the very low single digits, the minus 1, minus 2. Not the high minus -- the minus 3 range, which is where we are at right now.

Great. Thank you.

Simeon Siegel with Nomura Securities.

It's still confusing to have two analysts named Simeon.

Yes, I will work on that. (Laughter).

Can you give any color on the second quarter's monthly comp cadence and maybe any color on the European or international comp performance? And then just to your earlier point, in addition to the product mix, you called out improved gross margins from international. To your earlier points, any thoughts on quantifying the ongoing gross margin improvement there, and then when you would expect to see that real tailwind from the SG&A and international as well?

I'll try and sort through all this. There's a lot of questions in there.

Let me just say I don't want to get a lot of detail here to break it apart. But obviously, we started off with a great January. We took a pretty good set back in February and it came back in March, especially in the second half.

So, the bottom line is that's kind of what you would expect given the weather sequence we experienced. Either way, it still fell a little below our expectations. We would hope to make a little more progress this quarter and we certainly expect sequential improvement next quarter.

In terms of -- what was the next part of the question? Was it more around SG&A?

It was on the European international comp side.

On the international side, all those comps came back a little bit, with the exception of Mexico. Certainly, on the European side, comps were down. A lot of that had to do with the leadership transitions and some of the short-term issues. We are working our way through there.

I think we will start to see that rebound in the coming quarters. But we need to give the new leadership some time to get their feet below them and their plans underneath them and start addressing some of the operational issues I mentioned earlier.

So yes, those were not as much of a help on the comp side as they had been in previous years and quarters, but my guess is they will be more of a help as we push towards the end of the fiscal year and into next year as those things begin to have an impact. Mexico continues to be fantastic, and obviously, the bolster for our overall comps.

On the SG&A side, as Mark said, again, we continue to expect gradual improvement in gross margins consistent with our overall target of 20 to 30 basis points for the year. That's driven by a mix of factors including the shift to owned brands that continues, the shift towards retail, which continues. And, the shift from full-service to store business and BSG, which continues.

We continue to expect the gross margins will continue to improve and offset the slightly negative headwind associated with converting more customers to BCC from list. On the SG&A side, as Mark mentioned, I think where we are at now is pretty much consistent with where we expect to be for the rest of the year, and I don't see much change with our overall guidance there.

Great. Thanks a lot. Best of luck for the rest of the year.

Joe Altobello with Raymond James.

Thanks, good morning. I just want to go back to the Sally comps for a second. You mentioned that weather was an issue, although I appreciate you not really harping on it.

The initiatives that you are doing really hasn't had an impact, or a positive impact yet. Is there a chance that maybe there was some disruption given the Nail salon, the store refresh, that maybe there was some disruption from those initiatives that were actually negative in the quarter?

I would say it would be fairly muted. Most of the work we do in our stores, whether it be a store refresh or a Nail salon or anything else, we try and do on Sunday night before we open on Monday morning. I'm not saying that always happens.

There is, obviously, some store labor associated with this. Putting up nail chips -- I was in the stores actually watching the store team put up things like nail chips in front of all the colors.

Inevitably, that means that you are drawing from something. You may be drawing from them serving customers. The reality is, I would guess it would be relatively minor.

So, I don't want to say it's nothing, but I would say it's relatively minor. We need to make these initiatives, all of them, and they hit the consumer on multiple fronts, really come to fruition in the next two quarters and drive sequential improvement, overall.

Got it. Okay.

In terms of the store refresh, obviously you mentioned this morning, you're going to do another 500 stores. Is this something that you see expanding to the entire store base at some point? Or, are there some stores that you might not want to refresh?

Yes. The reality is, yes, there probably are. First of all, there are some stores that are much newer and were effectively already refreshed. So, that's true.

In this next round, we're actually going to target some of our oldest stores in the network. Up until now we've been doing this on a market-by-market basis and really hitting a market so that we can then turn on some marketing support for the fact that the stores are refreshed.

Now, we're also going to hit some of the oldest stores in the network so that we take out some of the ones that may diminish our brand imagery with the customer. I think, over time, we will work our way through the whole network. But how fast we do that will depend on the results we're seeing from the investment and whether it's really paying out.

So far, we don't have anything that makes us want to stop. We are going to keep going and see if we can continue to make a difference, especially in those stores that send the wrong message to the customer about our willingness to invest in them and create a good environment in them.

Great. Okay. Thanks.

Ike Boruchow with Sterne Agee.

Hi, good morning everyone. Thanks for taking my question.

Chris, quickly, could you comment on Easter? I'm just curious if it had any impact on your SBS comps or gross margin for the quarter. If there is anything worth calling out?

The second follow-up to that, quickly would be, I believe this is the most cash you guys have carried on the balance sheet since the company went public. Regardless, it's a lot of cash. I'm just curious how we should be thinking about that in terms of your capital allocation strategies.

Overall, I don't think Easter had any impact. The bottom line, it was just date shifted. The reality is, is that we picked it up later in the month or, excuse me, captured some early in the month and dropped some later. The bottom line is that it netted out during the month of April.

As for cash on the balance sheet, I'm going to let Mark talk about that one.

Well, Ike, that's pretty good research because I think I came very close during the financial crisis when we parked about $150 million on the balance sheet, I think we got real close to this number. The short and simple answer to this is that our allocation philosophy has not changed.

We will continue to use cash first and foremost to grow this business. Certainly, a little bit of it is a timing issue between quarters. Next quarter certainly interest payment quarters in terms of the coupon payments on the debt.

There is a little bit of a timing issue there. Overall, first and foremost is using cash to invest in the business, both organically and if we saw, certainly, targets of acquisitions for businesses, or brands, or whatever, certainly made strategic sense after having a very deep conversation with the Board. Certainly, we would pursue those, as well.

Lastly, is that our commitment to our share repurchase program has not changed. We're still committed to the program. We have said that our cadence will be a little bit more less predictable than what it has been in the past.

But, our commitment to it and our commitment that our Board has to it has not changed. Overall, our philosophy is still the same. We are just seeing a quarter in which we do have a lot more cash than usual on the balance sheet.

Got it. Congrats. Good luck.

(Operator Instructions)

Olivia Tong with Bank of America.

Hi, thanks.

First question, it sounds like you think that you'll see an inflection on comp store growth on Sally Beauty Supply come eventually, driven by some initiatives rolling out. It's just taking a little bit longer to bear fruit.

With that in mind, you now have probably another four weeks or so of data. Can you give us any color on whether you've seen a pickup since the end of the March quarter? And then also, for the year, how do you think about the contribution of the two pieces of the business, the Sally Beauty Supply versus the BSG side of the business?

We are not going to comment on inter-quarter results. I don't think that would be appropriate. But for the quarter, we do expect sequential improvement and we expect sequential improvement again in the fourth quarter. That's all I'll say there.

The other side, is that BSG business is obviously doing very well. It is ahead of plan for the year. I don't see anything that's going to hold them back. They've now fully integrated the additional brands they've acquired into the business.

They are rolling out a number of terrific merchandising and marketing programs in their stores. And more importantly, they can now really leverage the technology and capability we have built in terms of CRM in Sally and accelerate the process through our IT organization to make sure we can get that up and running in BSG, as well.

With the couple million stylists they serve, there's a terrific opportunity to leverage CRM and build that business and have a much more mobile and active dialogue with our stylist community just the same way we want to with our BCC community. In my mind, BSG is on a great trajectory. They've got actually further room to grow and improve.

I want to see them keep doing that because they're making great progress and the team is obviously playing off their front foot right now. As you said, the Sally business, we need to keep working on it and keep bringing up more initiatives that make sense. But right now, there is a great opportunity here in this quarter and the next quarter to really bring all of our core initiatives to bear so that we get that full additive effect of all of them and make those work so that we begin to get the inflection point in Sally.

To me, this is what's great. We have had this transitionary quarter where BSG is obviously on the track we want. Sally has made progress but is not quite where we want it to be. But we've got all the initiatives in place to get it there.

Finally, then, we've made a number of transitions in our European business that should allow us to improve that business in the coming quarters. I want all those businesses to be hitting on all cylinders as we enter next year.

Got it, thanks. It's very helpful.

And then, just in terms of expenses, it's great to see that improvement in SG&A margin this quarter. But obviously, there has been a lot of chatter around wage inflation, particularly for hourly employees. What's your plan on that and any change in terms of your expectation for this year, or is it potentially something that could impact fiscal 2016?

It's absolutely something on our radar screen, and a great question to ask. We do expect we'll see some labor inflation at the store level where we respond to competitive retail activity, and probably at the store manager level, as well. We have a full list of actions in place.

There's a team that meets here on a regular basis to discuss that. We're working on indirect sourcing and we're working on global sourcing. And finally, we're working on some very tactical price increases that would allow us to cover that cost.

I think the key message would be is that we expect to be able to cover that cost. But it's going to take hard work for us to make sure that we do. That's on our agenda.

We're working on it, but we fully expect to be able to cover the cost as we move through this year, but more importantly into next year and next year's budgeting process.

Got it, and then just one last question. Forgive me if I missed this earlier on. For the full year, are you still expecting same-store sales to be in the 2.5% to 3% range?

Yes, I think 2.5% is probably the better estimate within that range. I don't think -- excuse me, what were you going to say? (Inaudible).

Yes, our guidance was 3%. I don't think we're changing our guidance.

I'm sorry, I was thinking about segment by segment. If you think overall, our guidance remains the same, which is that 2.5% to 3% range.

Chris Ferrara with Wells Fargo.

Thank you, I have to go back to that last one. Just to be clear, the guidance coming in was for comps at 3% plus for the full year?

Correct.

Is 2.5% to 3% in Sally Beauty Supply piece, and is that what you're saying both of those still --

Yes, we want to exit Sally above 2.5% is what we'd like to do with the Sally piece and then the overall remains the same.

Right, okay. So overall still 3% plus for the full year?

Correct.

Perfect.

Thank you for the question. I appreciate the clarification there.

Yes. Of course. Then, Chris, you talked about weather, I guess.

More specifically, was weather a year-on-year drag for Sally Beauty Supply in this quarter? Or was it maybe a little better versus last quarter?

You know, again, I don't think it -- the bottom line is it hit us pretty good. But the bottom line is I just don't want to get into this making excuses due to the weather. The bottom line, is BSG was able to overcome it, and Sally was not quite able to overcome it.

So, we have more work to do in Sally. We expect that having all of our initiatives now coming together in this quarter and the next should allow us to do that. The bottom line is, we need to get out of this world of making excuses based on weather.

I fully appreciate that. Just making sure, it was a year-on-year drag, then? I mean not that you are using it as an excuse, but it's just whether it's a fact or not, right?

Again, Chris, the weather was bad the year before. So, if you want to get into the exact details, the weather was bad the year before.

But the bottom line is, I don't think that's what made the difference here. What made the difference is we haven't got all of our initiatives to market yet.

Got it, right. Okay, so that's the next question too.

Relative to your expectations, the Supply side wasn't as good. Did you expect to have the initiatives to market faster than you did? I apologize if you said that already, or is there something else --

I don't think -- obviously, we always expect to try and get more impact faster. I think CRM might have been a month slower than we thought, but it wasn't dramatically slower. The Nail wall is about on target.

I think we, perhaps, I think we underestimated lapping some of the activity, especially in the appliance category. That category has been a drag on our overall comps. I think we underestimated what it would take to lap that, because there just isn't enough innovation in the category right now.

Overall, that's a good thing for us, because it means more of our sales are concentrated in categories where we're highly differentiated, such as color, such as care and nails. But I think we underestimated the lack of innovation in the appliance category and how that would negatively impact our comps.

Got it. That's really helpful. Thanks.

Mark Altschwager with Robert W. Baird.

Good morning. Thanks for taking the question. I just wanted to follow up real quickly. Can you confirm that you said comps were negative in the international side, but that you would expect that to move back to positive territory by year-end?

No. They were not negative, but they were not as high they have been in previous quarters.

Got it. Okay. And then within Sally, can you talk about the trends that you're seeing with the professional customer and how you're thinking about the growth rate there for the remainder of the year?

Overall, the professional customer is a fairly low growth customer for us, it's fairly flat. I don't think we expect that to change. We want to maintain that customer in our stores, so that we have that professional heritage and credibility.

But we don't really want to grow that customer base. That's consistent with our target, in terms of maintaining the professional heritage of the business. And yet, over time, shifting more and more toward list and BCC.

Okay. Thank you. One more quick follow-up.

You mentioned some marketing initiatives and a potentially new campaign that's rolling out this summer. Would you expect a step up in SG&A related to that? Or any additional context there would be helpful.

A little bit. Most of it will fund through reallocation of our marketing dollars. There may be a little bit of an increase, but it won't be dramatic. Again, what we are hoping is that really helps us with the list customer in terms of bringing more traffic to the stores.

Great. Thanks again.

Jill Nelson with Johnson Rice.

Good morning. I believe your eye-on-private brand, you did a repackaging label refresh. If you could maybe talk about how that went and your expectations for that brand?

Yes, that's going to take many months to complete. We've done the first phase of that, where the first set of SKUs went out and changed. We have more coming this quarter and we will continue to do more.

As you can imagine, we want to do that in stages, so that we don't have a large inventory write off. It will take throughout most of this year and even a little bit into next year to complete that. But it's our single biggest brand, so that's why it's a fairly comprehensive rollover.

Basically, we've updated the packaging on the products. It looks much more modern and much more premium, and, I will call it, salon quality. That was the idea and the intent.

My guess is that it will take time for us to get the impact for that, because as we're doing a slow rollover in order to control the cost, it will take time for that impact to roll through. But, it actually it is great because the bottom line is it will have an impact both in the US, as well as -- these brands are very big in Latin America and South America and in Mexico. It's a great chance for us to continue to up our image there as well.

It's something that we'll roll in over time. But, I don't think we got a whole lot of impact for the quarter. Hopefully, as we get into next year, it will start to have a building impact.

Okay and we're seeing quite a few number of professional hair care brands moving to being more open to selling online. I know you've got the brand through Loxa Beauty. Can you just talk about that shift, definitely seeing those brands be more open to online and whatnot?

Yes, I think more and more, I would expect that to happen. Loxa's point of differentiation has to be different that.

Loxa's point of differentiation has to be the relationship between the stylist and the consumer and the ability of the stylist to recommend to the consumer and then the consumer to come in, name the stylist, and of course the stylist to benefit from that recommendation through a commission. That is its point of difference.

They are working hard to continue to build more traffic, both to their website as well as among stylists so that they maintain that community. I think expect the idea that Loxa will face increased competition over time associated with more brands being available online is something we expect. And our point of difference is going to be around the relationship between the stylist and the customer.

Okay. Thank you. And just last one, could you just give us a bit more update on the data security breach given it seems like it's the second one in just over a year?

What should we expect? Any higher investments into IT and whatnot? Thank you.

Well, what I'd say, is I think it's way too early to understand that or not. The reality is, we're just investigating at this point in time and indicative analysis that makes us want to make sure that we're protecting our customers. It's very early stages.

We won't know anything for weeks, if not more, in terms of how much investment will be required, if any incremental investment or what the outcome of this will be. I don't want to speculate at this time what the definitive outcome will be.

We will wait and get there in the coming weeks. And of course, we will bring you up to speed on that, as we do.

Appreciate it. Thank you.

Steph Wissink with Piper Jaffray.

Thank you, good morning everyone. Just a couple of questions from us. First, you guys mentioned a couple of times already the benefits of mix.

I'm curious if you can just talk a little bit about the categories where you are seeing some innovation. I know you mentioned the electronics side has lapsed innovation, but maybe some of the areas where you are seeing some excitement.

And then separately, with respect to the store refreshes. Just curious if you're refreshing pools of stores in similar geographies or if it's more just as there is an incidence of lease renewals?

If it is more of a concentrated geographic strategy, are you seeing list, overall, in stores that haven't yet been remodeled just given the refresh package driving some incremental traffic? If you could just talk a little bit about the geographic strategy of the refresh, that would be helpful. Thank you.

I'll try and hit both of those.

On the mix side, you pointed to a good example of one, right? If the appliance category is down or flat, while color, care and nails are growing, that's a positive mix for us. Both in terms of the margins in those categories, as well as relatively high penetration of owned brands.

Positive mix comes from both the category mix, in terms of which categories are selling. Appliances tend a slightly lower margin, as an example. As well as, the mix of owned brands within that category in terms of if we have a high penetration of owned brands in a particular category. That helps our mixes -- our overall margin, as well. Those trends are generally positive and what we expect, and they continue to slowly move that direction.

In terms of the store refresh, what I would say is this. We have, up until now, been focused mainly on a geographic roll out. So, we've done markets such as Columbus and Dallas and Phoenix and Los Angeles and some of those market-based refreshes, with the intent of, obviously, helping us market to customers in those areas and zones.

In the next round, we are going to work in another tactic, which is to also hit some of the oldest stores in the network that perhaps diminish our brand relative to the overall average store.

As a result of that, we can test whether those older stores make a higher -- we get a higher return on the investment in those really old stores in the network work. So, we are going to do a mix of stores in the next 500 that will come after June 1.

Great, just one follow up for you on the mobile adaption. I don't recall the actual date you went live. If you can just give us some insight when or how the adaption curve is looking, particularly related to your loyalty customers.

Well, in terms of mobile, we actually haven't gone live yet. We are about to go live in the coming weeks.

What I've been noting is the fact that on our e-commerce business, since we've refreshed the site and made it much more content rich, we are seeing a large surge in traffic, which is starting to convert to sales. We are seeing an increase in our online business, which was up 12% year-to-date right now.

What has been missing from that as that we haven't had mobile responsive design up until now. And so as we've gotten all this new traffic, most of which is coming from mobile devices, we haven't been able to offer that content-rich shopping environment for the customer.

That's coming in May. And so we expect that will continue to help that trajectory, in terms of greater conversion of those mobile customers who visit our site looking for answers to their beauty questions.

Thank you. Best of luck.

And with that speakers, I'd like to turn it back over to you for any closing remarks.

Again, just to summarize, we are pleased with the early results of our initiatives and the sequential improvement in our results. The team and I know, however, that we have a lot of work ahead, and we remain extremely motivated by the progress we've made, the positive results we've shown, but more importantly, the sequential improvement and results we expect in the coming quarters and years. Have a good afternoon and I look forward to seeing you soon.

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