Sally Beauty Holdings Inc (SBH) 2016 Q4 法說會逐字稿

Ladies and gentlemen welcome to the Sally beauty holdings FY16 fourth quarter and full year earnings conference call.

(Operator Instructions)

As a reminder this conference call is being recorded. I would now like to turn the conference over to Karen Fugate please go ahead.

Thank you.

Before began I would like to remind you that certain comments including matters such as forecasted financial information, contracts or business, and trend information made during this call may contain forward-looking statements in the meaning of [section 21-E] of the Securities Exchange Act 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, participate, 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 Sally Beauty Holdings SEC filings. Including most recent annual report on form 10K been filed today. The company does not undertake any obligation to publicly update or revise its forward looking statements.

Furthermore, during this call we will reference certain Non-GAAP financial measures related to the company's performance. The company has provided a detailed explanation and reconciliations of its adjusting items and Non-GAAP financial measures in it's earnings press release and on its website.

With me on the call today are Chris Brickman, President and CEO; and Janna Minton, Group Vice President, Controller and Interim 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 full fourth quarter and full year earnings call. I will take you through the important financial details of the quarter, and the fiscal year, and then discuss our 2017 guidance.

We achieved solid financial results in FY16, with consolidated full year adjusted EPS growth of 12%. Consolidated sales reached nearly $4 billion with same store sales growth of almost 3%. And despite the unfavorable impact from foreign currency exchange, gross margin expanded 20 basis points.

SG&A as a percent of sales for 2016, including special items associated with the data security incidents and executive separation expenses was 34.6%. Excluding the special items, SG&A as a percent of sales was 34.1%. 10 basis points higher than the prior year, although below our guidance range of 34.3% to 34.4%.

Cash from operations was $351 million. Which enabled us to invest in the business and return a substantial portion to our shareholders by acquiring 7.8 million shares of stock totaling $207 million during 2016. Capital expenditures ended FY16 at $151 million, exceeding the high end of our original guidance range of $125 million-$135 million.

We allocated the additional capital towards an acceleration of our Sally store refresh initiative, merchandising resets, new store openings, and key IT projects in order to put this work behind us, and focus on sales improvement going forward. During the year, we certified 5000 store openings and ended the year with 5119 stores for growth of 3.1%. Inventory end in FY16 at $907 million, up 2.5% over the prior year. And finally, adjusted EBITDA grew 2.5% to reach $628 million.

Now, turning to segment performance for FY16, starting with Sally beauty. Sales grew 1.5% at Sally to reach $2.4 billion. This increase is attributed to same-store sales growth of 1.7% and new store openings.

Unfavorable foreign currency exchange impacted sales growth by 200 basis points. Gross margin expanded by 40 basis points despite unfavorable foreign currency exchange in Mexico and Canada. This growth is primarily due to the profit improvement initiatives we launched early in the year, including selected pricing increases and vendor negotiations. Operating earnings were $410 million, up 60 basis points decline from the prior year.

FY16 was a busy year for our Sally team. We implemented new in store merchandising across cosmetics, hair care, and brushes and combs in over 2800 stores. In addition, we completed the upgrade to our owned brand packaging and introduce new brands and products.

On the marketing front, we completed our migration to the improved CRM and email platform. As a result, traffic and sales from our beauty club card customers has improved, and we are optimistic that are tactical marketing issues from the third quarter are now behind us.

Our Sally store footprint increased by 3% to end the year with 3781 stores. We accelerated our store refresh initiative in the back half of the year. And to date approximately 1500 stores have been updated with new flooring, LED lighting, and signage. In FY17 we intend to take a pause on store refreshes to focus our attention on our customer engagement initiatives.

Our BSG business had another great year. Sales were up 5.5% with same store sales growth of 5.5%. Unfavorable foreign currency exchange impacted sales growth by 70 basis points. Gross margin expanded 20 basis points to reach another record high of 41.5%.

BSG made terrific progress on expanding their CRM capabilities. This initiative should enable us to develop customized messages to license professionals based upon their shopping patterns and unique needs. Our beauty app for stylists is due to be released in January. The app is a comprehensive business tool for stylists, and includes a link to our e-commerce platform for the stylist and their customers.

In late September we acquired Peerless. A small beauty professional company with 15 stores in Utah and Idaho. In addition to the store footprint, we also gained exclusivity to brands we did not have in that territory.

For the fourth quarter, our consolidated sales results were softer than we anticipated. Primarily due to slower sales performance in July across both businesses. Sales trends improved in August and September, and we ended with a sales growth of 1.3%. The impact from unfavorable foreign currency exchange offset sales growth by 130 basis points. Consolidated same-store sales grew 1.2% in the fourth quarter.

BSG same-store sold were up 1.9% compared to 7.4% in the prior year. While Sally same-store sales growth was slightly under 1%. Gross margin was 49.5%. A 20 basis point improvement over the prior year, driven by gross margin expansion Sally and BSG of 40 and 10 basis points respectively.

SG&A as a percent of sales including special items associated with the data security incidents and executive separation expenses was 35.4%. Excluding these special items, SG&A as a percent of sales was 34.1%, 10 basis points higher than the prior year.

GAAP net earnings in the fourth quarter, including special items of approximately 8,000,000 net of tax was $52.6 million, and the earnings per share was $0.36. Excluding special items, net earnings were $60.5 million with earnings per share of $0.41.

Looking ahead to 2017, our operating goal is to drive profitable sales growth. We're excited about our upcoming sales initiatives. And I have challenge the team to reallocate spending to the highest return initiatives and a rationalized expenses wherever possible.

In Sally our in store investments are mostly behind us. And the team is focused on the next phase of customer conversion and engagement. In the coming quarters we intend to leverage our CRM capabilities and introduce new brands to the stores. In addition, we will continue to find new and creative ways to communicate our unique value proposition through digital and social media as well as traditional media.

Finally, we are now rolling out our new selling model to all store managers and associates. And this will provide them with the skills they need to cross sell categories and drive units per transaction.

For BSG, we expect to gain channel share through acquisitions and brand exclusivity. We will continue our efforts to become the indisputable partner of choice for stylists and manufacturers through innovative ideas like the stylist mobile app, and our advanced CRM capabilities.

Beginning this year we are adjusting our full year guidance disclosure to place an emphasis on consolidated company metrics while moving away from business specific metrics. We believe this change aligns with our objectives to drive long term shareholder returns through consolidated earnings growth, strong cash flow, and disciplined capital appointment.

Having said that, our consolidated 2017 financial goals are straightforward. We expect revenue improvement from same-store sales growth of approximately 3%. And organic store openings of 2% to 3%. Gross margin expansion is expected to be 30 to 40 basis points. And should offset higher SG&A expenses resulting from the increasing costs in labor and IT investments. We believe the combination of sales growth and gross margin expansion will lead to mid single digit operating earnings growth.

Capital expenditures are expected to be below $135 million. In FY16 we accelerated a portion of our capital investments, but expect a decrease in FY17 and beyond.

Looking past 2017, we believe we can build upon our earnings growth momentum as labor cost inflation and IT spending taper off over time. This should allow for SG&A leverage and higher earnings growth in future years.

Before I turn it over to Q&A, I'd like to finish by welcoming Don Grimes to SBH as our Chief Financial Officer and Chief Operations Officer. After a thorough and deliberate search we are thrilled to have Don join our team. He is an accomplished executive with significant financial and operational expertise in the retail industry. His broad experience will be an asset to us as we build upon our strategy and prioritize our opportunities for long-term growth.

Now I like to turn it over to the operator for Q&A.

(Operator Instructions)

And our first question will come from Simeon Siegel with Nomura Securities.

This is [Dean Watameiroff] on for Simeon. Thanks for taking our question.

No problem good morning.

Good morning.

Can you talk a little bit about BSG? It looks like the comp in TM probably came in little light. Do you think the BSG comp was a product of lapping upper compares from last year?

If so, how should we be thinking about the 1Q comp? And that is just long-term should we think about that as a mid single digit range?

Yes. I think that's right. It did overlap a very big comp and additionally we have some new brands that are coming in that really didn't happen until this quarter next. I think the reality is, we knew it would slow down. I don't think it will slow down to that level on a regular basis. But I think the 3% to 4% level is probably reasonable for BSG.

Right. And then just a quick house keeping item, how should we be thinking about currency impacts for FY17?

When I'm really know. I don't want to predict currency. The reality is, we took a lot of hit from the Canadian currency last year and hopefully that will slow down. Mexico I think is a bit unpredictable still.

Great thank you much good luck for the holiday.

Thank you. Our next question come from Mark Altschwager with Robert W. Baird.

Good morning thanks for taking the question.

Maybe just to start out could you dig into some of the drivers in the Sally comp? Maybe the BCC versus the list performance and what you're seeing with professional and international? Then separately on the marketing front, any update on where you're at with the fixes that were put in place, and what affect you believe both had on the comps in the quarter?

Overall BCC growth improves sequentially. And so we feel like we're past some of the marketing migration missteps that happened as we change database providers and managers there.

List actually slid backwards a little bit but not a lot. It's kind of more longer long-term trend.

The Pro has been declining for a while in Sally. Honestly, I think some of that will continue as they are better served now through Cosmoprof and through other venues. But I do think it will kind of move closer to 0% to 1% kind of negative maybe around 1% negative we will see over time.

That being said, if you think about international, international slowed a little bit in the fourth quarter. I think there was some conservatism there. My guess is that will rebound. Although, I do were a little bit about how South American markets and Mexico markets will be in the next year or so.

Great. So maybe rolling that all together. Consolidated comps of been pretty stable near 3% the last two years. But they have decelerated to that 1% to 2% range in recent quarters. And as you alluded to in the last as of the comparison of will be more difficult in the first half of 2017.

Maybe just help us get comfortable broadly with this reacceleration back to the 3% range, and what you see as the key drivers will be over the course of the next several quarters?

The 3% of total same-store sales growth. Which is where we effectively finish last year just right around that. We are not doing, getting into segment specific comps.

That being said, I think the reality is, we've moved past a lot of the initiatives that were disruptive in store. Whether that be some of the store resets, whether that be packaging changes, or rather that be our marketing changes.

The end result of all that is we are expecting less disruption as we go into next year, and we're expecting more benefit from all the changes we have made. So we feel good about total comp a 3%. We think it's conservative and we think that's what we're focused on hitting.

That's great think it's a much and best of luck.

Thank you. Our next question will come from Simeon Gutman with Morgan Stanley.

Thanks good morning.

Chris, does the business require the three comps next year to achieve the mid single digit operating income growth? And in your comments you suggested that I guess gross margin will mostly or largely offset some of the higher SG&A. Is there a risk though that the SG&A actually comes in higher or is there a band around your forecast regarding the SG&A?

I don't think there's much risk of that, Simeon. I think there is a band there and I think we feel pretty comfortable with got it under control. We are still dealing with some labor cost inflation that's baked into our budgets. And we're working on mitigation factors and approaches that will address that.

But the reality is, we see 3% sales growth as doable for us. We see mid-single digit operating earnings quite doable. And will be some focus on margin improvement as well. Which we need in the slower growth environment to make sure we're offsetting the cost inflation.

Okay, and then just stepping back bigger picture on SBS. Can you put together weather looking back are looking forward where that business is in terms of its evolution? You mentioned slowing some things down next year to focus on execution. Just big picture where does it stand in terms of the progress in the guideposts that you have for that business?

I think that's a really good macro question, and I think the reality is, we change a lot in the business. We change a lot about the store. We changed a great deal of marketing. We've changed a great deal about our allocation of media, and obviously great deal of out of our CRM capabilities.

All those things although absolutely necessary, our disruptive to some extent. And so I think we feel good about the progress we've made, and now we really want to do is make sure that shows up in front of a customer every time they walk in the store.

So we are putting a lot of focus right now and training our Associates. And a great deal of focus on getting full leverage out of the CRM e-marketing capabilities we've built. And that's the real genesis of that. Which is let's reduce some of the disruptions, including some of the IT project disruptions, and really focus on improving the execution of the stores so the customer has a different experience in store.

Okay thanks.

Thank you. Our next question comes from Oliver Chen with Cowen and Company.

Hi thanks and welcome Don as well.

Regarding the monthly cadence Chris between July, August and September. What's your rationale when you kind of post game in July versus August and September? And were there shifts that you could of done tactically that kind of address what happened there?

And then as you look at the big opportunities at improving both comps, is it mainly traffic and just contextualize how we think about next year and achievability of your guidance versus this past quarter?

I don't know if I have a deep answer for you on July Oliver. The reality is it was bad across both businesses, which was surprising. And August and September were strong across both businesses. So I don't know if we know what drove that change.

In terms of the overall business, the reality is, we continue to see units per transaction up and total ticket up, but traffic down.

And so, we're struggling and what we're really thinking about as we go through our marketing approach for next year is, obviously we want to train our Associates and continue that trend towards a higher UPT. And were making great progress on that by the way. But we've got to drive the traffic issue better. And we're really honing in on this advocacy based marketing model that focuses much heavier on social media, and social media influencer's, as well as digital marketers. Marketing is the way to do that over time, and that's really the focus of the team.

One of the reasons we want to reduce the complexity of initiatives going into next year, is so that they can really focus harder on that.

Okay.

And just a quick follow up. This does kind of beg the question about competition in the marketplace. Which is broad yet intense.

Can you update us on, are there any revised thoughts and what you're seeing and how this may be inter playing with traffic? And on the BSG side, what should we understand about new brand addition to the portfolio or non-compares there, thank you?

I don't know if I have much insight into what's really changing with our competitors. I've been to a number of them recently. I don't see anything dramatically different in the beauties category that makes me think about striving our month to month sales. So I don't think I have much of a comment there. I don't see much different in the marketplace.

With BSG, we've got the Balm obviously really kind of hit very much towards the end of last quarter. And is going to be fully rolled out in this quarter. As well as we've got some additional new products that are rolling out in this quarter. So I feel very good as well as obviously holiday sales inventory is rolling out.

So the net result of all that is we feel good about BSG long-term a great market position. They have terrific market share and they should be well positioned to succeed over time. And they've got some terrific CRM capabilities coming online that they are continuing to build on. So I expect continued growth in BSG. I don't any see any reason it will slowdown. But we did comp a very big quarter last quarter.

Okay thank you best regards.

Thank you.

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer.

Thanks for taking my question.

Chris just going back to your 3%-ish comp store sales guidance for the year. Is there any more color you can provide in terms of how you thinking about the trajectory for this upcoming year? I know earlier in the year much more difficult comparison.

I don't think we think about it from a trajectory standpoint. I think what we're excited about is that we've gotten so much work behind us. Our core [ERP] financials are now converted over to oracle ERP.

We've gotten obviously a lot of work done in our Sally stores. As well as our BSG's CRM and Sally CRM. So a lot of the distractive work this had to happen, and it was necessary work, but much of the distractive work that is now behind us. And we can really focus on sales execution in store, and that's what gets us excited about going the next year.

We got good plans, we've got solid marketing. I think we've learned a great deal about how to market to the Sally customer and an affordable and efficient way. And we will be pulling those plans and driving them as we go into the next coming quarters. And we will link that in store activity session also drive UPT in same-store sales as well.

So we feel current confident the circuit conservative numbers, and that allows us to drive the mid-single digit earnings growth that we're really focus on for the organization.

Is there anything -- the question I continue to get is, around that 3% comp, is there anything that you're seeing right now in your business that gives you confidence to get to that 3% level were achieve that target?

We got to that level last year. So I don't think that is a difficult comp for business. We were very close to that last year. So it's a marginal improvement over last year. There will be a little bit of mix change because BSG will probably slow a bit as we said. And we expect Sally to accelerate a little bit. But it's not a significant change.

Okay great.

And then switching topics, to gross margins. So past few years is been more challenging to drive more than a 20 basis points or so gross margin expansion. Just want to get a sense as you look at is your what are the key drivers that drive that 30 to 40 basis point expansion?

The reality is actually got really close to it last year. We just lost some of it back in the form of foreign currency transactional hit due to foreign currency Mexico and Canada.

This year the big focus is on selected pricing activity that we will be doing in our stores. As well as the mix shift in categories, and then finally global sourcing is playing a much bigger role this year. We've gotten all of our teams aligned around our global sourcing strategy, and we're driving significant upside there. So I think that will be a big contributor next year. Much bigger than it has been in the past two years.

Great thank you.

You bet.

Thank you. Our next question comes from Jason Gere with KeyBanc Capital Markets.

Okay thanks. Good morning. Hey Chris. Just a couple questions. I guess the first one if we could talk maybe about some of the categories inside the Sally store. I know past quarters it was kind of nail and I would say hair appliances that where on the weaker side, but hair coloring and shampoo I think was a little bit stronger.

So can you talk about what you saw during this past quarter if there was any change there? And maybe tie into some of the innovation that's coming through that might be able to jumpstart some of these categories?

I think we had a couple of anchors that were really affecting us early in the middle of the year. Those were hair extensions, styling tools to some extent, and nails.

What we saw as we got towards the end of the year is nails is flattening out there, getting closer to more of a flat category, and we've got some good innovation there. We've already added CND to our Sally stores. We've got another brand coming next year which is terrific. So that will really give is actually the best assortment in nails of any beauty retailer. I'm really excited about where that will land is in the future.

Styling tools we've got some good innovation coming this quarter actually. And we saw that start to flatten at the end of last year. Hopefully will see some growth as we go into this year. We've got a new ion magnesium line that we developed our selves to bring renovation to the category. And hopefully we will see that start to take that category.

Hair extensions has continued to be a problem. It is slow. I guess the lesson is, the problem is, as got towards the end of last year. My guess is we will continue to see it flatten out, but as of yet we don't know that category is a long-term winner or not.

We may see us allocate more of that category to our multicultural category which is been killing it for the most of the year. We continue to expect to invest they are as its growing demographically. As well as it's a category we are winning in.

Another winning category as we saw a hair care continue to rebound after the big reset. So we expect more of that going forward. We will continue to build on our success in cosmetics as you go into next year as well.

So lots of changes going on in these categories. I expect extensions may still be negative next year, but the other two, nails and appliances, we expect the turnaround.

Okay. Great.

And second question is, I just want to talk about BSG and maybe looking at the balance between the margins and the comps that you are delivering. How do you, how where you balancing it? Because it seems like BSG keeps pushing higher and higher into the margin.

Once upon a time it was at 14% operating margin. Now you're at 16%. So how do you think about the combination? Do you feel that you have to do a little more promoting at times to kind of keep that comp in the 3 to 4 range? Or do you feel that just with the assortment that you have out there that you can get both simultaneously?

BSG is not a heavy promotional driven business. It really comes down to having the right products and the right lines in store. And obviously we've made a lot of progress on that in the last couple of years.

Most of the bottom operating earnings leverage are talking about is coming through SG&A leverage as they continue to grow the business while holding costs in line.

There is some gross margin growth, and I can expect that to continue to be small. Kind of 10 to 20 basis points or so. But most of that is due to reducing discounts that are unnecessary discounts that sell through either a full service area and better controlling that. As well is just making sure that we are launching exclusive lines where we can. And finally some private label penetration and what I call things like sundries in those categories.

So I expect some gross margin expansion in BSG, but not a lot. And then most of the leverage will come as we drive top line growth and leverage our SG&A.

Okay.

And the last question I have and I need to ask. And I appreciate looking for mid-single digit operating profit growth next year. But one of the things, you have strong cash flow obviously some of the investments that you've made are starting to wind down a little bit, what's your view on share buyback especially with the stock down 15% today? Will you get more aggressive is that something that can be driver to EPS for next year?

It will be. The bottom line is a continued to return cash to shareholders. Our board looks at this consistently and makes this decision every quarter. And we have a 10b5 in place as well we do open market purchases.

So the net result is, I would say the top priority for us. But we don't disclose specifically what we do. We manage that is opportunities come up each quarter.

Okay fair enough. Thanks for answering my questions.

Thank you. Our next question comes from Ike Boruchow with Wells Fargo.

Hi everyone this is Lauren Frasch on for Ike. Thanks for taking my question.

While Sally investments are largely behind us, it sounds IT investments are going to continue to weigh on SG&A next year. Could you give us a little color as to what those investments are, if they have the potential to be profit drivers?

I hope more of them will be in the future. We finished off most of our investment in 2016. So it's nice to have most of our international ERP done. We did the first phase of core financials for the US last year as well. So that's a big chunk a big hurdle to get over. We've been a lot of investments in security and a lot of investments in our IT infrastructure as a whole.

I expect that will wane. Especially in 2017, and then further from that. And then we will focus on investments that really drive top line growth or cost control. So we're focused obviously on a lot of investments are and CRM and e-commerce next year. And I think you'll see us make investments in other technologies that help us manage inventory better or order forecast better. So you will see a shift. It will decline and there will be a shift, and more than hopefully will drive top and bottom line performance as opposed to more in the past was really just making sure our infrastructure would hold that.

Got it thanks so much guys.

Thank you.

Thank you. Our next question will come from Olivia Tong with Bank of America.

Thanks very much.

You recognizing that you don't want to give expectations by division, but is your plan to continue to report the two divisions going forward as a separate housekeeping question.

We will report the performance of our divisions absolutely. We just won't forecast guidance for each division and segment.

Got it. Okay.

So I guess you been asked a few times of on this call was going to drive to 3% growth. For next year. And you said that we've done it for this year.

But you also said that BSG is expected to grow 3% to 4%, which would imply, lets call it, 2% to 3% comp to growth for SBS, and that obviously has been have not kept up with that level. So perhaps can we just focus on what's going to drive the improvement in Sally's Beauty Supply. Because if you look at a two year stack basis, keeping the rate that you are at right now, which is sort of slight maybe 20 to 30 basis points of growth in the first half of FY17.

Listen, I'm not going to go segment by segment. Even the BSG one I was talking about what's a long-term growth trajectory for BSG as opposed to next year's growth trajectory for BSG. The reality is, we're not going to disaggregate it. But yes, I will say that there will be a little bit a slowing in BSG and some acceleration in Sally.

Is not a lot. We're not being overly aggressive. We expect some rebound and strengthening in Europe. And we are cautious in South America and Mexico given all the turmoil that's going on right now.

Okay thanks.

And then, you obviously had that big win with OPI a few years back. And Cody has talked publicly about their desire to get the brand to more salons. So in terms of, not specific to that relationship such as being an example, how much can you partner with your vendors in play a part in their expansion?

We do this quite a lot. And obviously we're working with Cody on an extensive basis about additional brands we can carry from them and expand. And we're working with other vendors such as Revlon and others who has now agreed to put in CNB our stores. That we think that would be nice win for Sally stores. We got another brand we're looking at in the nail category for early next year. That I think will be a win, and we're actually looking at a color brand that we might add to Sally for the first time in a number of years. It would be a new brand that we would bring into the color isle.

So there's a lot of opportunities to talk to all of our vendors about expansion. We are taking a relationship with them in dealing with the much more on global level. Both in terms of how we get brand expansion, and how we work with them on marketing. And I think that's going to overtime open up new opportunities for us to bring in additional brands to both businesses, our BSG business, our Sally business as well as international businesses.

Got it.

And then you mentioned that there's about 1,500 doors that have been refreshed. What's the plan for the other 3,500? Is it eventually get back to on the refreshing angle or is there something else planned for those other 3,500 doors.

Remember is not really 3,500 because there's a lot of BSG stores International stores in there as well. The real focus was on the 2,900 or so Sally stores. And remember a lot of those stores that haven't been refreshed were newer stores anyway.

So our thought as we went into next year since we accelerated quite a bit of work on refreshing stores into this year. Was to try and allow our stores and our teams in store to get trained, learn the new selling model, and focus on driving UPT and build momentum. And then we will come back and start attacking where might there be some gaps in stores that we still want to remodel and refresh.

Great thank you.

You bet.

Thank you. Our next question comes from Kelly Halsor with Buckingham Research Group.

Hi Chris thank you for taking my question.

Just first so I guess it's fair to assume then that kind of similar to the cadence of the comps guidance last year given the compares of [EPAL] comps -- concepts are more difficult in the first half of the year. That we should expect it to kind of improve throughout the year? Is that how should we should be thinking about the guidance?

I don't think so. I think we are basically just setting a conservative full year guidance for our business that we think we can hit. We don't have any specific insight into one quarter being better or worse than others. And our goal is just drive consistent earnings growth over time.

Okay and then just when you saved the mid-single digit growth, that's so EPS growth, that's not your operating income growth so we should assume

That guidance is operating earnings growth.

Those mid-single digit -- okay EBIT growth.

Okay and then just lastly around your marketing expenditures and try to focus on driving traffic to the store. Could you give us an idea of where your penetration in marketing is currently at Sally? Should we expect that to tick up here as you focus more there? And then also any color around potentially changing your loyalty program.

So a couple things. So there's not a lot of growth in total marketing budget at Sally. There's a little bit. We are spending some money to test a new loyalty program, which I will get into more to answer your second question.

The real issue we're doing in Sally is having learned for the last couple of years what doesn't work and what works, we're really focusing the marketing budget at Sally. So you're seeing an increase in digital media, digital spend, an increase in social and social influencer's. As well as then we will continue on with a more normalized level of direct mail and CRM spend. And then finally we're pulling back on some of the more broad based TV and radio, and then finally we're upgrading we're working on a test loyalty program.

Now let me talk about that in a little more specific. We're going to test it in two states next year. It does require investment to test it. But we do think that is necessary to think about the next generation of what loyalty can be. Because it's taking more and more time to resell cards, and as a result, although we're still growing our BCC program, we believe we can grow it much faster.

So we're going to test a free card. Will be a new loyalty program is based on points, and earning credits based on purchases, we hope that this will drive more repeat purchases from customers. But we need to test that the early in 2017 before we ever think about rolling it out in 2018 or beyond.

Okay and then just two quick ones just going back to clarify. So we're supposed to assume that the share repurchases are going to be above and beyond what your guided to today? You're not including any share repurchases?

That is correct.

Okay. And then lastly just on the pricing, could you just walk us through again the pricing actions you took last year? I believe the first one you might adjust lapsed in September, and what we should expect going forward? And is there any opportunity as well as Sally Beauty?

There still is more opportunity. I think you will see us do last zone pricing activity this year. Which was the large activity I think you're referring to that happened early last year.

We will do a lot of tactical pricing activities as well as reduced discounts and promotional activities. And then finally, global sourcing will become a much bigger piece of our margin improvement strategy going forward. And that will be the big difference.

So there will be a little reduction in some of the pricing activity we took last year, but then we will make that up through other activity that will contribute to our margins.

Okay thank you very much.

Thank you.

Thank you. Our next question comes from Joe Altobello with Raymond James.

Thanks guys good morning.

First I want to go to the marketing question. I know you guys have done a lot of experimentation this year. So as we head into FY17, do you feel like you found the right marketing mix? Is there more experimentation that's going to happen this coming year? Or do you feel like you've got it right at this point?

I don't know if you ever feel like you got a perfect. I expect the experimentation will go down. So we think we're honing in on the right model for Sally. We think it's more of an advocacy based model. Which means there's a lot of tailored digital and social media spend. That targets people who are actively searching for our categories, and for products that we can provide to them.

It also is a significant, what I will call a learning around our direct mail spend we made last year on what's the right level for that. We cut it back a little too far but we got it about right now. And now you will see us push into a lot of advocacy were we'll put more money against PR and social activities, bloggers, and social media influencer's who can recommend Sally to their friends in a credible way. And finally, there'll be a little bit of additional spend as I mentioned on rethinking and revamping our loyalty to the program.

Okay, but it's more tweaking them really shifting money In a significant way?

I think that's a better way of describing it.

Okay.

And then just going back to July, and I know Chris you glossed over this a little bit, but it seems like if my math is correct, July probably computed negative for Sally probably close to zero or BSG. And I'm curious, I know you didn't feel like you had a good answer as to why that happened. But what were your store managers telling you at that point in terms of what caused that slowdown?

I won't get into the detail data by month. But the reality is, we don't really have an answer. We didn't hear anything from the stores. We didn't feel like any marketing mix or promotional mix missed anything.

There was a negative calendar the way the calendar laid out, and we expected some of that. But it was actually little bit worse than we expected. And we don't really have a good reason why.

But the good news is, it strengthen in August and September and set us up as we went into the new year.

Okay just one last one just to make sure my math correct. Was traffic at both Sally and BSG down in the quarter?

No. The traffic was down in Sally, although UPT and ticket are up. And total transactions are a little down in Sally, but BSG continues to be positive.

And how concerned are you that the customer who seems to have migrated away a little bit given the confusion I guess what's gone on the last 12 to 18 months. How concerned are you that she doesn't coming back?

I think is all about us repositioning the business. The reality is that we, if you look at the negative in terms of the customer mix, the Pro was probably the most negative right now, and I think actually she's got different options and more options than ever before. So I don't think we're having a core traffic issue with customers. We're going through a mix shift as the brand evolves.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Stephanie Wissink with Piper Jaffray.

Thank you good morning everyone.

Just a follow up on traffic and some of our marketing initiatives. Could you help us appreciate what the KPIs are? What you are looking for on a quarterly basis to emphasize if that marketing is effective? Particularly if you look at social and some of the influencer based marketing.

Okay so you got a break it down. Because your KPIs are different based upon what you're looking at. If you look at your CRM activities such as our direct mail, you're looking at response rates. If you're looking at your digital CRM, you're looking at email open rates. But then also visit rates in purchases that are made. So those have very concrete metrics that are very -- same with your digital spend it really comes down to how many people actually engage with the digital spend you're doing there. As well as what shows up in store. And you track that as long as you have a BCC card, or as long as they flow through the e-commerce site.

And then some of your other stuff such as your social media influencer's, you have to really look at impressions and things like that. You can't really look at, do they turnaround by the store, because the many customers you don't have any data on them to track whether they showed up in your store. But you're looking at do they actually engage with those posts. And are those social media influencer's recommending your brand to a broader audience of people, and as a result are you getting more impressions.

Okay that's helpful Chris.

And if you tie that into traffic at the store levels for SBS in particular. How should we think about the recovery and the track that curved?

Is your loyalty customer base tend to be fairly responsive to some of these new marketing initiatives? Or do you think is going to take some time for there to be a shift in that traffic path?

And then as a derivative to that, could you talk a little bit about your e-commerce strategy and how that might be tied into some of your new CRM testing initiatives?

Sure. I think the answer is it will be different. So your loyalty customer, your BCC customer, and even your list customer tends to be quite responsive to some of the promotional activity you may put out through your emails.

So the net result is that could turn traffic fairly quickly. If you get the promotional strategy right. For the social influencer's, and for your digital marketing spend, it tends to be a slower build. It's more of a grassroots build through social media where people are recommending your brands, or recommending trying certain products to carry in your stores. And that takes longer to build. So there is a mix of short-term activity and longer term activity that you're working on at the same time.

On our e-commerce side, we're really targeting faster growth rates in e-commerce. We've radically improve the website we offer. We're making it much more user-friendly. We have seen terrific improvements in traffic. We haven't seen the corresponding improvements in conversion yet.

It's up, it's positive, but it's not positive to the level we want. And our team continues to think about how we make the site more usable. As well as how do we link that toward our digital advertising and social media activity to draw more traffic and better conversion through the site.

Okay Chris thanks one follow up on your comment.

Should we assume then that the first half of this year you're going to be a little bit more promotional? To take advantage of that near field opportunity in traffic? And then as the digital initiative start to take hold in the back half, would you think about may be step down in promotion relative to your gross margin?

I think -- I don't think so. I think we have a constant stream or promotional activity that we're trying to tailor to our user group. To basically bring them to the store and inspire them to come. I have seen the calendar for the first half of the year I would say it's a normal calendar.

Thank you best of luck.

You bet.

Thank you. Our next question comes from Linda Bolton Weiser with B. Riley.

Hi thanks.

You under took a number of initiatives this past fiscal year. And I was wondering if you could share how the ROI's were on the different initiatives? And if there were any big differences between what you expected and what you are achieving in our ROI for any of those things you did this past year thanks.

Linda that such a broad base question because there are so many different things we changed. Obviously we did a lot of merchandising resets that affected. And some of those are significantly up. So as an example cosmetics, multicultural, those categories are significantly performing significantly better than previous years.

Nails I think is going through an overall seismic change in the category as the extended wear products cannibalize some of the gel products. So even though we're seeing good transactions there. The reality is sales have been down.

It's a very big question. I think what we're excited about overall is that we're past a lot of the disruptive activity. So as I mentioned earlier, the migration of our CRM platform, the upgrades of so many categories, the upgrade of so many stores, the changeover in the packaging, what we felt was necessary to establish our brands as salon quality brand. All of that is behind us now. Which allows us to focus much more on in store execution.

We're actually cascading out of selling model to all associates every single store in the country right now. And we see that as a real positive it will help us with the UPT. And as you get UPT up, that gives us a little bit of time to work on using our social media and advocacy based model to drive traffic over time.

Thanks.

Thank you. Our next question comes from William Reuter with Bank of America.

Good morning guys. You had an earlier question that built with competition, and you guys noticed that you said you weren't seeing a whole lot of changes. Was this meant to apply with regard to brick-and-mortar specifically? Did include online competition as well, and I guess was a specific with regard to channel. Meaning specialty versus mass or food and drug?

I think it was more brick-and-mortar. I think that's right. You're seeing obviously a significant investment in online channels.

That being said, is not penetrating much into the pro side. But I do think that online channels are pushing fairly largely into the retail side. And we expect that to continue which is one of the reasons why we're investing so heavily in our own e-com platform right now and really upgrading that.

So my reference was really on the brick-and-mortar side. II don't see much in terms of a difference as to how our major competitors are playing the game. And let's be clear, on the Sally side, the major competitors are mass competitors, and we treat those customers up in the salon quality solutions from mass.

I don't see much change there. Obviously this competitors a relatively slow growth, they are upgrading the categories to some extent, but most of them had already done that.

And then what I would say in the BSG side, we have one primary competitive there, salon centric, I don't see a big difference there. Or much change in strategy there.

And then finally, there's the e-com side, and there I think we have to continue to upper game to compete in that world.

Do disclose what percentage of your sales I guess would be more on the Sally side are done through e-commerce what you growth rates are there?

We do. We don't disclose the growth rate specifically, but around 1.5% of sales and they are growing double digits much higher than our store level.

Okay. And then just lastly for me, has there been any update in terms of your target leverage?

No. We're not changing that at all. We continue to be comfortable with the range we're in.

Okay I will pass it to others thank you.

Thank you.

Thank you. Our next question comes from Karru Martinson with Jefferies.

Good morning.

When we think about the conference that you've had, how much do you feel has come from the pricing and the tactical prices that you have taken in terms of driving that top line number?

I would say a little bit. Our total price increases that we took across the whole business was well under 1%. So I don't think it's a huge leverage point, it contributes to some extent, but not a great deal.

Okay.

And when we look at the store base the 1,500 that of an updated. How is their performance trended over the course of their updates versus the rest of the store footprint?

They have trended better, but I think it's important to note that those were also some of our let's call it worst looking stores. In many cases we went to markets and to store bases where we knew we had a problem in terms of aging store base.

So it's not surprising that those stores would get the most out of that investment. Is not clear to me some of the newer stores and the newer markets would get as much benefit from that?

All right and congrats to Don on the new spot.

Thank you very much for that.

I would like to turn it back over to you for any closing comments.

Thank you very much. I'd like to thank all of you for the questions today and for your continued support of Sally. And I look forward to seeing you in the marketplace soon. We will be out there in New York this week and coming weeks as well. Thanks again. And enjoy Thanksgiving.

Thank you and ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service.