Sally Beauty Holdings Inc (SBH) 2015 Q4 法說會逐字稿

Ladies and gentlemen, (technical difficulty) thank you for standing by and welcome to the Sally Beauty Holdings 2015 fourth-quarter and full-year results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Karen Fugate, Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contracts for 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 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 and believe.

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 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, CFO.

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

Thank you, Karen, and good morning, everyone. Thank you for joining us on our FY15 fourth-quarter and full-year earnings call. I'll briefly provide an update on our business performance and Mark will discuss our 2015 fourth-quarter results in more detail.

We finished the year with consolidated same-store sales growth of 3.5% in the fourth quarter. Our BSG business achieved a record comp of 7.4%, leading to strong operating performance. And in our Sally business, the two-year same-store sales stack was the highest level in nine quarters. In addition, we generated $301 million in operating cash flow in FY15 and repurchased approximately $228 million or 8.1 million shares of stock.

Over the fiscal year, we launched multiple initiatives in the Sally US business to stimulate brand awareness and transform the consumer experience. As I mentioned before, it has taken longer than we expected for traffic from the non-Beauty Club Card customer to recover, but we are seeing positive indicators that our initiatives are working.

We are nearing the anniversary of the nail studio rollout and we continue to be pleased with the results. Although the nail category has experienced softness across the industry, we ended 2015 with year-over-year sales growth.

Sales in our lash category have consistently grown in the high teens since we launched our new -- [Lash] studio last April. And the roll-out of our cosmetics studio in October is off to an impressive start with double-digit sales growth. Both cosmetics and eyelashes are high-trend high-impulse categories and we believe the updated presentation and improved assortment will continue to have a positive impact.

The new impulse kiosk installed near the sales counter entices the customer to increase their baskets with on-trend high-margin impulse items. We expect to have this unit installed in 2,400 Sally stores by early November.

In FY16, we will continue our visual merchandising innovations. Starting in January, we expect to launch the hair care solution center in both general market and multi-cultural hair care. This upgrade should demystify the extensive offerings of shampoo, conditioners and styling aids by organizing the products by the solution they are meant to address. For example, dry, frizzy, thinning or colored hair.

The refresh to our own brand packaging in Ion Hair Care is expected to be completed by the end of this year. So far, the brand has outperformed other brands in this category and we expect to extend this strategy to all of our own brand products.

Our largest category, hair color, can also be overwhelming for a retail customer. We intend to implement a merchandising solution late this spring that will provide the customer with an easier shopping experience for home hair coloring. We also have concepts in design for appliances, brushes and combs. These are scheduled for mid to late FY16.

About six months ago, we launched our sophisticated CRM program with automated triggers and dynamic capabilities and we have seen strong responses to our e-mail and digital campaigns. We will continue to enhance the platform with new benefits and features as we learn more about our customers' shopping behaviors.

By the end of November approximately 1,000 Sally US stores will have been refreshed with new lighting, flooring and graphics. The uplift in sales in the refreshed stores is encouraging. We continue to realize a comp improvement of 100 to 150 basis points versus the benchmark of stores that have not been refreshed.

These results exclude any marketing export designed to inform the consumer about these changes. Most recently, we've tested radio and local TV in the regions with refreshed stores. We expect this advertising will further increase awareness of our refreshed stores and lead to traffic improvement.

As we look towards the new fiscal year, we now anticipate that the Sally Beauty segment same-store sales will continue to improve sequentially and reach historical growth levels of 3% in the back half of next year. Our beauty systems group consistently performed well throughout the year and fourth quarter was no exception. The introduction of new brands and product innovation continues to drive sales growth above historical run rates, resulting in strong bottom-line performance.

In FY16, it's clear that BSG will be up against difficult sales comparisons. However, we believe they will continue to win new brands and customer loyalty resulting in another solid year of performance.

On a consolidated basis, we expect our sales and profit improvement initiatives we implemented in the back half of 2015, such as tactical and zone pricing, increased vendor support, global sourcing, and other cost-savings programs, will largely offset anticipated cost headwinds and allow for steady profit growth for SBH in FY16. In addition, we are excited about the pipeline of initiatives for the coming fiscal year, including the completion of own brand packaging upgrades, the reset of our hair care and hair color categories, as well as the introduction of local TV and radio advertising.

These investments, combined with all of the projects and upgrades completed during FY15 will create significant points of difference and a modern image for Sally. As a result, we believe we are well on our way to reframing and repositioning the Sally brand to be more meaningful to the next generation of consumers.

Now, I'll turn it over to Mark.

Thanks, Chris. Consolidated net sales for the fourth quarter increased 2.1% to $964 million. This increase was driven by same-store sales growth of 3.5%, versus 2.6% in the prior-year quarter and the addition of new stores. The impact of unfavorable foreign currency exchange rates for the quarter was $27.6 million or 2.9% of sales growth.

GAAP gross profit margin in the fourth quarter was 49.3%, a 20 basis point decline over the FY14 fourth quarter. Excluding a $1.4 million impact from the Sally Germany restructuring, adjusted gross profit margin declined 10 basis points to 49.4%.

Fourth-quarter SG&A expenses as a percentage of sales, including charges associate with the data security incidents and the restructuring of our Sally Germany business, were 34.3%, a 40 basis point increase from the prior-year fourth quarter. Consolidated adjusted SG&A expenses, excluding the data security and the restructuring charges was 34% of sales. Unallocated corporate expenses, including share-based compensation, were $36.5 million or 3.8% of sales, up $737,000 from the prior-year quarter.

GAAP consolidated operating earnings in the fourth quarter, including charges associated with the data security incidents and the Germany restructuring were $119 million, a decrease of 5.5%. Operating margin was 12.4%, a 100 basis point decrease from the prior year.

Adjusting for the data security and the Germany restructuring charges, operating earnings were $124 million, down 2.1%. Adjusted operating margin was 12.9%, a 50 basis point decrease from the prior-year metric of 13.4%.

For the FY15, our effective tax rate was 37.9% versus 37% in the prior year. GAAP net earnings in the FY15 fourth quarter were $56.2 million compared to FY14 fourth-quarter net earnings of $61.8 million.

Adjusted net earnings, excluding the data security charges and the Germany restructuring charges were $59.2 million. GAAP and adjusted net earnings per share was $0.36 and $0.38, respectively, compared to the FY14 fourth-quarter earnings per share of $0.39.

Looking at the balance sheet for the fiscal year end, inventories increased $56.8 million or 6.9%, compared to ending inventory on September 30, 2014. This year-over-year increase was primarily due to the additional inventory for new store openings and the addition of new brands.

Capital expenditures finished the year at $107 million, which was above the high end of our guidance range of $95 million to $100 million. Capital expenditures were higher due to additional stores and the Sally refresh initiative versus our original plan.

Returning to the segment performance for the fourth quarter, starting with Sally Beauty Supply, net sales were $582 million compared to $581 million in the prior-year quarter. The unfavorable impact of foreign currency exchange on sales was $21.7 million or 3.7% of sales. Same-store sales grew 1.8% versus 2.1% in the FY14 quarter.

Gross profit margin at Sally Beauty was 54.6%, a 20 basis point decline for the prior-year quarter. This decline was primarily due to the $1.4 million charge from the Germany restructuring, which led to an unfavorable impact on Sally's gross margin of 30 basis points.

Operating earnings were $97.9 million with an operating margin of 16.8%, down 180 basis points from the FY14 fourth quarter. The $4.2 million charge from the Germany restructuring had an unfavorable impact to operating margin of 70 basis points.

Sally Beauty ended the fiscal year with 8.9 million active Beauty Club Card members, a 10% increase over the prior year. These customers now represent 59% of Sally's US retail sales, versus 57% last year. Net new stores opened in the Sally segment in FY15 were 110 stores for a growth of 3.1%. This growth is net of the 15 stores closed in Germany.

Turning to BSG, BSG had another great quarter with same-store sales of 7.4%. Sales reached $382 million for a growth of 5.2%. This performance includes an unfavorable foreign currency exchange impact of $5.9 million or 1.6% of sales.

Gross margin in the fourth quarter was 41.2%, up 10 basis points over the prior year. Fourth-quarter operating margin improved 20 basis points to reach 15.1%. Net new stores at BSG increased 29 or growth of 2.3% for a total store count of 1,294. We ended the year with 958 sales consultants.

Now, I'd like to provide some guidance for FY16. For 2016, our consolidated same-store sales, we expect our growth to be in the low 3% range with sequential quarterly improvement in our Sally segment and slightly slower year-over-year growth in our BSG segment as they anniversary a very strong performance in FY15.

Consolidated organic store growth is expected to be approximately 3%. Consolidated gross profit margin expansion is expected to be in the range of 35 basis points to 45 basis points. We believe we can achieve the gross margin expansion because of the initiatives we have started in the back half of FY15, such as tactical and zone pricing as well as our ongoing vendor negotiations.

For FY16 unallocated corporate expenses, including approximately $16 million in share-based compensation, are expected to be in the range of $150 million to $155 million. Consolidated SG&A as a percentage of sales, including the unallocated expenses, is expected to be up 10 basis points to 20 basis points from the FY15 GAAP metric of 34.2%. The 2016 SG&A includes approximately $16 million in new business development initiatives in South America and continued investments in Locks of Beauty.

The effective tax rate for FY16 is expected to be in the range of 37.5% to 38.5%. And finally, we anticipate capital expenditures in FY16 to be in the range of $125 million to $135 million. Capital expenditure projects for the fiscal year include investments in new payment terminals for Sally US, merchandise resets in the Sally US stores and the continuation of the Sally store refresh initiative and upgrades to our US distribution centers. Chris?

Thank you, Mark. In summary, FY15 was a very busy and productive year. I'm extremely pleased with our BSG results and I remain encouraged with the progress in our Sally Beauty business.

We have a great team in place and we are executing against the right initiatives to create significant points of difference for our business. I believe FY16 will be a rewarding and successful year.

Now, I will turn it back to the operator to open it up for questions.

(Operator Instructions)

Simeon Siegel, Nomura Securities.

Hey guys, thanks and good morning.

Good morning, Simeon.

To your point about the comfort in that gross margin expansion, have you seen the beginnings of a lift from any of those initiatives? What assumptions are baked into the guidance? You mentioned the Sally initiatives but is there anything in terms of international improvement in there? What do you think about that BSG rate? Any help drilling into that number would be very helpful.

You bet. The reality is roughly 70% or 80% of those initiatives are already executed. We got to work about five months ago.

In the US, those initiatives, at least in Sally focused on tactical pricing in key categories, which was mostly implemented in August and September. Zone pricing, which was implemented in the very beginning of October. Obviously vendor allowances, which were pretty much all negotiated, or at least the majority were negotiated before October 1. And global sourcing. In addition, we took some price internationally and we had some vendor allowance negotiations internationally as well.

Pretty much all of those are in the marketplace and executing. We did not assume 100% capture rate from the initiatives in our guidance. We assumed that at some point something would go wrong and we would have to deal some of it back or adjust.

The reality is, it's been in the marketplace five or six weeks and as of yet we see no adverse impact at all. We're continuing to work on further initiatives in terms of additional stores that we might zone price, as well as further negotiations globally.

Okay, great. And to that point, the international sales at Sally, it looks like they declined in penetration slightly. Is that Germany? And then, given the progress with international, how should we think about the comps there and the progression to stronger profitability?

We don't break those comps out. We did obviously reduce -- shut down -- half of our stores in Germany so that will reduce our sales there. Mark, if you want to add something.

Yes, we had a couple of things this year. You had the, like Chris said, the 15 stores we shut down in Germany. We also, as part of that, we slowed down a little bit of the store-opening cadence in Europe.

We also were remodeling some stores in Chile for our conversion from InterSalon to Sally, which I also an impact because of the delay of where those stores were -- we actually had to close those stores for a period of time when we were doing the remodeling efforts. That had a bit of a headwind as well.

Looking at next year, we should go back to the same kind of cadence in terms of what we expect out of comps. It's just that mid to high single-digit run rate from our international business.

You bet.

Great, thanks a lot, guys, and best of luck for the year ahead.

Thanks for the question, Simeon.

Mark Altschwager, Robert W. Baird.

Good morning, everyone. First on the comps, nice job in the quarter. Can you give a bit more color on what drove the strength at BSG? I know it accelerated on a two-year basis throughout the back half of the year. Are you seeing stronger trends generally in the industry? Are there some competitive wins that are driving that?

And then in terms of the guidance, you talked about the more difficult comparison. But is there anything beyond that you are watching for that could result in a slowdown from these levels?

Yes, let me go back to your first question. A substantial part of that is driven by competitive wins. So they continue to win brands over from the competition and there's some additional brands that are moving over as we enter 2016 as well. That's obviously a big driver. Industry comps are good but they're not necessarily above trend line Industry trends are pretty much where you'd expect, in the low-single digits.

The business is executing very well. We're running the stores well, we're executing in terms of our marketing programs well. We just turned on CRM finally, where we're building out our stylist CRM database. I think that will help us as well.

They've got a long list of wins both in terms of territory expansions and brand wins that are adding to their trajectory. We do expect that to return a little bit more to a more normal trend line, but I don't expect them to slow much. They are a high-performing business right now. We continue to win brands from the competition. We just expect it to return a little bit more towards normal trend line.

Thank you. Then a quick follow-up on the changes in Europe. Can you talk a little bit bigger picture about where you are with the restructuring there? It's been a lot of moving pieces. What inning are you in and what are your expectations for comp growth and margin expansion within the international business for FY16?

For the most part Germany is done. The team continues to consolidate back-office operations and some of that is completed, although called there will be more that will happen throughout the year as we drive for more efficiencies in Europe. I'd say they're sixth or seventh inning there in terms of driving the efficiencies and getting the restructuring done. Overall in international we expect, as Mark mentioned, to be in high single-digits in terms of comp store growth internationally.

Great, thank you and best of luck.

Thank you.

Simeon Gutman, Morgan Stanley.

Thanks, good morning. First, following up on the previous gross margin question. How much of it involves price optimization, some of the upside? How confident are you In the success, or the eventual success, of some of the price optimization work?

Roughly 60% to 70% of it's probably price optimization, Simeon. As I said, most of that was in place as of October 1. The reality is, we did not assume 100% capture on our pricing activity. As of yet, and it's early days, we're not seeing any adverse impact that would make us believe we're going to have to deal that back. But we will monitor it closely.

In addition to that, we're working on some additional specifically zone prices where we could take price up in additional high cost to operate locations, given that the first wave seems to be very successful. And those would probably go out in the second quarter of the year, assuming that we can continue to perform as we are right now relative to the pricing activity.

At this point, I would say it's mostly in the marketplace. It's a substantial part of how we plan to offset cost headwinds. It seems to be working quite well at this point without any clear change in behavior from the consumer. If that maintains the pace then we will continue to push further.

That's a good tie-in. My second question was going to -- asking about the environment right now. You have some price optimization initiatives in place in what looks like a pretty fluid moment for retail? Are you selling to a pretty stable category?

I think that to make this business more resilient, but at the same time you depend on foot traffic at some strip centers. Can you give us any color or diagnosis of the consumer and what seems to be going on at the moment?

Yes, I think you said something quite important there, which is I think we are in a category where price sensitivity is not as high. I think we got an early start on some of these initiatives as well.

And then finally, I think we're taking advantage of some things that most other retailers have already done and we're playing a little catch-up but it is an opportunity for us. I think most retailers were already doing zone pricing in high cost to operate locations and we were a little bit behind the curve on that. It's a great chance for us to take advantage of that opportunity.

And I think other retailers were further down the path on global sourcing as well. I think the reality is it's an opportunity for us to play catch up and capture some value there.

And then I think the other side of that is, we've got to continue to differentiate our brand, both in terms of our loyalty program, in terms of upgrading our products and packaging and delivering better value in terms of our overall value proposition and telling customers about that value proposition of salon-quality products available at a better value and backed by our love it or return it guarantee. I think if we get better at communicating that message, which we tested through some radio and TV advertising in October, and we are pushing big down that path in digital and social now. That's a great segment and place to be in the marketplace and allows us to add value to the customer despite the fact that we're taking a little bit of price.

Thanks.

Taposh Bari with Goldman Sachs.

Good morning. Chris, can you provide some context into the split between US versus international comp performance within the Sally segment this past quarter and how that's trended over the past year?

We're not going to break the two apart, we will leave them together. The reality is that we're seeing progress as we enter this year in both segments and we plan on that. We needed to restructure our European business to get it right. We've now done that and we expect to see continued progress there.

We're seeing terrific growth in our business in Mexico. Our comps are strong in South America with a little bit of slowdown in Chile, potentially, as they deal with an economic slowdown in a commodity-driven marketplace. And the US, we expect continued sequential improvement in our comps in the US.

The reality is, we expect next year to be high single-digit, see high to mid single-digits internationally and low single-digits in Sally in the US.

Okay, great, that's helpful. As we think about the comp lift that you get from these refreshed stores, can you give us some sense as to which cohorts of customer bases or customer cohorts that you're getting that lift from? Is it universal across the board? Or are there certain groups that are benefiting disproportionately?

It's overall, but as we paired it up with marketing, which is what we've done more recently, we are seeing more lift in the list customer than in, say, the pro customer. I guess I would have expected that because that marketing is targeting a retail consumer and that's where the advertising ran as well.

I think as we go into next year, we're going to see this bifurcate a little bit. We're going to see more lift from the refresh in the marketing around the refresh be associated with the list and BCC customer and probably less so with the pro customer.

Just one last housekeeping item for Mark. What's your DNA outlook for next year? Can you quantify the impact that FX had both on revenues and EPS this past year?

The DNA outlook should be pretty consistent with what you saw for the year. It should be in that $89 million to $90 million range. As far as FX impact, on the bottom line from an EBIT standpoint, it was still very immaterial. Overall, it was roughly $87 million on the sales side.

Thank you.

Rupesh Parikh, Oppenheimer.

Thanks for taking my questions. I wanted to touch on some of your marketing efforts during the quarter. I know you recently had a partnership with Project Runway. Based on what you saw, do you feel that it brought more people into the Sally store? Is there any way to tie your performance at Sally to what you did with Project Runway?

I think it's a little too early to tell, but I see Project Runway as part of an overall marketing mix. Remember, Project Runway was only about 4% or 5% of our total marketing budget for Sally. I see Project Runway offering us credibility in terms of positioning the brand in a professional stylist situation.

Then we match that up with local advertising, that really drives what I'll call action. There is a call to action that happens through our radio and TV which drives people to the stores on a more immediate basis. Project Runway is more about creating a halo for the brand that puts us in the right setting, which obviously reinforces our salon-quality imagery.

As part of an overall marketing mix, I'm really excited about what Project Runway does for us. Because as you see us pushing more towards digital, social, radio, TV and a variety of methodologies by which we will communicate our brand value proposition, Project Runway will create the halo of salon quality, which is what we want to be known for. And salon quality at a better value, backed by love it or return it is the core value proposition we're trying to communicate.

Chris, going back to your comments in the press release, more of a focus on local TV and radio advertising. Based on your tests so far, what gives you confidence that this is the right vehicles to advertise some of the changes in Sally stores?

Well keep learning, but we saw increases across all nine test markets where we ran the advertising. We split it up and had -- in some markets we ran radio, in others we ran radio and TV and others we ran just TV. What we saw, actually, was the more we spent, the higher the impact we got.

We're taking the learnings from that now and beginning to really design the rest of our marketing for the remainder of the year based on that. But it was great early indications that as we tell our value proposition to the consumer and they hear about it, they like it. Now we got to make sure our stores deliver on that and our products deliver on that. But the reality is that radio seems to drive the most immediate impact in terms of short-term response, but TV also probably has more of a lingering impact.

Great, thank you for all the color.

You bet.

Ike Boruchow, Wells Fargo.

Hi, everyone, thanks for taking my question. Just a quick one, I'm sorry if I missed it, but did you give the growth of the BCC customer at Sally? Then also what the growth or the decline of the list customer was in the quarter?

For the quarter, I believe -- did we break those out in the quarter?

On the BCC sales is up about 7.5%.

And what was the list customer?

It was down 2.8%.

2.8%. So down 2.8% for list and up 7% of so for BCC.

Got it. Then the follow-up to that question is, I definitely appreciate the refreshes. You guys are putting in a lot of hard work and heavy lifting with Nail Studio and you added OPI and there's been a lot of change. But you haven't really seen much of a change in that list customer and the comp is still sub 2%.

I'm curious what gives you the confidence when you look out to next fiscal year that you will see the ongoing sequential improvement? Is there a data point you're looking at in the refreshed stores? Is there something else you could share?

Ike, absolutely. A couple of things I'd say. We are now just beginning to see all of the activity across all of these categories get executed. We obviously did the nail wall earlier in the year. We did the cash wrap in the year. We did the Lash Studio during the year and we're seeing double-digit there. We obviously got our CRM up and running. We just got the Cosmetic Studio done.

All of that is starting to really show terrific -- cosmetics is showing double-digit gains already as well. If you look at our core categories, actually, like hair color or hair care, we've continued to see progress there. We had two categories that were a drag this year. Both appliances and hair were a meaningful drag on same-store sales.

The reality is and as we go into next year, the comps for those categories are going to be substantially lower. In addition to that were making some progress there. Hair was really driven by some supply chain issues in terms of our ability to put the right product in store at the right time. We have made a lot of progress in terms of building inventory at the distribution center and store level there, so that we have the right products available. And with electricals we're not only anniversarying much less activity, we're also bringing some innovation to market as well, as we're relaunching some of our vendor lines.

If we can just bring those categories closer to flat or above that next year, then the comp guidance we're giving is pretty conservative. As we look at the progress we're making in the categories and the initiative that are done, and then the categories that were the headwind last year rolling over and lapping some lower numbers and then solving some of the problems that drove those declines, we actually feel pretty confident about comp growth next year.

Got it, thanks so much.

Kelly Houser, Buckingham Research Group.

Hi, thanks, guys, for taking my question. I wanted to go back to the store refreshes one more time here. So you are saying that the store refreshes see 100 to 150 basis point lift when you also have the marketing in place? Is that correct?

No, that's with no marketing. That's with saying nothing to the consumer.

Okay. It seems that at 1,000 stores there you've started to reach critical mass, though we haven't really seen that come through in the comps. Does that lift just not sustain itself for an extended period of time? Or are we just not there yet in terms of how many stores we need to get to?

Then on the same note, how many stores are there out there left for you to refresh? And what pace should we expect you guys to do that this year?

Most of what you are hearing about is the first 500, which is about 16% of the network. The reality is that next 500 is just finishing now here in November. It will be done by the end of 2015 calendar year. We will be at 1,000 by the end of November, effectively, early December.

And, again, we're going to also be start talking to the customer about that in terms of some radio, TV and digital and social in those markets, so that we begin to communicate to the list customer that there's a reason to come back and visit. Next year we expect in the back half of the year to do another 500. We'd probably do those earlier in the year except that we've got this hair care category launch in Q2, which is a big undertaking to really relaunch that category. We'll be moving a lot of SKUs around the store.

We want to do is focus the stores on the hair care category reset in January, February, and not disturb them with refreshes. So we'll pick back up with the next 500 in the back half of the year. That would get us to half the network being refreshed. I don't think all of the network needs to be refreshed because there are some stores that were done recently that are in good condition. But I could see us doing another 500 to 1,000 over the course of next year. of 2017.

Great, that's very helpful. You've mentioned some initiatives around the cosmetics category. Could you remind us how big of a category that is for you guys? Is that an opportunity for you guys to grow there? Is there any chance to get access to more brands in the category?

It's not a huge category for us but it's a high-margin category. We really didn't look good in that category. I don't know if you'd seen our set before we did the reset. We looked out-of-date. It was a little beaten up; it had been there a long time.

The team did a great job. They actually expanded category in terms of the square footage allocated and they brought out really modern fixturing that looks terrific in-store. It's right across from the Nail Studio.

What I like now is when you enter the front of the store, even if you're in a non-refreshed store, everything at the front of the store is now done. That first impression, Lash Studio is done, Nail Studio is done, cosmetics are done, cash wrap's done, impulse area done. And we've also put in new merchandising systems in the front of the store as well.

Finally, once hair care gets done and moves forward, that will be the last of the notch in terms of what you see when you first walk into the store. It creates a great chance to get a great first impression. Don't know if I mentioned lashes as well. Those are also completed. That's what we're really shooting for is to make the first impression substantially different so that as we invite consumers back in now with our advertising, they come in and they see something different and actually give us a new chance.

Great, thank you.

Oliver Chen, Cowen and Company.

(technical difficulty)

Hey, Oliver, why don't you try that one again.

Joe Altobello, with Raymond James.

Hey, guys, can you hear me okay?

You bet, Joe. There's no reverb there. (laughter)

Exactly. First question is back to the Sally comp for a second. If you could put that it to context for us, how did that compare to what you were expecting? If you're looking at it from a glass half full perspective, the two-year stacked accelerated modestly, but it did decelerate from the third quarter. Help us understand how you thought about the fourth-quarter comp.

It was below what we wanted, Joe, you're exactly right. The reality is it didn't decelerate much, it was pretty much flat. Here's where we're thinking, which is we've now just got to the point where our core categories are all reset. With hair care we'll really feel that way. Obviously once color is done in the back half of the year, we'll definitely feel that way.

Again, some of the categories that were the drags on comp last year, which really was appliances and hair extensions, we're going to be lapping much easier numbers there, as well as we've got some good solutions there that we're implementing, supply chain and solution and hair care and some hair extensions, and some innovation in the appliance category.

That's what really gives us the confidence that, hey, as we make more progress with the list customer and get her back to the store, we've got the right category resets done, we're seeing good growth out of those category resorts, we're seeing good growth out of the store refreshes. The advertising is showing early strong impact on sales growth. And we're getting out of our down-cycle in these categories that have been a drag on our comps.

Okay, great, that's helpful. In terms of the share repurchase activity, obviously you guys stepped it up in the fourth quarter. How should we think about that in 2016? Is it going to be the same level as we saw in 2015? That's the missing piece to your EPS guidance is, how much shares you decide to buy back next year. It looks like your operating income guide is probably up low singles, best we can tell.

Yes, I would look at our share repurchase cadence in the future very similar to what we've done in the past. We're very committed to the program. Our Board is very committed to it. Certainly, we've looked at entry points in terms of being opportunistic at times.

We've had a little bit of a fits and starts this year with some of the blackout periods for some of the data security breaches that we had to prohibit ourselves from buying at times. Overall, on an annual basis, we should be back to that normal cadence we've been at.

Okay, so about $300 million a year or there abouts?

Yes, $250 million to $300 million I think is probably a fair assumption.

Okay. And one last one for you, Mark, you mentioned earlier the DNA next year $89 million to $90 million. In the fourth quarter it was $25 million. So that would imply $100 million run rate. It sounds like you're expecting that to come down next year.

Well, you're also you got to tail off some amortization from some of the legacy BSG acquisitions and some of those have a shorter useful life. There was also some additional housekeeping clean-up, I think, in the fourth quarter for some write-off of some dispositions. Looking at the fourth quarter as your proxy of a run rate I think is probably a little bit inaccurate.

Okay, thank you for that. Appreciate it.

Oliver Chen, Cowen and Company.

Thanks a lot, congrats on overall comp. Chris, as we do think about list customers and our models on traffic, how would you prioritize which of the drivers will be more needle moving than others? How do you contrast thinking about demand creation and marketing versus the end store actions that you're taking?

And, Mark, I had a few modeling questions. I know there were some moving pieces with labor. I was curious about updated thoughts there. And then I wanted to try to zoom out to get an update on internet pure play versus your business model.

Oliver, let me take care of the housekeeping question real quick. I think in our guidance and the overall increase in margins, I think we've covered what we believe is the labor headwinds as we know it today. And I feel very comfortable about where we've landed, SG&A-wise. We are up a couple of basis points from where we ended in 2015.

There is a part of that is the $16 million of investments that we're making not only in South America but the further investments in Locksa. When you break down that $16 million, there's roughly $2.9 million of it in Colombia, there's roughly $4 million for new store growth in Peru.

And we are also entering the Brazilian market next year. We have begun the product registration in a lot of the legal organizations. The goal would be by the end of FY16 that we would be close to opening our very first store in Brazil.

And the remainder of that $16 million is investments in Locksa for the continued development of their platform. We feel pretty good about the overall behavior and cadence that we see in it and how it helps integrate both the professional customer and the retail customer with BSG. I think, overall, that's how we look at the SG&A for next year.

And, Oliver, let me try and hit a couple of these other questions. It's obviously hard to disaggregate which initiative is driving how much impact. That being said, quite logically we believed we had to execute some of the store refreshes and updates, category refreshes and updates, as well as packaging and product updates before we really dug down and marketed too much to bring those customers in. What we didn't want to do is bring customers in and have them see the exact same Sally.

We wanted to clarify our brand message and then make sure our stores, our products and our packaging was delivering on that message before we pushed too far down the marketing front. What I think you're going to see us do in the upcoming year is start to shift that. As we complete the hair care category reset the color reset and we continue to push out refreshing our stores, we will be investing more dollars and driving the list customer back to our store because we believe we have something unique and different to offer her. And that we can deliver on the value propositions of salon-quality products at a better value and backed by the love it or return it guarantee.

Versus an internet pure play, obviously we have a very distinctive offering. We're not just selling any brand out there. What we do is we go out and we -- obviously we want to upgrade our own internet experience and our own online experience.

But what we offer is salon-quality products that we source direct from the world's best manufacturers. They're sold under our own brands that are not available elsewhere. The reality is, we deliver those at a price that's one-half to one-third of what a salon product would typically charge for that product. It's a pretty unique value proposition.

The reality is we want to deliver that in a way where we're agnostic to what channel they buy in. But I think it's very hard for internet pure plays to go against that because they don't have the supply chain or the vendor relationships or the brands that they can leverage to do it. I think what we want to do is build our distinctive value proposition in both channels, both online and in the store, and be agnostic to where they buy.

Okay, Chris. Just regarding the list customer, what are your thoughts on the competitive landscape? What other sources might they be interested in? Or how's the competition moving? I was curious to get your thought on the general consumer shopping environment because there's been so many different variables at play with positives and negatives about the way the consumer is feeling.

The reality is, again, I think we have a really distinctive value proposition that we have to talk about. We go -- and this is very true -- we go to manufacturers who are making salon products that sell $20, $30, $40 a bottle. We source our formulations directly from them and sell them under our own brand as a result we can offer them for $6 to $9.

We may have done a poor job of talking about the value proposition but it's a pretty unique supply chain and value proposition. What we're trying to do is professionalize and upgrade the way we deliver that to the customer, both in terms of the category look, store look and feel, as well as online digital and social look and feel.

I think what we have to do is focus on our unique value proposition. I do think the competitors will continue to get better, which means we have to continue to get better. This is a high-margin category and I can't imagine why they wouldn't invest in it and they have. I think they've done most of that investment and now what we have a chance to do is really discern and separate and educate them about our value proposition. Also are unique expertise and capability in-store.

We're doing that now. I think the consumer is reasonably strong but I think they're still cautious. They're looking for value and they're looking for unique buys. I actually think that's an opportunity for us to position our value proposition which is, we can bring you the world's best salon products and we can do it at a better value than anybody else can because we go direct to the source and buy it and sell it under our own brands. We have to live up to that every day, but I think if we do we actually can stand out from the crowd in a pretty compelling way.

Thank you, encouraging guidance and best regards.

Thank you.

Jason Gere, KeyBanc Capital Markets.

Hey good morning -- I can still say good morning. Hey, guys, I have a couple of questions, just want clarification questions and then one real question. What was the shares outstanding on the last they of the quarter? If you have that, that would be great. And then the other question is to clarify, you said for the Sally stores, it would be 3% comps in the back half, so we're implying 2.5% for the year?

Jason, the easy one, which is the shares outstanding, it was about 151 million.

Okay, so that's our starting point for this year, okay. On the Sally, on the SBS, that was 3% comp in the back half of the year. I just wanted to make sure it wasn't 3% for the year.

For just the Sally business you're talking about?

Yes, just the Sally business.

We did not articulate it, we articulated our overall comp, which was in the low 3%s, which is our blend. The bottom line is we want to see good continued progression in comps throughout the year. Therefore, we would expect the back half to be stronger than the front.

And then adding on to that, what is your longer-term view on this business? I know in the past you've said 3% to 4%, somewhere in that range. Are you still as optimistic about it? I know obviously you've got some easy comparisons coming up, SKU optimization. You've got Germany falling out. Wondering the longer-term view on this business beyond, obviously, this fiscal year?

Are you thinking just Sally or are you thinking the overall business?

Just Sally.

Just Sally, I think that's where we're at, in the 3% range, a little above 3% is where we would like to get to.

Okay. So then the other question I have is about operating income. I think, doing the calculation, it looks like about low single-digit for this year. I was just wondering, the last few years it's been low single-digit. I know there's a lot of puts and takes.

Do you think that when you get beyond this year and when you've done refreshes and everything there, can you get back to a mid to high single-digit operating income? Is that being too aggressive? Or taking all the pluses and minuses -- and obviously this is a beyond 2016 question -- how do we think about the long-term structure of this business?

That's what we're shooting for, clearly, is to think about high single-digits operating income growth over time. We're going to get fairly close to that this year, I think. We'll definitely make progress on EBIT line this year. I don't think it will be long-term trend but we'll make good progress against it this year.

These investments over time will wane, but we're going to have to step up some of the investments here in the next couple of years, both in capital and marketing investments and other investments internationally, that will be a little bit of a drag on SG&A. But the reality is that we're seeing the business respond and if we can continue to get pricing leverage and get a nice mix shift leverage in the business by getting the list customer back in, I think you'll see good top-line margin growth as well as bottom-line margin growth.

Do you think that -- I understand the price and what's in place for this year -- but do you think every year getting some price optimization, do think that's realistic? I know there's been some changes -- there will be changes in ownership with among some of your suppliers. I'm wondering if you think that's realistic? Or is this really more you weren't as efficient on some of the trade spending out there and you can be more efficient going forward?

I think it's -- there's definitely a one-time element to some of the margin improvement but I wouldn't say all of it. We will get a larger pot than usual this year, as we took some very decisive action to cover the cost headwinds we saw.

That being said, the biggest shift we will see probably is if we can reignite list customer growth and that grows faster than our pros, which is what we expect to happen. That's a huge margin swing between those two customer mix. That's what we want to drive, is drive margin expansion through a combination of own brands and a shift towards list customers and BCC customers, as we move the business more and more towards a retail business with pro heritage.

Okay, great. Hey, Chris, thanks for the clarification.

Thank you.

Meredith Adler, Barclays.

Hi, this is Shaun Cross on for Meredith. Thanks for taking my question.

Hi, Shaun.

Hi. Can you talk a little more about your plans for entering Brazil? I thought that was pretty interesting. And also, too, how competing in this market might differ from other South American markets?

Sure. We still believe in a dual-track approach, in which we believe that what we have learned from the Andean region, which is really the Chilean, Peruvian and Colombian areas, that there is an opportunity and there's a void that's in the marketplace in Brazil that I think we can be very successful at as a small-box retailer of professional beauty supplies. Our ability to execute on that promise, I think, is not matched whatsoever by any of the competitive environment that we've seen in our experience over the last couple of years of studying the market.

With that said, to you're point, there are certain nuances to the market that are much more challenging than the other markets that we exist in today in South America. Namely, the importation and the duties and tariffs that are involved in bringing product into Brazil can be a bit of a barrier for some people. We believe that our price points, particularly our ability to bring our own label into Brazil and eventually with the partnership that we have around the world with a lot of the name-brand professional brands, that are willing to do local filling for us, that we'll be able to overcome some of those barriers, certainly as we develop into the marketplace.

The other tract of this is certainly we still would look at acquisitions that would make sense in the marketplace that would be highly accretive to our proposition and our platform, and certainly our keeping our eyes open to those opportunities. We actually are very optimistic about our long-term prospects there. It will be a very -- it is a long-term investment. Brazil is not a small country like the other ones that we operate in. We certainly are going at this with a very realistic and a very cautious and conservative approach.

That's helpful. Can you also talk a little bit more about some of the investments you're making in Locks of Beauty and more generally an update there?

Locksa was originally purchased in serving that purpose and growing quite well as a way to take professional brands, so salon brands, to retail but still engage the stylist by compensating them through a commission model. That's working well and a growing off a small base but growing quickly.

What we're finding though is that the Locksa team has all kinds of capability that can also help our BSG business. They've got some terrific apps for the stylists that help the stylists run their business, whether that be scheduling apps, apps around transaction and actually covering their transactions for them, as well as resupplying their own product and finally then linking that to a retail site.

What we're really beginning to do is engage Locksa across our entire BSG platform as a core strategy across our BSG platform, of a way to basically build a stronger relationship with the stylist that's an electronic or virtual relationship with the stylist that will allow us to market to her differently, support her in all of her activities, to help her conduct transactions with customers and help her sell to customers. That's a game changer for us. It's a bigger idea for Locksa than probably what we had when we bought it, but it's turning out to be that way. We're excited about it because we think it really differentiates BSG for the long run.

That's great. Just one more if I may. You mentioned that you just launched the CRM program at BSG. I'm curious if there's any initial comments you can make on that or what stylists are saying?

I think the biggest thing we can say is we're in early days. We have roughly 300,000 stylists who are up and running in that program. We're going to need to get it to five or six times that over the course of the next year or two.

I think it's a game changer in terms of our ability to market to stylists and equally as important to add value to the professional brands. Because in the future if we can get all of the stylists registered into that program as they shop our stores, we suddenly can market to those stylists in a very selective way, in a much more efficient way than direct mail which is what we historically used. We can track their purchase behaviors that help our vendors understand -- unique purchase behaviors of various stylists in different regions of the country.

I actually think it's quite a game changer down the road, it may even be more valuable on the Sally side. We're in early days, we're just building out the capability in the program. It will be built out dramatically over the course of the next year. I think you will see us reach critical mass in terms of names during the course of that year. Then we'll start changing the way we use it to market and go to market.

That's great, thanks, guys.

Jill Nelson, Johnson Rice.

Good morning, I'm looking at FY16 SG&A guidance you've given out there. Is there any big fluctuations quarterly on the timing of some of these investments that we should be looking for?

No, Jill, I think it's pretty ratable. I think when you looked at the big investments we made in 2015, where we talked about last are during the guidance, the $10 million we made in new business development, we ended up at about $8.7 million for the year. That's cadence in terms of the waterfall was pretty consistent. When you get beyond -- the Brazil one will be very consistent because it's product registration. It will be a very smooth cadence. Also the cadence with Columbia and Peru are also very consistent because of the timing of the new stores is very proportionate.

Okay. And then the BSG segment, it's been performing very strongly. If you could talk about, it looks for this past fiscal year you hit a EBIT margin record. Could you talk about the potential for that segment and where you see that going?

We're very excited about what BSG is doing. It's both in the short term and the long term. In the short term they continue to win brands from the competition and steal share in the marketplace, which is great. And obviously more of those have hit and will continue to hit as we go out of last year and into this year.

Beyond that, I think we're also really upgrading our ability, as I've just talked about, to build a relationship with the stylist, both though our CRM, through apps we will be bringing to market and through other ways we'll connect ourselves to the stylist. We will be able to add more value to the vendors over time. I think that will really distinguish us from the competition in a meaningful way.

I think this is a very strong business with very high market share. It's performing well and executing well, which is why it's stealing brands from the competition, and it's only going to get better from here. I think it's unrealistic to assume that it's going to deliver 7% lapping topsails, which is what it did last quarter. I think that will come more into moderation, but it's a strong business which has a solid foundation.

Appreciate it, thank you.

You bet.

Linda Bolton Weaver, B. Riley.

Hi. Chris, you mentioned a couple of times the importance of getting this list customer back into the store and you're doing all of these things to result in that. Where has the list customer been going? Is it the drug stores and grocery stores of the world? Or more like the Ultas and Sephoras of the world?

And secondly, to the extent there is some mass channel competition, what does the Walgreen-Rite Aid combination mean? Does it make it easier for you in terms of the strategies you're trying to execute on? Or is it going to male the competition harder down the road?

Let's break this apart. I think the reality is we're a trade-up customer. As I mentioned this before, our overlap is about 80% Wal-Mart, 70% Target, 50% Walgreen's, 50% CVS and Ulta's further down the list, more like 28%.

The reality is, we want to trade customers up to salon-quality solutions but they don't want to pay salon prices. That's our job and we've got to define ourselves as offering those salon-quality products and doing it at a good value. I think we're getting better at that. We need to complete the refresh of both our packaging, our products, our marketing and our stores in order to be better at that. But that's the game we want to win.

In terms of our competition, a lot of them made those investments over the last five and six years. They've upgraded their categories and their offerings against us. Most of that is already out there in the marketplace.

I don't necessarily think the Walgreen or Rite Aid connection is a big change or in any way changes the marketplace. I do think you'll see competitors continue to invest in this category. Where you see most of them going, including Ulta, but others, is they seem to be going more against department store cosmetics and skin care, which is not our core.

Our Core is really hair color and hair care. That's where we want to be highly differentiated and the other are more impulse items in our stores. I think what we've got to do is continue to invest in our core. If you've seen our ads recently, we are attacking and going after much more the idea of come and trade up to professional color and professional care, is where we want to be. We think that's a little bit zigging while the rest of the industry zags, we'll continue to do that.

I don't see a big change in the competitive environment. Right now I think our job is reaffirm our value proposition, which is delivering salon-quality products at a better value and in a better store environment with better packaging and better marketing than we've done in the past.

Great, thank you.

You bet.

We have time for one final question. Olivia Tong, Bank of America.

Great, thank you. I had a couple of clarifying questions. First on the comps. BSG, you had mentioned that there was clearly a very nice comp this quarter. We do have to go back probably three to four years to see numbers like that. Also you mentioned that you now have this high class problem in term of next year's comps.

Can you help provide a tiny bit of color in terms of the breakdown to get to that low 3%s between SBS and BSG? It looks like BSG starts off the year pretty nicely and decelerates from there. Whereas for SBS, I assume that perhaps a bit more challenge in the first half but you expect it to get better as the year progresses?

Yes, that's the right answer. We expect SBS to show sequential improvement quarter-to-quarter and get better as it goes throughout the year. We expect BSG to slow some but still be above the marketplace. And that's about as much detail as we can provide around that. That's how we would model it.

Got it. Are you still looking for 3% to 4% in the second half as you mentioned last quarter?

3% to 4% in the second half. I think we're looking at low 3%s overall comp for the year which means it will probably be higher than that in the back half of the year, but directionally that's what we're looking for the whole year.

Got it, okay. I'm trying to understand because last -- if I remember correctly -- last quarter you had said 3% to 4% in the second half. Is that still the expectation?

Here's the thing, which is the 3.5% comp that we put up this quarter is terrific. There's nothing wrong with it, it's just the mix is wrong. Over time we want the mix to be a little less BSG and a little more Sally. That's what we expect to accomplish during this fiscal year.

Got it, perfect. Then on gross margin, nice to see that 35 to 45 basis point outlook for FY16. You sound pretty confident about some of the things that you've already done and how they're starting to bear fruit. But even excluding the Germany costs, it does look like gross margin didn't change all that much in Q4. Was it that these things take a little bit of time to build? It was more towards the end to the quarter so you really didn't see it in the quarter? And you do expect a little bit more benefit coming within --

Very little of it really got into the fourth quarter. The tactical pricing, a little bit of it got in there because we started that in August and September. The zone pricing did not hit at all in that quarter. The vendor allowance negotiation did not hit at all in that quarter. The benefit from Germany hits next year. Global sourcing will continue to build throughout the year. Very little of it got into the fourth quarter. It's pretty much all going to be in FY16.

Got it, perfect. Lastly on CapEx, clearly up quite a bit in FY16 after a pretty robust 2015. Do you expect it to come back down again in 2017 as we go through the out years? I know I'm asking a question for 12 months from today, but --

It's a legitimate question. I think we would say it'll probably be high for one more year after that and then it might return to more of a normal baseline. But we do have some catch-up investments we need to make.

Perfect, thanks so much.

I wanted to thank everybody for joining us today. Obviously, as you've heard, 2015 was a busy year. We probably didn't get all of the payback from initiatives last year, but we fully expect it in 2016. We see the momentum building in the business. We're excited about FY16 and seeing all of those initiatives come to fruition. Thank you and we hope to see you all in person soon.

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