Sally Beauty Holdings Inc (SBH) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FY16 second-quarter results conference call.

(Operator Instructions)

And 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 we 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 Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe and similar words or phrases.

These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty Holdings SEC filings, including its most recent annual report on Form 10-K. 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 would like to turn the call over to Chris.

Thank you, Karen, and good morning, everyone.

Thank you for joining us, for our FY16 second-quarter earnings call. I'll briefly provide an update on our business performance, and Mark will discuss our second quarter results in more detail.

FY16 second-quarter results were consistent with our expectations. Our BSG business continued to deliver strong results. And as expected, Sally experienced some modest sales headwinds during the quarter. As planned, the Sally team completed the hair care transition to a solution-based offering in all 3,000 stores. This initiative was a major undertaking, and the team did an excellent job of executing in a very short period of time.

During March, we also launched our TV advertising campaign in the regions with refreshed stores. We believe that these commercials have had a positive impact on sales performance. However, it is too soon to know whether TV advertising delivers the best return on our investment. We will closely monitor the results of this investment over time, and continue to test radio, digital, and other social media channels to determine the most effective media outlets, with which to recruit new consumers.

Over the last 18 months, we have made significant changes to our stores, our packaging, our marketing mix and our claims. And it is not surprising, that we would experience some short-term consumer confusion, as we manage through this transformation.

For the quarter, our BCC sales growth was lower than our historical growth trends. However, we believe this deceleration is likely to be short-lived. And we are very encouraged by the fact, that we realized positive sales growth from our list customers for the first time in over four years. As a result, we are optimistic that the combined impact of all of our initiatives will lead to steady growth in the future.

Pro Duo, our European business was EBITDA positive for the first time. As you know, we changed leadership at Pro Duo about this time last year, and they've done a terrific job, identifying efficiencies and reducing expenses while growing the top line. Our South American business also performed extremely well during the quarter. The team is opening new stores as quickly as they can in Colombia, Peru and Chile, while at the same time laying the groundwork to enter Brazil in the future.

Looking ahead to the third quarter, we plan to continue to bring more innovation to our Business by re-merchandising our brush and comb category in all Sally stores, introducing a color education center into approximately 1,600 stores, and launching our own cosmetic brand, BITZI at our cash wrap. We will also upgrade the packaging of three of our owned-brands, Heel to Toe, Silk Elements, and So Gorgeous. The new packaging looks terrific, and the brands should be rolled out to our stores by July.

Late this summer, we intend to update the hair extension category to include educational signage, explaining the various lengths and quality of our hair extension assortment. Our beauty systems group performed exceptionally well in the second quarter. We continue to achieve growth from new lines and product innovation, as well as access new brands in new territories.

In the back half of the year, we are excited about the upcoming launch of a mobile application for the independent stylist. And BSG will be adding a new cosmetics line to all Cosmoprof stores called The Balm. This is a very cool brand with unique packaging, and we expect it to be an excellent impulse category for the stylist.

On a consolidated basis, we had a solid financial quarter, and executed on several key initiatives. As a result, we believe steady sales improvement will continue, and we remain confident that we can deliver on our full-year guidance.

Now I'll turn it over to Mark.

Thanks, Chris.

Consolidated net sales for the second quarter increased 4.5% to $980 million. This increase was driven by same-store sales growth of 4%, versus 2.8% in the prior year quarter, and the addition of 135 new stores. The impact from unfavorable foreign currency exchange in the quarter was $12.3 million, or 1.3% of sales growth. Gross profit margin was 49.7%, a 10 basis point decline from the FY15 second quarter.

This decline is primarily due to a higher mix of gross profit from our BSG business during the FY16 second quarter, versus the prior year quarter. On a year-to-date basis, consolidated gross profit margin is up 10 basis points. We continue to expect gross profit margin expansion of 35 to 45 basis points for FY16.

Second quarter GAAP SG&A expenses as a percentage of sales, including charges related to our 2015 data security incident, an asset impairment, and our recent management transition were 34.8%, a 90-basis point increase from the prior-year quarter. Adjusting for these items, SG&A expenses as a percent to sales were 34.6%. On a year-to-date basis, SG&A as a percent to sales was flat versus the prior year.

We continue to expect that SG&A as a percent to sales will be up during FY16 year, of approximately 10 to 20 basis points over the prior-year metric of 34.2%. Consolidated GAAP SG&A expenses including unallocated corporate expenses were up 7.5% over the FY15 second quarter. This year-over-year growth was due in part to incremental expenses associated with our IT upgrades, higher recruitment and compensation expenses, and the recent launch of Sally's TV advertising campaign.

GAAP consolidated operating earnings in the second quarter were $123 million, a decrease of 5.1%. Adjusting for the 2015 data security charges, management transition costs, and asset impairment, operating earnings were $124.2 million, down 4.8%. Adjusted operating margin was 12.7%, a 120-basis point decrease from the prior-year metric of 13.9%.

Interest expense was $27 million, down $2.3 million from the prior year ago quarter. This decrease is due to the December 2015 refinancing of our senior notes to a lower interest rate. During the quarter, we repurchased 3.8 million shares of common stock for $100 million. On a year-to-date basis, we've acquired 6.2 million shares for an aggregate cost of $162.4 million.

Our effective tax rate was 37%, down 130 basis points, compared to our effective tax rate in the prior-year quarter. The lower effective tax rate was primarily due to an adjustment to nondeductible expenses in the current period. We continue to expect the effective tax rate for the fiscal year to be in the range of 37.5% to 38.5%.

GAAP net earnings in the FY16 second quarter were $60.2 million, compared to FY15 second quarter net earnings of $61.5 million. Adjusted net earnings excluding charges associated from the 2015 data security incident, the management transition, and the asset impairment were $61.3 million, down 2% from adjusted net earnings of $62.5 million in the FY15 second quarter. GAAP and adjusted earnings per share were $0.41, compared to the FY15 second quarter earnings per share of $0.39.

Looking at our balance sheet for March 31, 2016, inventories increased to $63.1 million, or 7.5%, compared to the ending inventory on March 31, 2015. This year-over-year increase is primarily due to additional inventory for new store openings, and the addition of new brands in BSG and Sally. We continue to expect inventory to decline throughout the year. For FY16 year-to-date capital expenditures were $74 million. We continue to believe that capital expenditures for FY16 will be in the previously stated range of $125 million to $135 million.

In turning to the segment performance for the second quarter, starting with Sally Beauty Supply, net sales were $588 million, up 2.7% compared to $572 million in the prior year quarter. The unfavorable impact of foreign currency exchange on sales was $9.5 million, or 1.7% of sales. Same-store sales grew 2.3%, versus 1.4% in the FY15 quarter. Same-store sales growth was positively impacted by selective price increases in certain geographic areas of the United States, as well as favorable product mix.

Gross profit margin at Sally Beauty was 55.3%, flat when compared to the prior-year quarter. Gross margin in the US business was up over the prior year, however, this increase was offset by lower gross margin performance in Canada, Mexico and the UK.

Operating earnings were $102 million with operating margin of 17.4%, down 110 basis points from the prior-year second quarter metric of 18.5%. Sally Beauty ended the quarter with 9.2 million active beauty club card members, an 11% increase over the prior year. Sally ended the period with net new stores that were opened of 101, with the year-over-year growth of 2.8%.

In turning to BSG, BSG had another terrific quarter with same-store sales growth of 7.7%. Sales grew 7.3% to reach $392 million. This performance was -- includes the impact of unfavorable foreign currency exchange of $2.9 million, or 80 basis points of sales growth.

BSG's gross profit margin in the second quarter was up 41.4%, up 10 basis points over the prior-year, and operating margin improved by 40 basis points to reach 15.6%. Net new stores increased by 34, or a growth of 2.7%, for a total store count of 1,312. And lastly, we ended the quarter with 944 sales consultants.

Chris?

Thank you, Mark.

On a consolidated basis, we had a solid financial quarter, and executed on several important initiatives. I believe we are well-positioned to reach our financial targets that we laid out at the beginning of the fiscal year.

Before I turn it over to the operator for Q&A, I would like to welcome David Gibbs, President and CFO of Yum! Brands to our Board of Directors. I am very pleased to have David on our Board. He brings a wealth of experience, especially in consumer retail, and building a global business. I am confident that David will be a strong addition to our talented group of Board members.

Now I'll turn it back to the operator to open it up for questions.

(Operator Instructions)

Simeon Siegel with Nomura Securities.

Great, thanks. Hey guys, good morning.

Good morning, Simeon.

Chris, can you talk about the results you see, or I guess expect to see when transitioning to the solution-based offerings? Does it drive incremental units, is it better sell-through? I don't know if it's a customer loyalty and frequency maybe all the above --just how do you measure the success of that shift? And then, just any color you guys can share on the international versus domestic comps at Sally? Thanks.

Yes. So we don't break out our international versus our domestic, but the international comps are higher right now. But they are all trending up together. What I will say on the hair care reset, we heard from our list customer, way back when we did research, understanding what was going on with the Sally brand. That the hair care section was one of the most confusing sections in the store. There's so many SKUs and so many options, and it was very hard for her to understand, especially given that she didn't know the brands, because they're are owned-brands, that it was very hard for her to shop the category.

So we did this for the list customer. And we knew we were going to have to transition the BCC customer to get used to it, because it was going to move some of her products around in the sort. But it would make it easier for the list customer to shop the category over time, but then to find a solution she needs. And oh by the way, make it easier on our associates to make recommendations in that category as well, because it divides the shelf up based upon the solution sets.

And I think we're going to get there pretty quickly. We are already seeing positive movement in the list customer. And I think we managed through most of the disruption with the BCC customer, and hopefully that will get better over time. But the reality is, I think it really addresses some of the big concerns the list customer had, and we expect that to contribute to comps positively over time.

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

Thank you.

Jason Gere with KeyBanc.

Thanks. Good morning, guys. Hey, just a couple questions. First I know you talked about things that are progressing on plan, and I think -- you talked about the consolidated side of reaching kind of the full year sales, and I think that was same-store sales over 3%. But when we look at I guess, the breakdown between BSG, has just been this monster. The Sally retail side is -- it's trickling north of 2%. Do you see that the BSG side is going to continue, and that's going to be a more -- it's maybe the approach to the Sally side will be more 2.5% this year, and then obviously hopefully better next year. I was just wondering if the composition of that full-year sales kind of is intact, if you could provide some color around that?

Yes, so the reality is we keep predicting that BSG will slow a little bit, and it doesn't. But the reality is, we do still eventually expect it to slow a little bit, as it begins to overlap acquiring some of the new products and brands into its network. That being said, the team is executing very well. And I think they are winning market share, and they are building a really strong brand with stylists. So we certainly still expect it to be 4% to 5%, but the reality is it should slow somewhat off of these levels.

Meanwhile Sally should continue to gradually improve. And the reality is if you look at the breakdown of this quarter for Sally, BCC declined a little bit from historic levels down to 3.1%, which is some of the transition disruption we expected. List actually improved a positive 2.7%, which is a huge improvement. And something I really want to make note of, which is it's the first time it's been positive in a long time. And hopefully it's evidence that some of what we're doing across the entire transformation is beginning to take hold with that customer group.

And the professional consumer was down a little bit, around 1% which is what we expect over time, a slow decline in the pro customer and retail growing. So I think -- obviously you can't predict exactly how these things are materialized, but we still see it basically on track. We see Sally continuing to grow, and we see BSG still growing, but a little less than what it's growing at, in terms of current pace.

Okay, and that dovetails into the second question, about getting the BCC customer back. Is it -- I don't know if you can comment about the April trends, that what you've seen, but are you doing more tailored merchandising? It seems that there's some good programs in the store that we've seen.

And then in terms of like the managers there, how well are they kind of understanding, what your goal is in terms of some of the technology in the store, ways to make the customer better? Do you feel like they're properly trained to kind of handle both sides of the equation, with both the list customer kind of converting on the BCC, and obviously just making sure the BCC customer doesn't lose focus on what they want?

You covered a lot of ground there, but let me start.

I'm breathing now. (laughter)

I think the reality is that we don't release obviously month-to-month comps. But the reality is we expect the BCC customer to bounce back over the next coming quarters, to where historical levels. And there's a few improvements we can make in the store that will allow us to do that, and the team has already recognized those. I was in the store yesterday, and saw a few little tweaks we can make to the assortment that will help with that. So we're making good progress there, and we'll continue to make progress, but I do expect it to bounce back in the coming quarters.

Your question on technology is well-stated. We do have a gap in technology that we are filling over time. We did one transition this quarter, which is to move to Verifone terminals at all of our stores, and got that completed in the quarter, which is great. We will also be moving to iPads in all the stores, which is coming this quarter as well, so will enable them in their selling capabilities with iPads in the stores. And over time, we will move to new POS terminals in all of our stores as well. BSG will get those first, and then Sally afterwards. So we'll continue to upgrade that.

And obviously, then we're putting great focus on our associates selling solutions, and our associates really helping customers make this transition and help us through this transition. So the team actually is really focused on enabling the associates with better selling stories right now. They're doing a great job of designing those, and helping them get those get those, both through the iPad, as well through just simple selling tools. So I feel pretty confident about going into the back half of the year as we exit the first.

Okay. And your answers are so great, that it kind of led to my last question. So as you talk about the associates -- and obviously only have a few people in the store typically at any given time, maybe it seems like two or three. I'm sure the topic has come up internally, about labor and minimum wage increasing, and I know you guys have talked about that.

I think at the last year, I think you talked a little bit about you were expecting some increases to kind of come through and the pricing to offset. But can you talk about where we kind of stand with minimum wage? Is there any additional pressure out there, are there offsets against that., that shouldn't leave the SG&A higher? Thanks, and I'm breathing now.

Yes, I think the overall story stays about the same. There's not as much impact in our BSG business. There is impact in terms of wage inflation in our Sally business. And we expect that we will be able to cover that through a variety of cost reduction, price increases, margin improvement initiatives, even better management of coupons and discounts is one we are working on right now as well. And we've seen a lot of stacking of coupons that happens, because of system controls that we think we can eliminate as well. So there's plenty of opportunity for us to cover that cost, as it comes in. And overall it's about in line with our expectations, maybe a little bit higher, but not a lot. And we've got a firm grasp on that.

Okay, and thanks again for answering my questions.

Oliver Chen with Cowen and Company

Thanks a lot. Hi, Chris and Mark.

Hi, Oliver.

Regarding the list customer, it's really encouraging there. Is there a factor there that you would isolate in terms of the inflection you saw in list, and any learnings off of that, in terms of fine-tuning on what you're doing well, or making tweaks to the nature of the changes you are making? And it was helpful that you also elaborated on some reality of short-term customer confusion. Could you just dissect where you saw that most, and what -- if there's any tactical steps you can take to continue to alleviate that?

Well, let me start with the first question. So in terms of what's working with the list customer, it's hard to isolate it down to one thing, simply because we done a lot of things to our stores, to our marketing, and everything else. And obviously, the packaging looks better, the merchandising in the stores looks better. The marketing -- I was reading through our May marketing plan, and just taking another scan of it and the reality is all of the integration of radio and digital, social, print, it's just really a game-changer in terms of how we talk to our customers, including our social as well.

So it's hard to isolate. We watch the overall number obviously, because it's really important that we are driving new customers to the store. And so we see this is a huge positive sign, that over time we can make this model relevant to a new generation of consumers, while holding onto our historic consumers. But I have a hard time answering the first one in detail, simply because there's so many different changes we've made over the course of a year, that it's hard to isolate which one of those have the biggest impact.

What I will say on -- in terms of winning back the BCC customer -- as I said we mentioned this at the beginning of the quarter, we said that we thought there might be some disruption in the quarter, as we culminate all this type of activity that we had been changing. So it wasn't a surprise to us. There's a few small things like, where did hairspray end up, and did we change the label on certain packaging? And as some of the communication materials change to the BCC customer, and we are working on tweaking those things, as well like helping our associates to help them through the transition as well.

And I'm sure we could of done a few things better. But the reality is we see this as a short-lived phenomenon. And as I said we kind of expected it. And so our goal would be to build that BCC customer over the next couple of quarters up to those high single-digits again, while holding onto the improvements and progress we are making with the list customer.

The reality is that, I just think the overall formula is what we are working on, which is keep the BCC customer growing -- and total BCC customers actually went up. It was just the purchase amount that changed. So I think if we can kind of continue to increase the total BCC population, and grow their basket back over time than the whole formula works.

But why did that happen with the basket size, did they just not pick up an item they might have otherwise? What's the underlying -- (multiple speakers)

I think there are underlying things you can point to. I mean, I was in the store yesterday -- so it's just two stores, where it's a mother-in-law research, but we put some of the hairsprays that sell to an older consumer down, way too low on the shelf, and we'll have to adjust that. We changed a few of the nomenclature for some of our owned-brand packaging, and it did cost some confusion among certain customers. These are small things that are very correctable. We're already working on those, and we're already seeing the progress. So we expect over the next two quarters, these will all be very solvable.

Okay. And our final question is, just as we look at the model and the gross margin line, how are you feeling about the vendor marketing programs, and any key drivers we should just pay attention to that will affect this line, in terms of benefiting or hurting this line throughout the year?

Oliver, we feel very comfortable with our guidance for the year. When you look at how we shaped the conversation for the quarter, US has performed kind of within the range of guidance that we've set forth for the year. And we feel very comfortable about our vendor relationships, the cadence of the allowances that we've been able to capture. And also the other part of this is, if you start to look out into the third and fourth quarters, if you recall last year -- this is last year, our margins were a little depressed from some of the initiatives that we took into consideration, with some more promotional cadences that we did in third quarter, as well as into part of the fourth quarter.

So you're actually, sequentially your margins historically are actually down in the back half of the year. So we've actually got a little bit of an easier comp going forward. So we feel very comfortable about our guidance for the year. And particularly with what we've done structurally on the Sally US business.

Great. That's really helpful. Best regards. Thank you.

Taposh Bari with Goldman Sachs.

Hey everybody. Good morning.

Good morning.

How are you, Chris?

Very good.

I wanted to ask you about frequency of the BCC customers. I know when you are trying to get the list customer moving, which seems like you are, frequency was an issue, because they didn't shop that frequently. But I think the BCC customer shops more frequently. So trying to get a better sense for how quickly you can reaccelerate that growth, and how the frequency plays into that equation?

I don't think it's going to take a long time. I mean, I think we'll make progress this quarter, and maybe get a good part of it back this quarter, and hopefully we will get all of it back by the fourth quarter. But the reality is again, we didn't see any disruption in terms of building the total BCC base. We actually added customers to it, it's still growing. But the reality is that we probably caused a little bit of disruption here. And the new BCC was a little bit slower. That's where we are seeing the impact, the existing was fine.

So I think, overall we feel like -- let's be honest, right, the hardest thing to do is to recruit new customers, while you hold on to your old ones. And we've seen other retailers have big problems with this. I think having a couple of percentage point slow down in growth on your existing customers, while you see a pretty good significant move in your new customers is actually not bad for a quarter. And the key then is we've got to build off that, and show that we can get those existing customers back up to their historical levels, while we continue to hold on to those growing list customers.

That makes sense. On that point, the gross margin, I wanted to ask a follow-up. So I think gross margins benefit from list growth and professional declines because of mix. And I know that that phenomenon played out in the US, and the margins were up in the US. But help us better understand, I guess what happened in international, for that to be big enough to kind of offset the US benefit? And Mark, as you think about the guidance for the year, it implies some nice acceleration into the back half. Help us better understand what specifically changes in the equation over the next six months, versus what we saw this quarter?

Sure. The big headline for international was certainly currency. And you really started to see the spike in currencies from a decline into the second quarter, third quarter, and fourth quarter, and we should start to anniversary a lot of that event and we saw a little bit of towards the tail end of the second quarter, but didn't really benefit from it. But certainly into the third and fourth quarter where the currencies had declined and where they are today, that should start to stabilize.

Now from the overall standpoint, it certainly is very true, the only exception that we see is -- certainly in the UK, we did a little bit of cleanup work around some holiday promotions, that was the right thing to do. We got -- we liquidated the inventory we got value out of it and it's not sitting on the books. So took a little bit of a margin hit for that, but it was certainly the right thing to do from the business standpoint.

As well as is Pro Duo, or our European operations is going through a little bit of a cyclical change, in which you see a lot more of the middle salons, the kind of larger salons basically ordering less and when they are ordering less, it's not economical to be called on by a lot of the national or the brand sales folks because a lot of their sales forces are continuing to be either let go, or rationalized in Europe, which bodes very well for our store business. And we've seen a lot of the open line business, which is typically lower margin than our private label or our exclusive label businesses pick up and we've seen it in the comp growth there, where our comp growth has been in the high single-digits and has been very consistent. We saw, actually even in Europe we saw double-digit growth in many of the countries.

So we see a little bit of that cyclical nature. But you see the same also FX impact in Chile, as well as Columbia, but that starts to anniversary itself mid year here for us, based on where currencies were last year, versus where they are today.

Can you help --?

I think Mark's got it right on target, which is if you take the three factors of easier back half GM comps, combined with the stabilization of year-over-year currency in some of the markets like Canada and Mexico, and then finally a reduction of some of the promotional activity in the UK that went on in this quarter to clear out some inventory that we won't have to do in the next quarter, those are the drivers that make us confident about GM going to the back half of the year.

Okay, maybe a follow-up on the currency piece. Can you tell -- we know obviously what the translational hit is from currency, can you tell us what gross margins would've done on a constant dollar basis in the quarter?

We don't have that data with us right now.

Okay. Maybe asking it a different way, does the impact on gross margin move in tandem with the year-over-year change in currency, or is there a lag?

There's typically a little bit of a lag. So it's not a one-to-one relationship. And also a lot of it's also dependent on the --most of our currency impact that you see in the financials is the translation adjustment, where you do see the actual kind of transactional adjustment, particularly in Mexico and Canada, where parts of their inventory or their product selection. And you see this also in some degree in South America, is being sourced from other countries or in the US, the transaction adjustment has a little bit of an impact. But typically because of the lead times of when they have to source inventory to keep their stores in stock, is fairly long, there is a bit of a lag to it.

Got it. Thanks guys.

You bet.

Rupesh Parikh with Oppenheimer.

Good morning. Thank you for taking my question. My first question, I guess -- I just wanted to ask a little bit more about your hair color studio rollout. So the color education center, I believe that's only going to 1,600 stores, so just I wanted to get a sense of as why it's only 1,600? And also, in terms of the hair color rollout, what else are you doing with that studio?

So it's only going to 1,600 stores, primarily due to room. We have some pretty small stores. And so in terms of being able to take that space up, to basically create a simple 1, 2, 3 easy steps for a home hair color, as well as -- it's great. There's a little thing people can text there, and get automatic color tutorials. And then, of course, we put Blaze up in the aisle.

And the goal was not to disrupt the customer, in terms of where the product is, and what brands and SKUs are available. But free up space that allows -- as they enter the aisle, or at the end of the aisle, be able to quickly see, here's how I go through the color process. I think it will be great. Eventually, I'd love to have something like it in all stores, but in the short-term it was just governed by room in the store, in terms of what we could fit in there easily, without moving SKUs around, and confusing the consumer obviously.

I'm equally excited by the way, about brush and combs coming up. We have the best selection of brushes and combs in the industry. We have a great professional selection. It hasn't always been merchandised that well, in terms of good-looking fixturing, and we're going to operate that dramatically here, as well as put in some good educational material around the category and I think that will be a nice step forward there, and it will just be another category across all of our stores, where we can really begin to make some industry-leading claims, about what we can offer versus what our competitors offer. S

o both of those will be done this quarter, both the hair color education center, as well as the brushes and combs. And I think you're going to be surprised about how exciting BITZI can be long-term, but we'll let that happen and rollout and see what it turns into.

Okay. Great, look forward to seeing the changes. And then switching gears, just to your pricing efforts. Just wanted to get a sense -- you guys obviously have had great success so far this year. Just want to get a sense of how they're progressing, versus your expectations? And as we look forward should we continue to expect benefits from additional pricing efforts for the balance of the year?

We will continue to work on it. As I mentioned on the previous call or previous question, there's a step here about stacking of coupons that we can work on, that's actually pretty valuable in terms of the amount of money that's at stake there and that's effectively a price increase by reducing the amount of inappropriate or stacking that's going on in our stores today. So that's a price increase we will work on.

We are expanding the number of pricing zones as well, we did that in the last quarter, and we'll continue to work on category pricing opportunities as we go forward. So and I think the other side, is also to look at our professional customer discount based, there are clearly some pros in there, that are great pros that we wanted to continue to give a deep discount to and there are some that aren't, and that maybe have the number and shouldn't, and we'll continue to work at that and that will be a price increase as well. So there's lots of opportunity to take what I call tactical price increases that are not very visible to the customer that help us overcome some of the cost headwinds that may come our way.

Okay. Great, thank you.

Simeon Gutman with Morgan Stanley.

Good morning. Chris, to clarify the list customer piece, is that ticket, trips increasing, or is that the overall ticket positive?

It's mainly ticket. It's, the vast majority is 2.7% sales growth, but we did see sequential improvement in both actually.

Okay.

So the net result is it's -- both are improving, but ticket is improving even more.

Got it, okay. And then, in terms of the BSG business, what do you think that -- I don't know, the addressable market -- but what do you think that market is growing? And are you surprised that the run rate seems to be accelerating for you? I mean, it looks like you're taking share on top of an industry, that I don't know if it's getting better or worse, but are you surprised that you're getting -- that you're taking that much share?

Yes. I mean, I think the industry is growing low single-digits probably 3%. So it's not zero. We are definitely taking share. And it's a mix of things. One is, we're bringing better and new brands in to our stores. Part of it are we have a larger network of stores, and we're executing really well in them. We have better service in those stores with better trained associates in the stores to help our customers.

As well as by the way, I think our BSG teams are doing a really good job of the market front, in terms of connecting with our customers. And if you look at us on social media now, and how they are managing their media spend. They are showcasing stylists and using BSG as a community around BSG, where they can share ideas, and share creative ideas and it's really resonating with the stylists. So I actually think they are executing on all fronts. Obviously, again we still do expect it to slow a little bit from here, but it's exciting to see how well this team is hitting on all cylinders right now.

And if some of it has been, because you've gotten some new brands, why should it slow, if those brands are not fully cycled yet?

Well again, some of them will be fully cycled here in the next quarter or two, not all of them are. But there's a few that we picked up in the second quarter of last year. My guess is, and I think that was TIGI and Framesi if I remember correctly.

Now there was some inventory loading that went on, on the other side during that, so I doubt they were fully cleared out by this time. But those are brands that we're going to cycle in the upcoming quarters on a full-year basis and that should lower down a bit.

We also benefited from some territory expansion that we'll also anniversary as well through, not only just contractual arrangements, but also from some acquisitions, and those are in existing brands. But we'll start to anniversary those as we get into the back half of the year.

Yes.

Got it, okay. And then second on price increases, and apologies if this was asked in some form, did you talk about if you've made incremental ones during the quarter, on top of what's already in the base? And then as best as you can tell the run rate of the ASP lift that you we're getting from prior ones, is that roughly holding, meaning you're selling the same number of units?

Yes I think that the answer is, we are expanding that program and we did in the second quarter and it hit throughout the quarter. I can't tell you exact what month they all got implemented. And I would say there's some impact on demand, but the net impact is definitely positive. And we'll continue to look for opportunistic chances to take price in certain categories. And as I mentioned with things like coupons and others, there's definitely some other opportunity there as well.

Great, okay. Thank you.

Joe Altobello with Raymond James.

Hi, thank you. Good morning. I wanted to go back to BCC for a second. Could you remind us how much of your Sally sales, the BCC customer contributes? Is it still about half?

Well, it's [57]% of retail, and of course, retail is about 80% of our total business, so that's the way we do the math on it.

Okay. So if you did that, and the BCC customer you said was up about 3.1% this quarter, they had been up [7.8%]. (multiple speakers)

[6% to7%] typically.

Okay. [6% to7%]. So it's fair to say that the hair care transition impact this quarter was probably 150 basis points on the Sally comp?

Well, listen. I don't want to chalk it all up to one thing. And I said and I mentioned in my call, right, we've done a lot of things to our stores and our marketing everything else. But your point is well taken, which is if we can get the BCC customer back pretty quickly here in the next -- at the trend rate that we've been running historically, while hold onto some of the positive impact we've made with list customer, then you're exactly right, there's lots of upside here in the Sally comp.

Okay. But directionally I'm not too far off, it sounds like?

You're not too far off in terms of total upside opportunity and impact. You're exactly right.

Okay. And then just switching gears on SG&A, you guys had talked about that being up year-over-year, and it obviously was, and a lot of that was marketing. Is it still going to be choppy in the back half, and do you think the second quarter was kind of the peak, in terms of the year-over-year increase from a marketing perspective?

I think I'll answer your first question, is that certainly we expect a little bit of choppiness. We did have a lot of one-off items, certainly in the second quarter. But we also -- as far as our new business development, in which we talked about that there's roughly $[16] million worth of new business development in our guidance for the year.

Most of it is tracking very closely, from a ratable standpoint. But certainly the bigger investment that we're making, particularly in Brazil is more backend loaded and depending on timing of some of our events along that endeavor, that can be choppy. So we still believe in the guidance that we put forth of being up about 10 to 20 basis points over our historical run rate of last year of that 34.2%. But it will be a little bit choppy. But I think some of the one-off items should start to dissipate from the picture, like what you've seen in the last two quarters.

Okay. And then just one last one on the marketing side. You mentioned the TV advertising in March in the refreshed markets. Typically I think TV tends to be pretty quick, in terms of the impact on the customer. So I'm curious -- and I know you guys don't want give monthly comps -- but maybe at least directionally what you saw in April, in terms of the impact from that marketing campaign?

Well, here's what I would say overall, which is without getting to a monthly comps. The reality is that TV definitely has a positive impact, as far as we can tell. We need to track it over time, because it actually tend to have a lagging impact more so than other medias. And as an example, radio tends to be quicker in our experience thus far, and we are running radio right now so there's a pretty substantial radio support for the brand going on in April, that will be repeated again later this year.

So the -- we're going to track all of those mediums, and look at which one gives us the best overall formula for recruiting new customers. I think my best evidence that it started to work, is what's going on with list customer. If we continue to see growth in the list customer, while we rebound with BCC then we're going to be really happy with all these investments. But the reality is, is that we need to, a, we need to repeat it in these markets, because you have to hit the message multiple times, in order to really get the value. And, b, we're going to have to expand it to more markets over time.

So again, it's a formula we're still working on, I don't think we're going to say that we know it yet. We want to find the best kind of mix of media, that gives us the lowest-cost way of really reaching new consumers. Digital and social is really increasing for us, and that's playing a big role. So we're going to have to test our way into finding out what the final media mix will look like. But I do think there's evidence that it's having a positive impact across the board.

Okay, great. Thanks, guys.

Ike Boruchow with Wells Fargo.

This is Lauren Frasch on for Ike this morning. Congratulations on a great day quarter, guys. I know you are lapping some acquisitions at BSG, and it will cause comps to dissipate a little bit, and going forward. But do you see any additional acquisitions in the future, any other brands that you can tuck-in to the segment? Thank you.

What I'd say is, there are definitely some territory acquisitions, they are smaller, but there is some territory acquisitions we can add in the back half of this year, and we are looking at those aggressively. Not a lot of brand pickups. So I think we -- most of those have rolled through. There may be a few smaller ones, but most of the big ones have rolled through. Although there is some additional territories we can pick up, of brands as well. As we're really excited about the launch of this product, The Balm, which is b, a, l, m, just to clarify. But we are excited about the launch of that line in our stores as well. I think that's a really unique and fun line that will add something new to the stores as well.

Great. Thank you so much.

You bet.

Olivia Tong with Bank of America.

Great, thanks. Just first on gross margin. I wanted to pull together, a couple different comments that you guys have made. If it's historically, your sales initiatives provided a nice boost to gross margin, more sales of your owned-brand retail growing faster than Pro, et cetera and that continues to go. But obviously BSG is growing quite a bit faster than SBS right now. So margins have been turning the other way.

So can you kind of prioritize or help us understand, of the different initiatives that you have on gross margin that you're clearly very optimistic, sort of -- not necessarily quantify, but at least prioritize what offers the most to you? Because you did discuss quite a few of them. Thanks.

Sure. I think that what Chris summarized after my commentary, was almost in order of priority, is just that certainly, our vendor relationships in terms of our allowances, the participation that we've gotten has been, is certainly we've done a very good job negotiating our ability to get better pricing. And also certainly, we have enough headwind, or we have enough room from the ceiling standpoint, that when there is cost increases that certainly we can pass those along, that are not necessarily transparent to the customer.

Also the pricing levers that we've done -- this really is uncharted territory for us, if you look back at us historically. And with some of the zone pricing schemes that we've done, as well as some the ability to kind of certainly make sure that we balance our costs out appropriately, both SG&A as well as the costs of products has been very good.

And then, lastly as -- like you said, is it certainly, you continue to want the BCC customer to continue to penetrate. They are definitely customers that are very loyal to our exclusive label program. So those things tend to go hand-in-hand, when the comps start to -- are driven by that customer. So those are our priorities. And certainly we feel very confident about the outlook that we put forth for the year.

And I think what you mentioned what I'll say, organic versus in organic levers. So there's organic levers such as the growth in our retail, versus our Pro business, or the growth in owned-brands versus others, that just kind of happen naturally over years of change. But then there's the specific levers we've decided to pull in the recent quarters, such as zoned pricing, tactical pricing by category, better promotion, and now coupon management as well. Those in organic levers will probably be bigger in the next year, and then we'll get back to more of those organic levers.

Got it. That's very helpful. And then just on BSG, it obviously continues to do quite nicely. So how accurately can you predict that business? And I guess I'll just leave it there.

Well, I mean, I don't think -- the fact that it's over performing by a couple hundred basis points, versus what we think long-term growth should look like, I don't think it means we are way off in terms of accuracy. The reality is there's a build up from, well, how much is the industry growing? Because it's such a huge player in the industry, that plays a role. And then there's how much share can you gain, whether that be from brands you capture or from stylists you convert. And so we have a build up.

I think we've been more successful than we thought we'd been, both at capturing brands and capturing territories, as well as perhaps on the marketing side in recruiting stylists. I think the long-term growth rate of that business is more like 4% to 5%, but that team continues to out execute their competitors and hopefully we'll be above that for a while.

Thanks.

Mark Altschwager with Robert W. Baird.

Good morning. Thanks for taking the question. One more quick clarification on the BCC customer. Are you seeing a slowdown in traffic, fewer visits from that customer? Or is this all -- the smaller basket sizes and some of the merchandising issues that you identified?

A little bit. But I think it's a little bit of both, to be honest with you. But I think again, both are fixable. And again, we thought that there'd be a little bit of this, as we began to get into -- given how much change we had already implemented beyond that, adding in, changing our largest -- our second largest category, and moving probably a third of the store around in just this quarter. We did anticipate that there'd be some disruption, and there was. But again, I think we expect that we'll be able to win the customer back pretty quickly.

Okay, thanks. And then can you update us on the CRM marketing initiatives with that customer? Do you still expect to see an incremental lift there, or have we begun to lap those changes?

No, I think that should absolutely play a role in our growth over time. Even though we implemented that say, last May at that point in time, we were really just beginning to learn the algorithms, and how to follow up with customers, and how to deliver the message back to them.

And I think we've gotten a lot better at that in the last nine months, and most of those algorithms are getting in place now. And beyond that, some of the digital retargeting we do around customers is they do searches. So the reality is I think that will be a long-term growth lever for us, I don't think we are lapping that much impact at this point in time.

Great. Thank you very much.

Jill Nelson with Johnson Rice.

Good morning. Quick update, just on the refreshed stores. I believe heading into the holiday season you had about 1,000 stores that you had refreshed. Kind of where are you at in that stage now? And kind of your next few quarters out, do you plan to continue to refresh more stores?

You bet. I don't know if you remember, we decided to take a hiatus on refreshes during this quarter, specifically -- or last quarter, excuse me, Q2, because we knew we were going to be doing some major initiatives in our merchandising around the hair care solutions center. We are picking back up now with refreshing, and our target is to try and do 500 stores before the end of this fiscal year. So that we'd be about 1,500 by the end of the fiscal year.

Okay. And then just any update on Loxa Beauty, just that initiative there, and is that tying into, I think the mobile app you mentioned today for the stylists?

Glad you asked that question, and yes, it is. They in fact are the key engineers and designers of that app, and that app will do a lot of things. So it will help a stylist effectively run their business from their mobile phones.

So they will be able to schedule appointments. They'll be able to order product directly from us. They'll be able to transact, and they will be able to refer consumers directly to Loxa who wanted them to buy those products for their own use.

So the app becomes the center point of helping independent stylists effectively run her business from her mobile phone, and then link it back both to CosmoProf and to Loxa. So Loxa continues to make sales improvement, which is grow their business and obviously drive their own brand. But it's also providing huge leverage in our BSG business allowing to provide you unique and distinctive technology to the stylists through our BSG business.

Appreciate it. Thank you.

You bet.

Linda Bolton Weiser from B. Riley.

Just getting back for a moment to the BCC sales decline. Is there anything that you changed in terms of how you reach out? My understanding is in the past, you would reach out with special offers. If a BCC customer was known to use a certain hair color or something? Is there anything you changed about those offers and how you're reaching out to them, or are you convinced that is just the store reset that affected the performance?

Well, listen, first of all, it's not the sales decline in BCC. We decel-ed, in terms of going from 6% to 7% now 3%. And as you go through a transition like this, and recruit new customers to your brand, I think that's a fairly moderate impact on your core customer base.

We are making changes in our marketing as well. And we have as, an example, reduced the amount of direct mailers that we send out to those customers, and shifted some of the media to other marketing mix. And we are obviously, still doing all kinds of promotional activity that's tied to seasonal events.

But the reality is there's many changes affecting our customer base. Some of it is in store. Some of its through our marketing. Some of it's through our packaging and products because obviously as we change the packaging those customers might have been buying that same package for many years. And now they're going to have to adjust to a new package that looks a little bit different. But obviously creates a much more stylish look for our list customers.

So the reality is, I think it's a normal transition period. And I don't think it was terribly severe in terms of the amount of transition that we've experienced, and our expectation is we'll win them back in the next couple of quarters.

Thank you.

You bet.

Paul Alexander with BB&T Capital Markets.

Great. Thanks for the question. Could you talk a little bit about what you saw in the macro environment this quarter? We've talked about the modest sales headwinds, but it sounds like we've mostly chalked that up to the hair care solutions reset. So last quarter, we were talking about the volatility of weather. Obviously, traffic has not been great out there, so just what else did you see, besides the hair care reset?

And then now that's mostly complete, and you're looking at brushes and combs, and also the hair color reset. Obviously, that's expected to be less disruptive this upcoming quarter? Correct.

Yes, much less so. Because the reality is, we're not moving any of their products or changing any other products really. It's all going to be the same SKUs, just better presented and with more educational information, and good merchandising around it.

So I think you'll find there's -- that we don't expect really any disruption associated with either brushes or combs or the hair color education center. I was in stores yesterday, saw the education center up in the stores, and it was a pretty seamless cutover. So I don't think there will be anything there.

The reality is I think the overall market is pretty flat to slightly up, but it's meddling along. I don't think it's bad, but I don't think it's great. But we just needed to find our own brand in that, and our own value proposition, and recruit customers to our business. There's plenty of opportunity, given the traffic that's in the malls that we're in, to bring new people to our stores if we get our value proposition right and communicate it clearly. So I don't think it's fairly slow growth environment should affect our ability to drive our comps over time. But that's what we're seeing out there is, kind of a slow meddling environment around us.

Great. Thank you very much.

You bet. One last question.

Steven Ruggiero, R.W. Pressprich.

Thanks for taking the question. One quick one. I'll just shift from operational tactics to capital allocation. You've been ramping up your CapEx spend, and with your growing financial flexibility. I just wanted to better sense of where you're finding the best and most reliable returns? You mentioned Brazil, and you also mentioned territorial acquisition in the back half of the year, and how that plays into it?

Yes. Well, first of all, the amount of investment that we're making in Brazil this year, is just really to get started, so it's not a significant piece of our investment thesis for an overall perspective. And some of the territorial targets that are out there, as history is typically indicated they are very small, and there are things that certainly don't cause any kind of headwind within our capital allocation plans or cadence that we typically have had.

So overall, kind of really to get to the central theme of your question that you asked, is in terms of returns, is that our best returns is through our organic growth, and in terms of the investment in our stores. And then we make certainly, strategic investments with some of these territorial acquisitions. And entering into new markets, those have a longer tail, in terms of their investment thesis. And particularly, Brazil will have a long investment tail to it, over a number of years.

So we're just now kind of getting the planning of that established and the organizational side of that established. So it doesn't have a great impact on the short-term thesis. But our overall outlook and our overall use of capital, and cadence of share repurchases is still very consistent with what we've done in the last couple of years. And we continue to look at that quarterly, with the guidance of our Board.

Great, thank you very much.

All right. And with that, I'd like to thank everybody for joining us today. We are halfway through the fiscal year, and we remain confident that we will reach our financial and strategic goals for the year. Thank you, and I hope to see all of you soon.

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