Karen Fugate - VP, IR Gary Winterhalter - Chairman, President and CEO Mark Flaherty - SVP and CFO.

Nancy Hilliker - Citigroup Meredith Adler - Barclays Capital Olivia Tong - Bank of America Merrill Lynch Ike Boruchow - Sterne Agee & Leach Chris Ferrara - Wells Fargo Chad Sutherland - Goldman Sachs Jason Gere - KeyBanc Capital Markets.

Good morning ladies and gentlemen and welcome to the Sally Beauty Holdings Conference Call to discuss the company's fiscal 2014 second quarter results. All participants have been placed in a listen-only mode.

After management's prepared remarks, I will facilitate a question-and-answer session, and initially, each caller will be limited to two questions. (Operator Instructions) I would now like to turn the conference over to Karen Fugate, Vice President of Investor Relations. Please go ahead..

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contracts of 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 Sally Beauty Holdings' SEC filings, including its most recent annual report on Form 10-K, effective September 30, 2013, and its most recent quarterly report on Form 10-Q being filed today. The company does not undertake any obligations to publicly update or revise its forward-looking statements.

The company has provided detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its web site. With me on the call today are Gary Winterhalter, Chairman, President and Chief Executive Officer; Mark Flaherty, Senior Vice President and Chief Financial Officer.

Gary?.

Thank you, Karen, and good morning everyone. Thank you for joining us for our fiscal 2014 second quarter earnings call. I will start today, with an overview of our succession plan announcement, followed by a high level review of our financial results and business initiatives.

Mark will then take you through the quarter in more detail, and provide the latest update on the data security incident. As you may have seen from our press release this morning, the Board and I through our succession planning process, have selected a very well qualified candidate, Chris Brickman, to eventually be my successor as CEO.

Chris is a terrific fit with the company, due to his extensive global and broad leadership experience, running a multi-billion dollar international division at Kimberly-Clark, as well as hits tenure serving on the Sally Beauty Holdings board.

Chris is a quick study, and understood the nuances of our business in a relatively short period of time, as a board member. Our plan is to bring Chris on the team effective June 2nd as President and Chief Operating Officer of Sally Beauty Holdings. I will continue in my role as Chairman and CEO.

Over the coming months, Chris and I will work closely together, to ensure a smooth and successful transition to his appointment as CEO by April of 2015. Once that transition occurs, I will continue to play an active role with the company as Executive Chairman.

I remain very confident that the company is well positioned for growth, both domestically and internationally, and believe we have chosen a capable and seasoned executive to carry on the legacy of success we have experienced for the last 50 years.

Now I'd like to turn to the results for the fiscal 2014 second quarter; on a consolidated basis, same store sales increased by 1%, which represents solid performance despite severe weather challenges during the quarter. I am not fond of attributing business performance to external factors such as weather.

But it's difficult to ignore, given the sustained and broad geographic impact. I will make an exception this quarter and provide the number of store closure days to help put the sales impact in perspective. Total U.S. days closed at Sally and BSG in the second quarter exceeded 5,400 versus just over 1,300 in last year's second quarter.

Consolidated gross profit in the second quarter was 49.6% versus 49.5% in the prior year. This 10 basis point increase was predominantly due to favorable product mix shift in the Sally North American business, as well as market improvement in Sally's international operations.

Now turning to Sally performance; same store sales growth for Sally was positive 0.5% in the second quarter versus down 1.6% in the year ago quarter. Sales performance in the regions that were less impacted by store closures, such as the West and Southwest, performed better than regions most affected by the unusual winter conditions.

Net sales for Sally Beauty Supply reached $570 million, an increase of 2.5% over the prior year quarter. Sales growth at Sally was primarily due to new 120 store openings and same store sales growth. Beauty Card member sales increased 7.4% for the quarter. Club ownership grew 11.3% to reach 7.8 million members and membership renewals reached 54%.

Gross margin in the second quarter was 54.8% versus 54.5% in the prior year. This 30 basis point increase was predominantly due to favorable product mix shift in Sally North America, as well as margin improvement in Sally's international operations. Our international business performed well this quarter.

Same store sales were strong, which led to gross margin expansion, SG&A leverage and EBITDA growth. We opened our second store in Peru this quarter and expect to have at least six stores open by the end of the fiscal year.

Operating earnings for our Sally segment were $105.5 million, slightly down when compared to last year's second quarter of $106 million. Operating margin was 18.5%, 60 basis points lower than last year's second quarter, primarily due to investments in new businesses and higher marketing expense in our Sally U.S. business.

In March, we hired a new Chief Marketing Officer for Sally North America, Ashley Sheetz. Ashley brings a wealth of marketing experience and was most recently Vice President of Marketing at GameStop.

In her new role, Ashley will be responsible for all the marketing initiatives at Sally North America, including digital and print advertising, social media, e-commerce, customer acquisition initiatives, loyalty programs and the new CRM rollout. I'm delighted to have Ashley on board and look forward to her contributions.

Now turning to the BSG segment; BSG had same-store sales growth of 2.2%. Net sales also grew 2.2% to reach $349.9 million. Sales growth from our store business, which represents about two thirds of BSG sales, grew 4.3%, while sales consultant business was down 1.6%.

The sales consultant business was also impacted by slower business at salons from the weather issues. BSG's gross profit margin was down 10 basis points to 41.2%. The timing of vendor rebates and concessions compared to the prior year, was the primary reason for this decline. Operating earnings at BSG increased by $1.1 million or 2.1% in the quarter.

Operating margin was down 10 basis points at 14.5%. This performance reflects the decrease in BSG's gross margin, depreciation, and investments in Loxa Beauty. Loxa Beauty made its debut in mid-March.

Although it will take some time for the site to gain meaningful sales traction, we are encouraged with the positive feedback we've received from the salon stylist community, as well as our supplier partners. In May, we kick off our consumer marketing campaign, and start advertising directly to the end consumer.

Store count at BSG ended the quarter at 1,254, an increase of 53 stores. Our sales consultant count is 993 versus 994 in the year ago quarter. Before I turn it over to Mark, I want to briefly comment on more recent performance. Consolidated same-store sales for our U.S. stores in April, was in line with our expectations.

Although we are encouraged, we will continue to closely monitor the effectiveness of our customer acquisition campaign for retail traffic. Now I will turn it over to Mark to provide more financial detail for the second quarter.

Mark?.

Thanks Gary. Consolidated net sales for the second quarter were $919.5 million, an increase of 2.4%. This increase was primarily driven by 173 net new store openings and same-store sales growth of 1%. Consolidated gross profit was $456.4 million or 2.7% over the prior year.

Gross profit as a percentage of sales was up 49 -- was approximately 49.6%, up 10 basis points when compared to 49.5% in the fiscal 2013 second quarter. Consolidated gross margin for the first six months of fiscal 2014 is 49.3%, which is flat compared to the first six months of fiscal 2013.

In light of this performance, we feel it is prudent to revise our 2014 full year gross margin guidance from a 30 to 40 basis point margin expansion to now a 20 to 30 basis point expansion. Second quarter SG&A expenses, including unallocated corporate expenses were $312.8 million, growth of 4.5% from the prior year.

SG&A as a percentage of sales was 34%, an increase of 70 basis points over the prior year. Included in the fiscal 2014 second quarter SG&A is a $1.1 million pre-tax charge associated with the data security incident.

In addition, higher enrollment in our self-funded healthcare plan and investments in new businesses, also played a role in higher SG&A expenses. Unallocated corporate expenses including share-based compensation were $32.3 million or 3.5% of sales versus the fiscal 2013 second quarter expenses of $27.9 million or 3.1% of sales.

This increase is primarily due to higher than expected healthcare enrolment. Heading into fiscal 2014, we expected higher SG&A expenses and some deleverage this year. However our actual expenses are running above what we anticipated, primarily due to increased enrolment in our employee healthcare plan and the timing and investments in new businesses.

In addition, we anticipate share-based compensation to be more than the previously expected figure of $19 million due to the additional grants related to the executive management transition. This share based compensation charge will be higher by approximately $3.5 million and $200,000 in the fiscal 2014 third and fourth quarters respectively.

As a result, we now expect our consolidated year-over-year SG&A expense growth for the second half of 2014 to be in the range of 6% to 8%. This estimate does not include additional expenses associated with security incident, which we will adjust for in our financial presentation.

Consolidated operating earnings in the second quarter decreased 2.9% to $124.1 million. Operating margin was 13.5%, down 70 basis points, primarily due to higher SG&A and depreciation expenses.

Interest expense, including the amortization of debt refinancing costs totaled $29.3 million, up $2.5 million or 9.3%, primarily due to higher principle balance. For the fiscal 2014 second quarter, our effective tax rate was 38.3% versus 35.8% in the fiscal 2013 second quarter.

We continue to believe that our annual effective tax rate for the fiscal 2014 year will be in the range of 37.5% to 38%. GAAP net earnings were $58.5 million with earnings per share of $0.35 and adjusted net earnings per share or adjusted net earnings was $59.2 million with an adjusted earnings per share of $0.36.

In looking at our balance sheet, inventories were $819.8 million, compared to the fiscal 2013 year-end inventories of $808.3 million, a 1.4% increase. Inventories increased $67 million or 8.9% compared to the ending inventory on March 31, 2013.

This year-over-year increase was primarily due to additional inventory from new store openings, new product offerings and promotions for the Sally U.S. 50 Years of Beauty event. As of March 31, 2014, our debt excluding capital leases totaled approximately $1.8 billion.

Additionally, there was no outstanding borrowings on our ABL facility as of March 31st. Capital expenditures for the first six months of fiscal 2014 totaled $30.3 million and reflect expenditures to open new stores expenditures on existing stores and IT specific projects.

Although our capital expenditures were lower in the first half of the fiscal 2014 year than we expected, we have several projects underway during the second half of fiscal 2014,.such as the BSG point-of-sale system, continued implementation of their ERP system, and the deployment of Sally CRM that will replace our total capital expenditure within our previously stated guidance of $85 million to $90 million.

During the quarter, we repurchased approximately 2.1 million shares of our common stock for an aggregate cost of $59.5 million. As of March 31, we had approximately 331 million remaining under our $700 million authorization. Before I turn it back over to Gary, I'd like to provide an update on the data security incident.

As we had previously disclosed, we had discovered the data security incident in late February, where we detected a malicious software or Malware, as it's commonly referred to, on certain parts of our information technology systems, including our point-of-sale system.

We immediately engaged forensic experts to assist in our investigation, which is continuing.

During our investigation, we discovered and are reviewing the evidence, that a portion of the payment card data for some transactions on our systems, primarily during the period from February 21st to February 28th, 2014 may have been illegally accessed and removed by the Malware.

We have completed the removal of the Malware from our point-of-sale systems and believe the incident has been contained. The costs we have incurred to-date, in connection with the data security incident primarily include professional advisory and legal costs related to our continuing investigation.

We expect to incur additional costs and expenses going forward, but we are not able to determine the probability of or reasonably estimate the magnitude of these potential costs or expenses at this time. We have adjusted for these costs in our financial presentation today, and will continue do so going forward.

Gary?.

In summary, we had solid results despite the weather challenges in the U.S. and Canada. I'm pleased that we achieve a positive comp in the US and I remain confident that the company is well positioned for improved performance in the back half of the year. Now I will turn it over to the operator, to take your questions..

(Operator Instructions) First we will go the line of Oliver Chin with Citigroup. Your line is open..

Hi everyone. This is Nancy Hilliker filling in for Oliver Chen. Thanks for taking my question..

Good morning Nancy..

Good morning.

I would like to just touch on -- could you talk a little bit more about the branded product, how that influenced margins in this past quarter, and also the appetite for perhaps adding more, like the OPI, the TIGI, this year? And then if you could update us on modeling in terms of the anniversary sale this year and how we should think about that, and just one final follow-up if you could talk about traffic versus ticket in the quarter?.

You might have to repeat a couple of those, but lets start with branded goods first. First of all, the largest contributor to the brands you're talking about is OPI. OPI is not dilutive to our margins, its actually right in line with the margins we get on other nail care products, so that's a good thing.

Its also, we believe bringing in a new customer, because the average ticket we are looking at, when they purchase OPI is higher than our normal average ticket. So we are real pleased with that. The margin dilutors that we really had were the CHI electrical appliances and the Curl Genius, both of which were very strong in the first quarter.

So I think that the dilutiveness of our gross profit margin going forward will be lessened by the fact that the electrical appliances -- they still sell well and there will be a little bit of that, but its not nearly the impact that you get in the December quarter with the holiday.

The other two products aren't selling enough to be materially -- impact the margin that being the TIGI, and I think we had a small ethnic brand, Mizani, that came in -- and its doing well in that category, but again its not a big margin diluter.

What the next part of your question, Nancy?.

The next part is just if there's any modeling impact for the anniversary sale and how we should think about that in terms of modeling? And then just traffic versus ticket in the --?.

The 50th Anniversary, as I said in the past, is more of a margin impact for -- typically than sales impact. We have done these kind of events many times in the past. And what we are finding is, that it is helping us to offset some of the margin deterioration that we talked about in Curl Genius.

I also think, that it will give us a little bit of incremental upside to margin in these back two quarters. But some of that is also going to be dependent on the retail traffic strengthening; because as you know, that's our highest gross profit category of sales, and its still -- gosh, not quite half of our retail sales.

So when that continues to be negative on us, that has a bigger impact on our margins actually than any of the other things that we just talked about.

Traffic versus ticket; ticket was up a little better -- performed a little better than traffic in the quarter, which did not surprise us at all, given the issues that we described with store closures and weather and all that.

But we are really looking forward to this quarter being -- quarter two being behind us, and this quarter not being affected by some of these extraordinary circumstances that we had with weather and all that; because I think we will get a true read this quarter of how the customer plan and program is continuing to impact our retail customer, which is what we need to continue the Beauty Club card growth, is more retail customers to convert..

Great. Thank you so much..

You're welcome..

Thank you. Our next question comes from the line of Meredith Adler with Barclays. Your line is open..

Hey guys. Thanks for taking my question..

Hi Meredith..

Hello. Maybe I'll start by saying that, personally, I'm sorry you're retiring, Gary, but I am happy for you..

Slow down, I am not going anywhere yet..

Well, its going to happen, its on the horizon..

Well it is for all of us, isn't it?.

No comment..

I didn't mean you. Go ahead..

I guess I did want to talk about, maybe the question that other people have on their mind is to just, what is it about Chris? Is there anything about you retiring that relates to where the business is going, the fact that you are bringing in somebody with a very big global experience? Does that say something about where you think the growth is going? Obviously, international has been growing faster, but does it say something about where the focus of the company is going to be going? Just maybe talk a little bit about that..

First of all, let me tell you that, this may be happening a year or so before we would have planned it to happen. But we saw this opportunity with Chris, and had some experience with him for a year and a half on our Board, and I certainly didn't want to stand in the way of getting somebody of that caliber into the company.

So I think that the international experience he has had is wonderful, because obviously we are growing percentage wise at a much faster rate outside the U.S. than we are inside the U.S., and that's going to have to continue, simply because you reach a saturation point in the U.S.

I still think we have a lot of runway in Canada and Mexico, but our international businesses in Europe are doing extremely well, and we need to develop the South American market faster than we have been. So all of the experience he has in those areas, will be great for us.

But really, I would tell you that I don't see a big change in strategy towards that, but I do think as the company continues, it will continue on the path that it is, where we need to have more international growth and it needs to contribute faster than it has been, and I think he is going to be a huge help in accomplishing that..

All right, that's very helpful. If we could just talk a little bit, certainly Sally is not the only company where it's very hard to see underlying trends because of weather.

But for whatever data you have, where there wasn't bad weather or so far into April, is there anything about a customer that -- return to the old customer acquisition program that's changed your view about the effectiveness, or you still feel that you're back where you should be, and it's going to produce what it should produce?.

Well first of all, as we mentioned on the call, states like California, Texas, Arizona, places where we really had no impact on weather, did quite well. We were very pleased with our performance there.

It is very difficult to read through things like weather, especially, when our issue has been with the non-Beauty Club card retail customer, because when you think about that, that's a non-Sally customer, and if there is any customer out there that's not likely to come in for the first time, because they can't even get to the shopping center, its going to be that customer.

The BCC customer, who is used to buying their monthly air color or whatever from us, is going to make a little more of an effort to get there, and obviously we are in a lot of shopping centers anchored by brochures, and places that you really have to get to every week. Same thing about the professional customer.

So that just adds to the difficulty of us being able to read the success of the program during that quarter. Now having said that, the program is never moving as fast I'd like to see it move. I think that bringing on Ashley Sheetz from GameStop, I am meeting with her two or three times a week right now, she has only been on board a month.

But she just gets it, and we are going to see a lot of things start to happen quickly with her and I think we can even accelerate what our expectations were. Now, I will still tell you that, I am not changing my feeling about a one to three comp for the year or SBH, I am pleased that Sally -- if you would have told me that the Sally U.S.

business or the Sally segment was going to comp positively for Q2, if you would have said that to me back in mid-February, I would have strongly disagreed with you, because we just faced some horrible issues with the weather and everything, but things picked up a little the second half to February.

March was okay, even with the shift in Easter, and my comment on April was, that we are pleased and what we saw in April was in line with expectations. And again, that's not a 2% or 3% on Sally U.S. comps, but it stayed positive, which is what we are looking for right now, and then to build on that, going into May and June, I feel good about that.

I think as I have said all year, we are going to continue to progress quarter-by-quarter throughout the year..

Great. And then I just have one more question about BSG. This is a business that, as you see the mix shifting towards the stores, the gross margin has benefited meaningfully from that.

This quarter, you talked about just comparisons on vendor monies, but to what extent -- is that always a driver of the gross margin and is there normally a lot of volatility in that particular source of money?.

No, there is not normally a lot of volatility. If you recall, I said the same thing about their margin in Q4 of last year, and I told you we could get up in Q1 of this year, which we did. The same thing will happen in the back two quarters of this year. It is a significant amount of money, so it does have an impact on their margin.

But as you also suggested, as that business does move more toward the store, the margin does increase. Now what offsets that a little bit, is we are doing more and more business with some of the larger chains, and the chains get a fairly significant discount.

That appears in the gross margin for the full service segment, but when we report gross profit for BSG, its total margin. So the store margin is actually continuing to go up nicely, because of the shift -- I am sorry, because of the booth renter phenomena and the shift to the stores of the market is much better in the stores.

But there is a bit of a drag, doing more and more business with chains on the other side of the business. But I still expect BSG to increase margin over last year, and the margin percentages that you all have modeled there, I think are well in line with BSG. Talking about BSGs comp though.

I think one thing that people did consider is, BSG business is two-third stores, and they had weather impact too. I notice a lot of guidance was still over 5% on BSGs comp, which was a little bit unrealistic with what happened to their store closures and so forth as well.

On thing I would like to bring up while we are talking about BSG comps, is this quarter, we are going to be anniversarying the Miracurl rollout, which was in May and June of last year. If you recall, that was curl machine that BSG got first, and we had a huge business in that in May and June.

We think we have promotions in place that will offset a lot of that, but that could have -- could put some pressure on margins -- or I am sorry, on comps for this quarter. Unlike the Sally division, who got that product or a version of that product late into summer and early fall, BSGs big surge in it came in May and June..

Great. Thank you. That's very helpful..

You're welcome..

Thank you. Our next question comes from the line of Olivia Tong with Bank of America. Your line is open..

Great. Thank you, appreciate it. I think it's promising to see that the membership growth and the sales from Beauty Club card members remained solid despite the weather.

Presumably, demand was down from those consumers as well, so why do you think that was the case?.

Well, as I said a few minutes ago, that customer, the Beauty Club card customer is a much more consistent customer and typically, a lot of those customers buy hair color from us. They are going to have a tendency to make that extra stop, even in difficult weather circumstances.

Now I will absolutely agree with you, that in a lot of cases, they just couldn't get anywhere either, and if the store is closed, they can't come in even if they want to.

But I do believe, that that customer is more likely to come a few days later, when things clear up a little than a retail customer, who might be coming into the center, hey I got a mailer from Sally, but they are there for the grocery store, and they can't -- you can't probably get out of the car. So they are much more likely not to stop..

Got it. And then it sounds like you don't want to necessarily give the same-store sales comp numbers or regular weather areas versus bad weather areas.

But perhaps can you talk a little bit about the spread, the divergence in same-store sales growth between those two buckets? And it sounds like for BSG, you also said that weather was an issue, so perhaps can you split that up a little bit between the impact on the Sally Beauty sales store -- sorry, Sally Beauty Stores side of the business and then also the BSG side? Thank you..

That's a little bit difficult to do. And the reason for that is, I don't know where you live, but in certain parts of the country were affected much worse than others with this weather.

So you could have -- ideally, we had as much as a 4% or 5% impact in some of the areas that were really severely affected and probably a 1% or 2% impact in some of the other areas that are kind of fringe and weren't quite as affected.

And to really dig into that, that's why we tried to put some color on this, just the store closure days, because I think we could banter back and forth on the impact on comps and you could argue it several different ways.

I think this morning, someone said that they thought the total impact on SBH compacts, which would be Sally and BSG North America, was somewhere around 1.5 points, which would have put us at a 2.5% comp instead of the 1% we reported.

I'd have a hard time arguing that up or down, so I think that that's pretty close, but again its next to impossible to really be able to accurately measure that. I mentioned, the Southwest and Western states of Texas, and even if you look at Florida, where we had good weather.

But then you look just a little north of that at Georgia, and a lot of this as you well know, when you have that weather in Georgia or Texas, it has a much bigger impact than in the Midwest, because nobody is prepared for this kind of stuff in those states, and you saw what happened in Atlanta here, you're probably two or three times during the month of February, and then again in early March, that's why I think its really difficult to get into too much detail.

I told our folks around here, we just got to look through this quarter, we can't measure anything horrible quarter for this to happen to us because we felt after Q1, we were starting to see some traction. And I still believe that I think it was just very-very clouded with these issues..

Got it. That's helpful and that actually leads [ph] into my next question, which is just around a lot of the activity you've done is trying to restore traffic and improve traffic overall in stores, and certainly the weather kind of put a damper on that.

So how do you think about the weather's impact on your ability to continue to rebuild traffic after they are sort of -- it started two quarters ago? Then you had a bit of an issue that you had no control over hitting you.

So how does this help -- how does this impact your ability to continue to get back on that track of restoring traffic?.

I don't think it hurts our ability actually. In some ways, even though we are communicating with some of these customers, and we sent them something in the mail.

Even though, they couldn't come in, the advertising impact of that is probably helpful, and then, when we send them another piece, which we certainly will do, and the weather is a little better, you kind of got a little of the advertising impact.

I guess I could make case that you communicated with them, one or two more times, even though they weren't able to take advantage of the communication, you did communicate with them, there's advertising value in that. So hopefully that will actually help us in the back half of the year.

But I don't really see a downside to what the progression of the program and how it was working in any real serious interruption and keep in mind, we didn't even start this back up until late -- in the third quarter. We are actually in the fourth quarter of last year.

So we still are looking for this thing to continue to grow, and looking back on it, when we first started this program back in 2008 and 2009, it took us a year, 18 months to really start seeing this thing start to click.

So I expect it to continue slowly getting better, and again if I can look through the issues of the second quarter, I still believe that it is..

Got it. Thanks Gary..

You're welcome..

Thank you. Our next question comes from the line of Ike Boruchow with Sterne Agee. Your line is open.

Hi everyone. Thanks for taking my question..

Good morning Ike..

Hey Gary, how are you?.

Good. .

I guess the first question I had, Mark or Gary, just looking for a little bit more clarity on the new outlook on the SG&A line. I think I heard right. For the back half of the fiscal year, you're thinking of expense growth at 6% to 8%. That just sounded like -- if I heard that right, it sounded like it was more Q3-weighted than Q4.

So does that mean we should see kind of the higher end of that growth rate in Q3 and then the lower end in Q4? And then just curious, of those dollars, what is nonrecurring? How should we think about expense dollars as we get into the next fiscal year? Any color there, [indiscernible] bit of a step up from what we normally see from you, so just trying to understand how we should think about SG&A?.

Sure Ike. You are correct in assuming that the third quarter should be a little of a spike over the fourth.

Part of this is, you do have the share based compensation, which should be -- is more of a nonrecurring or one-off item, and the reason for the -- given the acceleration of that is, because its -- one individual being retirement eligible, that those particular securities or equity rewards are accelerated. So that's a bit of a one-off.

The other items that are really driving this, are a little bit of the increase of insurance that we have seen over this year.

We saw a -- typically we budget a, or forecast for an increase in participation each year, and we think the increase in participation that we experienced during our open enrolment at the end of December this year was nearly double, almost triple what it was in our past historical run rates.

So that has created a little bit of an increase in premiums for what we typically run at. That's not a non-recurring charge, that is one that is new.

Also, we made some additional investments in advertising on Sally, as Gary has talked about here on the call and we have talked about previously, is we are continuing to make the investment in our national prospecting programs, as well as our BCC program, to further our CRM efforts; and that -- the effort towards that is certainly more weighted in the third quarter than the fourth quarter, as far as the spend is concerned.

Lastly, is that we do have investments in some of our new markets, that are going to be negative leverage drag right now, until they start to mature. The Peru market that we just got into, has a negative leverage drag right now, because we only have two stores, and as that starts to mature, that will certainly subside.

Also, the Loxa business is more back-end weighted, based on its launch this year. So the third and fourth quarter are much more heavily weighted from an SG&A standpoint, than what you saw in the first half of the year. So those are things that more or less we will take care of, as volumes start to increase, but they are a bit of a drag right now..

Okay.

And any color on how we should be thinking about the dollar growth for next year in a more normalized kind of environment?.

I think it’s a little premature right now, but certainly we will -- we will certainly give guidance as we move towards the back half of the year..

Okay. And then Gary, I'm just trying to -- I wanted to follow up, because I was a little confused. The commentary that you gave on April, it sounded like you said you were pleased and it's in line with your expectations. But I thought I heard you say it's not 2% to 3%.

But is your expectation your guidance, your 1% to 3%? I'm just trying to dig into it a little more, because I was kind of confused what the message was on April?.

Its within our guidance. We don't have all the numbers completely in from international and so forth. But we were within our internal expectations, which obviously we worked in the second quarter..

Okay.

And the last question would be with the new CMO in place, can you talk about some of the initiatives that are in place with the CRM and maybe some things you're looking to do on the target marketing side, that you think could be an incremental driver to the business over the back half and into next year?.

I think the thing I am most excited about is, she has an extensive background with CRM programs, and when we first talked with her, I had said, wow, selling video games, selling beauty supplies, but had amazed me as the thought processes are very similar in how you approach a customer when you have a lot of information on them, to get them to react in a particular way, based on that information, which is what CRM is all about.

And she really gets that. I also think, any time you have a woman in that role, which are on both sides of our business, we have women in the chief marketing roles for BSG and for Sally. That just adds something, because they just understand these products, which should be obvious.

The most exciting thing I am looking forward to was her addition, and the timing on it is really good, because we are just getting in a position, as I have said the last couple of quarters to start taking advantage of all this data and our CRM programming and all of the things that you have to have in place, to have an effective program, are pretty much done now, and we are looking forward to launching that program aggressively..

Great. Thanks..

Sure. Thank you..

Thank you. Our next question comes from the line of Chris Ferrara from Wells Fargo. Your line is open..

Hey thanks. Gary, just another point of clarity on April.

You were referring to the US comp when you said not 2% to 3% but positive, right?.

Yes..

Okay, okay. And I guess back to SG&A, the 6% to 8% growth in the back half of the year, it went along with plus 20, 30 gross margin. It seems like that might imply sort of flattish EBIT, or maybe slightly positive.

Is that the way you're thinking about things?.

We are taking a very conservative and very cautiously optimistic view of the back half of the year. We were encouraged about the margin expansion we had for the second quarter. That's the first time in a couple of quarters, where we have seen consolidated margin expansion.

And given the fact that we were flat for the first half of the year, overall, in order to make up what the original guidance was, that would have been a bit of a big ask, out of the business units. And so with that, its just that, you're certainly not getting the contribution on the margin side, that you would necessarily see to really drive that.

And then, coupled with the fact of just the incremental increase that we discussed on the SG&A side, as I said, yeah, we are looking at somewhat of a flattish to slightly positive growth in the EBIT..

And that's for the full year remaining or is that for the back half?.

Full year..

Yes, okay. And then I guess on BSG, right, I know Gary, you pointed out that maybe expectations were a little optimistic given weather also hit BSG. But I guess the comp was pretty easy as well, right? So, I know maybe that related to two years ago as well. But weather looks like -- again, you called out 150 basis points, maybe give or take.

You still had a pretty big deceleration in the underlying sort of two-year growth rate.

So what besides weather at BSG is going on, and do you think BSG can still be the sort of 4% to 5% comp grower that it has been more recently?.

I do, because we continue to bring in brands at BSG. We actually will start anniversarying some of the things that we -- well some of the acquisitions that we made very small acquisitions.

But the other thing that a bit of a fluke with BSG particularly this year, is of the 57 stores or may be 60 stores we opened last fiscal year at BSG, 40 of those opened in Q4. So we don't anniversary those for comp purposes for until Q4 of this year.

So between that and the Miracurl that we are anniversarying in May and June, BSG may look a little soft, but underlying, BSG is performing extremely well.

I couldn't be more pleased with BSG and like I said, as we continue to add brands here and there geographically, that just adds to it, it gets a little choppy geographically, because you are not always adding the same brand everywhere. But overall, I am very pleased with BSG..

Finally, just back to SG&A, I'm sorry if you said this and I missed it.

I know you pointed out a lot of the healthcare stuff isn't one time, but what's your view on the ability to leverage SG&A going forward in 2015 or 2016? Like will 2015 have some of the anniversarying impact of what's unusual or what's hitting 2014 that you maybe didn't expect?.

Its my expectation that it will. But its premature to give guidance a this point, till we start into kind of the full throes of our planning process for next year, as well as years beyond, and we are just kind of in the beginning, planning stages of that at this point..

Keep in mind too, we gave some guidance at the end of last year, that with everything we had going on this year, we knew about Loxa then, we knew we were going to have a little bit of extra healthcare. We knew we were still doing the ERP rollout in Europe, that we weren't expecting to get a lot of leverage this year.

And as some of those projects, either mature and give us the ability to get a little extra leverage, like the ERP will, and as we start to get some revenue out of Loxa, to offset the pretty significant SG&A costs that we are putting in this year.

I think in future years, if we can continue to grow our gross profit margin the way we have historically, that I feel like we can get leverage on total sales..

Just for the normal cost structure of our business, as we start to normalize our comps back to our historical run rates, we should easily get back to some of that normalized margin expansion. But this year is bit of an odd year in terms of how the incline is working towards getting back to those normal -- for those historical run rates..

And you think that 3% to 5% historical run rate is still in play.

3% to 5%?.

Sorry, consolidated comps..

Yeah. I believe that down the road, that we will be in that area, just given the performance of international. As I said a minute ago, I think BSG is still a 4% to 5% comp business. Throwing all that together, if Sally U.S., just comps 2%, it will be in that range..

Thanks a lot for all the time..

Thank you..

Thank you. Our next question comes from the line of Taposh Bari from Goldman Sachs. Your line is open..

Good morning guys. Its Chad Sutherland on for Taposh. .

Good morning Chad..

Just a follow-up question on marketing, obviously you talked about rolling out the Loxa Beauty program this quarter.

What does that look like from a consumer standpoint, and I guess how are you thinking about that opportunity?.

Its really difficult to put that in perspective right now, because this is such a new business for us, and its really a new concept. So far, we are very pleased with the reception that we are receiving from stylists and salons and our vendor partners. And a lot of things still have to happen here.

These suppliers, are for the most part, putting by now buttons on their website to transfer business that they get inquiries, that they get what we start the consumer advertising, that I think is going to add a whole new dimension to this.

But I still believe that it will take the salons and the stylists to sign up and then ultimately, talk about it, which they'd be foolish not to, because they are taking money for really doing nothing, other than mentioning it. As we said from the beginning, this could be something very significant, or it could be just a normal e-commerce type site.

I think it has all the components to do something good, and we also continue to add brands to the site, as we reach agreements with some of these suppliers on what we are going to be doing with their brand on the site. So we are excited about it.

Its something new for us, so I don't want to say this is $100 million business for us, we just don't know..

Got it, that's helpful. Thank you.

And then on a slightly different track, can you just talk a little bit about capital allocation? Have your priorities changed at all? Obviously the buyback was pretty consistent quarter-on-quarter, but how are you thinking about that going forward?.

We are still very committed and very consistent in terms of our capital allocation. We haven't wavered and still are very committed to the share repurchase program that we are undertaking right now, and you will still see a very consistent cadence from us..

Thanks a lot guys. Good luck..

Thanks..

Thank you. Our next question comes from the line of Jason Gere with KeyBanc. Your line is open..

Okay. Thanks. I can still say good morning.

I guess just following up on the last question about the buyback and the capital allocation, so sounding like more modest EBIT growth this year, would you get a little bit more aggressive in terms of using that $330 million that you have left under the program this year, or how should we think about that? Is that over a two-year period? Do think this year would be more aggressive? So that's just kind of the first question, if you could provide any incremental color..

Jason, what we have said before, is that we are very committed to managing towards the financial target leverage ratio, and a range in which we operate in and we are very comfortable in that range. We are at certainly the higher end of that range because of some of the -- our performance kind of coming back into more historical levels.

But in terms of that, we haven't changed our thoughts on that, and with that, you get a very consistent cadence in terms of our buyback program..

Okay.

I guess the other question, just kind of more bigger picture; so if we think about fiscal 2014 as really being kind of an abnormal year for Sally Beauty with the weather, the change in the marketing campaign and the new CMO, and even now just more on the healthcare costs, can you talk maybe about the levers that you guys can still pull to get back to what could be like a low double-digit type of EPS growth over the next couple of years? And obviously, this year it's looking more mid-single-digit type of growth though with a lot of those kind of unique items affecting you.

But what are really the bigger drivers that we -- should we think about more on the margin side, even though Sally Beauty -- the Sally business has got terrific margins now. It does sound like there's a little more investment maybe within new markets and some of the marketing may be over the near term.

But I was just wondering if you can kind of provide a little bit more of the balance between sales versus margin as we think over the next couple of years..

I think first of all, as far as Sally's gross margin expansion, fundamentally, nothing has really changed there. We continue to see our own brands or our controlled brands, increasing at a faster rate than sales, which is good for margin. We continue to see the retail piece of the business, including Beauty Club card outpacing the professional growth.

So that's good for margin. Although that's where we have been consistent this year, but I think it will get back to that, just because there is only a finite number of stylists out there that we can do business with. And the March driver on the BSG side of the business continues to be the shift towards the stores.

Now, we will continue to invest in some new markets. We tried to do that in a way, where we are not going into too many new markets, with significant costs at the same time.

So right now, our goal in Europe for example, is to get our ERP system in place, and then to start expanding within the countries that we are already in, even more quickly than we are. Same thing is true in Mexico, as Mexico now adds mass and adds sales to the expense structure we have.

Our EBITDA and our contribution there continues to rise, to go up. Same thing will happen in Europe. So Mark mentioned Peru. There is a fair amount of costs going into these countries and product registration and all the things that you have to do, just to get the business up and running.

Even though, you will only get, may be in Peru, 45 or 50 stores approximately. We believe that they will be very profitable stores. They will be similar to our Mexican business, which is very high end mall business, very high gross profit margins, and once its built out, its very profitable.

So to answer your question with all that, I believe we can get back to leveraging SG&A at a mid-single digit comp range in overall consolidated comps..

By what timeframe is that? I mean is it still a few more quarters and then maybe some point during fiscal 2015 that we start to see that come back? Just trying to get -- I know you are not giving guidance, but I'm just trying to get a sense of the timing here, if this is something that could kind of trickle into the fall and that, by calendar 2015, we should start to see the fruits of the labor really kind of coming through..

Well as Mark said, I think right now, it’s a little early in the process. We are just starting our planning process for fiscal 2015, and I think as we get later in the third and for sure, on our call for the fourth quarter, when we do give some guidance for next year, we will be in a much better position to make a call on that..

Okay. I understand. That's it for me. Thank you..

Okay. Thank you..

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

Thank you, operator. As I said before, I am actually pleased that we ended up with a quarter, where our same store sales growth was positive at 1% and our overall sales growth was 2.4, and we did increase gross margin by 10 basis points.

We really look forward to having the weather issues behind us this quarter, and executing our plan in the second half of the year. Thanks as always for your interest in Sally Beauty Holdings..

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