Karen Fugate - VP of IR Gary Winterhalter - Chairman and CEO Mark Flaherty - SVP and CFO Christian Brickman - President and COO.

Simeon Gutman - Morgan Stanley Oliver Chen - Cowen and Company Simeon Siegel - Nomura Securities Olivia Tong - Bank of America Merrill Lynch Jason Gere - KeyBanc Ike Boruchow - Sterne Agee Chris Ferrara - Wells Fargo Joseph Altobello - Raymond James William Reuter - Bank of America Merrill Lynch Taposh Bari - Goldman Sachs Mark Altschwager - Robert W.

Baird Stephanie Wissink - Piper Jaffray Jill Caruthers Nelson - Johnson Rice & Company Linda Bolton Weiser - B. Riley and Company.

Ladies and gentlemen, good morning and welcome to the Sally Beauty Holdings Conference Call to discuss the company’s Fiscal 2015 First 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.

Additional instructions will be given at that time. Now I would now like to turn the call over to Karen Fugate, Vice President of Investor Relations for the company..

Thank you. Before we begin I would like to remind you that certain comments, including matters ,such as our 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 other 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 from December 30th and its most recent quarterly report on Form 10-Q being filed today. The company does not undertake any obligation to publicly update or revise its forward-looking statements.

The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are, Chris Brickman, President and CEO; and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Chris?.

Thank you, Karen. And good morning everyone. I will briefly share my perspectives on the quarter and then provide an update on our strategic initiatives. Mark will then discuss our fiscal 2015 first quarter results.

As we mentioned on the last call we anticipated that our first quarter results might fall below our full year expectations as we continue to invest in and drive improvements in support of our core business. We continue to believe that subsequent quarters will show steady improvement as our strategic initiatives are fully implemented.

Consistent with these expectations SG&A expense was higher this quarter than we anticipate going forward due to the final quarter of incremental healthcare expenses, additional management transition cost and investments made to lay the foundation for our strategic initiatives.

As a result we do not believe this quarter’s deleverage is indicative of how the remainder of the year will progress and we remain committed to delivering on our full year plan. Now I would like to provide an update on the progress towards our strategic initiatives starting with Sally Beauty.

For Sally Beauty many of our initiatives are centered around creating points of difference in our stores, our merchandise and our marketing. We have already begun to talk to consumers in a way that it is more relevant to them and highlight the unique offerings that are only owned at Sally.

Our new slogan Discover beautiful finds at beautiful prices is intended to convey quality products at affordable prices, exclusive brands not found anywhere else, products that are carefully selected to meet consumer needs and trained beauty experts available to assist.

These key points will be at the core of all of our messaging to existing and prospective customers. I am very pleased with the progress of our CRM initiative. We are reaching out to our consumers in new and relevant ways that we’ve never done before.

We’ve seen nice results from the pilot CRM Group with average ticket and number of transactions higher than they were in the non-pilot group.

In addition, we are testing new advertising techniques, such as digital display ads, digital video and social media ads as well as radio advertisement through Pandora Radio and inclusions in Pop Sugar subscriber box. While I don’t believe all of these channels will be a home run we do know our customers today better than we ever have.

So test marketing in ways that are new and relevant to them makes sense. Overall we remain optimistic that the early results of our market initiatives and we believe that CRM program will be completely rolled out by the end of second quarter 2015. Next our store refresh initiative was completed in the last quarter with 139 U.S. stores in three regions.

As a reminder the capital spend per store was approximately $20,000 and included hardwood flooring, LED lighting and updated signage. These remodel stores have thus far shown a lift in comps when compared to the relevant benchmark stores. Although these are early results we believe this investment will provide a positive return over the long run.

As a result we decided to move forward with an additional 376 stores to be remodeled over next five to six months. We will continue to monitor performance of the completed stores to determine how quickly and broadly we want to move forward with additional stores. The new nail studio is now installed in virtually all of our U.S. Sally stores.

We’ve already begun our marketing campaign to promote the nail studio to our customers with full page ads in fashion magazines, including Elle, Teen Vogue and Cosmopolitan. The customer feedback and buzz around the nail studio has been terrific and we’re planning to move forward with the solution studio for hair care over the next 12 months.

Hair care in the U.S. Sally stores represents 22% of our sales and is the second largest category next to hair color. We believe this will be another exciting way to distinguish ourselves from the competition.

The packaging and label refresh for our largest owned brand Ion is now underway and is being integrated into the stores on a product-by-product basis. The new package is modern and appealing and I'm confident it will be well received by our professional and retail customers.

In BSG we continue to have success in our initiative to increase brand distribution and we recently picked up key brands in new territories as well as extended contracts with several key existing vendors. The BSG team’s is also making steady progress in their new CRM initiative to make BSG the obvious choice with the professional stylist community.

In addition we are very pleased with the momentum in our BSG e-commerce site LoxaBeauty.com. They are continuing to sign up new stylists and increase awareness and adoption with retail consumers. Finally, during the quarter we purchased approximately 2,433 shares of our common stock, for an aggregate cost about $7.25 million.

As of December 31st we have approximately 993 million remaining on our $1 billion authorization. We said before that the cadence of stock buyback may not be as consistent as they were with our prior authorization.

However, our stock buyback philosophy had not changed and our Board of Director remains committed to using excess cash flow to buy back stock. We will work diligently over the next several quarters at the direction of our Board to allocate cash to the highest return investments including growth in the business and share repurchases.

To summarize, we are very pleased with the early results of our initiatives including CRM, Marketing, the Nail Studio, our store refurnish program and the acquisition of new brands and territories for our BSG bids. We will continue to work on these initiatives for the remainder of fiscal year 2015 and I look forward to sharing the results with you.

Before I turn it over to Mark I would like to comment on our announcement regarding the CEO transition.

During our most recent Board meeting, Gary Winterhalter, our Board and I agreed that with the new fiscal year well under way and our strategic initiatives taking shape it was the appropriate time to transition the CEO to me and for Gary to assume the position of Executive Chairman of our Board of Directors.

I am very grateful for Gary’s leadership during this transition period and I look forward to building upon on the strong foundation he fostered over his 26 year career at Sally Beauty Holdings. Now I will turn it over to Mark to provide more on financial details for the first quarter.

Mark?.

Thanks Chris. Consolidated net sales for the first quarter were $965 million, an increase of 2.6%. This increase was primarily driven by same store sales growth of 2.3% and the 187 new store openings. The unfavorable impact of foreign currency exchange rates was $12 million or 120 basis points of growth.

Consolidated gross profit were up 2.9% over the prior year. Gross profit as a percentage of sales was 49.1%, up 10 basis points driven by broker [ph] business segment. First quarter SG&A expenses including unallocated corporate expenses and share based compensation were up 5.5%, and were 34.9% on a percent of sales basis.

SG&A expense growth was higher this quarter then we anticipate going forward. A view of the larger expense items include $3.5 million from the final quarter of incremental healthcare expenses, $1.5 million in connection with our ongoing management transition plans and $1.1 million from incremental investments made towards new business development.

Unallocated corporate expenses, including share-based compensation were $41.5 million or 4.3% of sales versus the fiscal 2014 first quarter expenses of $36.6 million or 3.9% of sales. GAAP consolidated operating earnings in the first quarter decreased 4.6% to $116.2 million.

Operating margin was 12.1% down 90 basis points primarily due to higher SG&A expenses versus the prior year quarter. Interest expense including the amortization of debt issuance cost totaled $29.2 million, up 2.6%. For the fiscal 2015 first quarter our effective tax rate was 36.9% versus 37.8% in the fiscal 2014 first quarter.

We continue to believe that our annual effective tax rate for the fiscal year 2015 will be in the range of 37.5% to 38%.GAAP net earnings were down 5.3%, to $54.9 million with earnings per share of $0.35. That was flat compared to the prior year.

Adjusted EBITDA for the first quarter was $144.8 million, down 3.2% [ph] when compared to the $149.6 million incurred in the fiscal 2014 first quarter. And turning to our business segment performance, starting with Sally Beauty Supply, same store sales growth was 1.6% versus an increase of 90 basis points in the year ago quarter.

Net sales for Sally reached $587 million, an increase of 2.3% over the prior year quarter. Sales growth is attributed to new store openings and same-store sales growth. The impact of unfavorable foreign currency exchange offset the sales growth by $9.3 million or 160 basis points. Beauty Club card sales increased 6.6% for the quarter.

Sales from our list customers or non- Beauty Club card customers improved sequentially for the fourth quarter in a row and contributed to our year-over-year improvement in total retail sales growth. Club membership also grew 8.7% to reach 8.3 million members. Membership renewal rates increased to 63.1% versus the 54.2% in the prior year.

Gross profit margin for Sally in the first quarter was 54.4%, up 10 basis points primarily due to shift in customer and product mix.

Operating earnings for our Sally business was a $101.2 million, slightly down compared to the prior year due to higher SG&A expenses related to healthcare, advertising and costs associated with our strategic initiatives. Now turning to Beauty Systems Group segment, BSG had same-store sales growth of 3.9%. Net sales grew 3% to reach $378 million.

Overall sales growth was attributed to same-store sales and new store openings.

The unfavorable impact of foreign currency exchange rates impacted sales performance by $2.8 million or 70 basis points and looking at the sales growth by distribution channel, our sales from the store business grew 4%, while our direct sales consultant business was up 1%. BSG’s gross profit margin was up 20 basis points to reach 40.9%.

Operating earnings at BSG increased $1.8 million or 3.2% in the 2015 first quarter. Operating margin was 15%, up 10 basis points primarily due to the gross margin expansion. And looking at our balance sheet, inventories were up $838 million, an increase of 2.9% when compared to ending inventory on December 31, 2013.

This year-over-year increase was primarily due to sales growth from existing stores and additional inventory from new store openings. Capital expenditures for the first quarter for fiscal 2015 totaled $19.4 million and reflect expenditures to open new stores, expenditures on existing stores and IT specific projects.

As Chris mentioned earlier, we intend to refresh another 376 Sally U.S. stores over the next few months and expect the associated capital expenditures related to this project to be approximately $9.2 million. At this time we continue to believe that capital expenditures for the fiscal year 2015 will be in the range of $95 million to $100 million.

Chris?.

Thank you, Mark. Overall I would characterize the first quarter as a step in the right direction. Our top line was somewhat dampened by unfavorable currency exchange and a soft November, while SG&A was negatively impacted by expenses associated with incremental healthcare expense and management transition costs.

Nonetheless, we are on the right track with our strategic initiatives and I believe that strong execution of these initiatives will drive continued improvements in our results. And finally it goes without saying that I’m very pleased to assume the role as CEO.

I strongly believe that our company is well positioned for growth and that we have a strong team in place. I can assure you that my priority is to remain focused on the execution of our strategic initiatives to drive long-term shareholder value. Now I’ll turn it over to the operator to take your questions..

[Operator Instructions]. We will begin with the line of Simeon Gutman with Morgan Stanley. Please go ahead..

Thanks. Good morning, it’s Simeon..

Hi, Simeon.

How you’re doing?.

Good, good morning. First question just big picture, Chris you are fixing up stores and some another 376 more remodels. You’re advertising in channels that I’m not sure are very traditional for this segment and it makes sense to have the stores ready for when these new customers come and have the CRM initiative in place.

Can you just talk about how you look at sort of the risk and reward of I guess going down these routes which for a business I don’t think that traditionally was moving in this direction what’s the opportunity going forward?.

I want to emphasis on that we are not doing any radical moves, no giant bets. So we are moving dollars and resources in time slowly to test new channels.

We are testing them thoroughly, getting feedback and understanding whether it’s working, what the response rates are and then shifting more dollars if it works and not shifting more dollars if doesn’t.

So although there is substantial amount of experimentation going on, I don’t want you to think that we have suddenly abandoned our core direct marketing techniques or anything else, we haven’t.

It still represent the vast majority of our marketing budget but we are going to also be experimenting in a very rapid way with other channels and as those prove fruitful or not we will shift dollars according to pay back not based on gut feel..

Okay, my follow-up, and I will just make two parts and then I will jump off. On the international business, curious how you look at that.

Do you look at it any differently from when you were sitting on the Board? And then the other part of that question totally unrelated your L'Oreal contract which I think expires end of ’15, can you comment what you plans on it were?.

Well I will do the second one first. The L'Oréal contract was extended through the end of 2018 and then going on to the other question, no, I don’t international has radically changed. I think what I would say is we are making leadership changes in Europe, at continental Europe because we felt like we needed to improve our operating discipline.

I still feel very excited about the foundation that has been built. It’s a great store base, there is some terrific owned brands there but we needed better operating disciplines in terms of our marketing and merchandizing pricing and other things in order to get profitability up.

So we are making those changes as needed and there may be a little bit of transition period while we do that, but we will get it done. We are resetting our store base in the UK in terms of shifting some stores that were branded Sally but were really trade stores.

We are going to shift them over to salon services and really clear by then the retail business of Sally and the B2B businesses in salon services and so there are some transition going there. Mexico continues to chug along and do fantastic but it’s going to obviously face some currency challenges in the coming year.

And South America continues to grow rapidly. So I don’t see any radical changes, it’s more about just let’s improve our execution, get the formula right and then we will drive growth from there..

Okay, thanks..

You bet..

All right and next we will go to line of Oliver Chen with Cowen and Company. Please go ahead..

Hi, guys, congrats on great solid results.

Chris from a bigger picture perspective as you continue to innovate across these disciplines and product store experience in CRM, what do you think is - how will you prioritize what may have the most near-term impact and as you do elaborate on the remodels which look great and then some of them which aspect of the comp is getting lift, is it conversion or units if you could elaborate there that would great?.

Yeah, on that second part I think it maybe a little too early for us to tell. What we are seeing though is we are seeing improvement in both the list and the BCC customer and the list customer is the one I am most interested and concerned about which is I want to win her back.

I think we all do and so the fact we are seeing both customer groups respond to that refresh is what we wanted and that’s what we are moving forward more aggressively. But we will continue to track that to make sure that continues to deliver on the promise.

It’s very hard on the other question to disaggregate what’s having the most impact but I think they all really work together in concert, right. You need to create points of difference.

If your goal is to win back the list customer but at the same time hold on to your BCC customer, who really guess the model and is very loyal you know I think CRM has the greatest impact on this BCC customer. I think things like the Nail Studio, the store refresh and alternative marketing channels has the most impact on the list customer.

And so that’s how we are thinking about it but it is very hard disaggregate and say the Nail Studio should have this much impact, the store refresh have this much.

That’s hard to do but in general what I have seen in focus groups because I have spent a lot of with consumers in the last three to six months is that the BCC customer really gets the model.

She is bought in, she loves our brand she’s loves the service [ph] in the stores and so what we want to do for her is really use CRM to give her ideas and inspire her to come back more often with great ideas.

And what we want to do with the list customers is improve the look and feel of our store and create points of difference in store as well as reach her through our marketing channels so that we give her new reasons to come visit us and give us a second shot at her business which seems to be working..

Okay. And just as a follow up Chris, where are you in the journey with respect to the marketing to the non-BCC customers. Are you guys happy with where that is and you have elaborated on this to what should we pay attention to as we continue to monitor your efforts which has been good momentum on the non-beauty club card customer..

Yeah, I’d describe it as early in the game. I think we're in the second or third inning here right. I mean the reality is we're still learning which mediums were - we are still learning which points of difference really get her back into the store. We're still learning the most efficient ways to reach her and talk to her.

We think we got the message right now which is great. We got a massage that works both with the BCC as well as the list customers and now we're really in the experimentation phase what's the most efficient and effective way to reach her. So I’d describe it as very early in the process. We'll continue to refine that model.

We've got a great team in place now which I'm really excited about. And so we're just going to keep building that muscle and I think it's going to pay up more and more as we go over the next subsequent quarters..

Okay, and to follow - one question on - should we also think about the gross margin sequential improving throughout the year as the compares get a little bit easier.

And as product and customer mix shifts to be the primary driver here thanks?.

Yeah I think it is a combination of products. Obviously it's more as you drive own brand sales obviously and mix shift. Clearly also narrowing the gap between the growth in the BCC customers and the decline in the list if we are successful at that. That's a bit of a negative drag, we want to change that.

So I think that's right we're looking for a gradual expansion, but our guidance overall for the year remains the same which is about a 20 to 30 basis point improvement for the full year..

Okay, thanks. Congrats on all the innovations. Best regards..

Thank you very much Oliver..

All right. And next we'll go to Simeon Siegel with Nomura Securities. Please go ahead..

Thanks. I guess I need to thank Simeon Gutman for the help on the pronunciation there. Good morning guys..

Yeah, she did better, on you than the other Simeon..

Second time --, I think it's not very often you get two Simeons on a call..

I think this is - you are already [indiscernible] that..

Can you guys talk about the cadence of the SG&A dollar growth for the rest of the year, just given the comments regarding the spread between this quarter and the upcoming quarters? And then just, I guess quick one in light of the 120 basis point comment, what the right way to think about FX going forward, whether it's translation transaction, mix shift hedging offset I guess, anything you could help there will be great, thanks..

Sure Simeon. Let me answer the last first is that - we typically and we saw this as well in the first quarter, it's just that it is more of a translation adjustment impact, it is the transaction adjustment impact to our financials. If you look at the overall impact on sales it was up $12 million.

And when you look at gross profit, if you look at proportionately our P&L roughly 3% [ph] of the sales impact was a gross margin impact. So that was about $5.9 million. And then when you look at S&A, S&A is roughly three quarters of the gross margin impact. So that was about $4.6 million.

So when you net all those down you get to about be even when you get to an EBIT level you get to the less than $1 million pretax. So again it's predominantly a trends at the translation adjustment impact and not a transaction adjustment impact.

And that's how I would view certainly FX going forward but very consistent when we’ve gone through headwinds. Even in 2009 when we saw an unfavorable FX impact on sales of almost $86 million, there are our EBIT impact was less than $2 million. So you are seeing a very consistent cadence in terms of how the headwinds that are affecting us today.

Overall when you look at SG&A, certainly over the next couple of quarters you should expect to see a little bit more a positive leverage impact very modestly over the next succeeding quarters.

Certainly we had some - unusual items that we called out in the - some of our prepared remarks where we have some of the management transition costs you're seeing still the calendar year impact of healthcare impact that’s in the first quarter where the overall delta going forward into 2015 versus 2014, you shouldn’t see that kind of an impact and we feel that we’re getting through some of the investments that Chris has mentioned and through some of the management transition costs.

So some of those should - we should be getting to the downside of those types of situations..

Perfect, thanks a lot guys..

Next we’ll go to the line of Olivia Tong with Bank of America. Please go ahead..

Great thanks so much.

Chris can you talk about the delta in the comps on the stores that were refresh versus the base, perhaps quantify the spread between those two? And also I know its early days but can you point any other metrics that may have shifted for that refresh stores, an uptick in list customers, better renewal rates of Beauty Club cardholders or perhaps a better conversion of list customers to cardholders?.

Yeah I'm not going to give the details of how much better it was. Suffice it to say it was better enough that we felt we could get a very solid payback on the investment we’re making and it fits with our overall marketing strategy. What I will say is this which is the most important thing, I was zeroing in on this was the growth in the list customers.

If you look at our overall business we’ve been running with the BCC customers in the high single-digits consistently even in some of the worst of times. And that customer is quite loyal. You’ve seen in focus groups if you talk to her individually she still loves the business and loves the business model. It works for her.

The concerns with the list customer, who we were at one time losing in the high single-digits and now we’re losing in a low single-digits and we wanted to win with the list customer and whether that be through our marketing, the nail studio or the store refresh and what we saw very quickly with the refresh stores was that this actually worked even better for the list customer than the BCC customer.

And it makes sense because the BCC customer like the store anyways, the list core customer needed to be convinced. So what I’ll say is just that which is - it’s working very well.

It’s driving a turn - it will pay back the investments we’re making and most importantly it will help us with our core strategic goal which is to win back the list customer, get her back into the stores so we have the ability to convert her into a BCC customer which we’ve proven success at doing overtime..

Got it, thanks. That’s really helpful and then on same-store sales, can you talk about the cadence for the remainder of the year, given that comps are particularly easy in the March quarter but you’ve got quite a few initiatives that I assume would build as the year progresses.

So as we look at last year versus this year, should Q2 be the strongest in terms of comps and then it sort of decelerates a little bit from there or are there initiatives that will build as the year progresses to keep that comp pretty consistent as for the remainder of Q2 to Q4?.

Yeah I mean the reality is I hate trying to predict quarter to quarter comps. I do think you’re right, the comparisons for last year were at the soft distance in this quarter, but also a lot of our initiatives are still rolling out.

So I think we go back to our original guidance because we did expect slow and steady sequential improvement throughout the year. That’s what we’re shooting for.

It works out a little different than that because one quarter slight suffered down that’s fine, but our goal is to get back to that long run comp level of Sally, that’s 2.5% to 3% same-store comp.

When we’re getting close to that then we’ll start to be at that objective and really the components of that would be this BCC customer in the high single-digits and the list customer kind of in zero or minus 1 or 2. Once we get to that then we’ll start to hit on all cylinders. So I don’t think it’s good to predict quarter-by-quarter comps.

We’re committed to the slow and steady improvement..

Great, thanks guys appreciate it..

Next we’ll go to the line of Jason Gere with KeyBanc. Please go ahead..

Okay, good morning and congratulations Chris again. I guess just following up on Olivia’s question. So would you expect to see Sally Beauty stores delivering that 2.5, 3 for this year.

I think that’s what you’re initially talking about but I just wanted to make sure on an annual basis that that’s still the target? And secondly I was just kind of wondering if you can give maybe an update on how January is starting out and I know you’re anniversarying some of the bad weather from last year.

So just wondering if you could talk maybe a little bit about how traffic trends are from the beginning of the calendar year?.

To the first question I’d say yes, that remains our target to the full year and we always expected that the first quarter would be the slowest of the four. So our target remained unchanged in terms of our forecast for the full year. I'm not going to specifically talk about January yet, the numbers are very fresh.

But what I would simply say is that we continue to remain committed to that full year target and January supports that commitment..

Okay, and then lastly, I was just wondering if you could talk maybe little bit about BSG and other maybe acquisition opportunities, territory exclusivities, what’s the opportunity out there and would that take a higher pressure since you are talking about investing in the business with your free cash flow and the core business before share repurchases.

I was just wondering where acquisitions kind of fit into that play as well?.

So first of all BSG is obviously continuing to be successful on acquiring new brands. And I mean brands in terms of the new territories and exclusive contracts and they have done a very good job of that. And we’ll continue to roll those out in this quarter and the next. So that will help our sales and comps in BSG.

In terms of the brand acquisitions there are some opportunities out there that are small to modest in size but there are some opportunities out there that we are actively looking at. But none are at a point now where it’s appropriate to talk about them specifically.

If they are within an affordable range as well as we see a strategic fit we will definitely bring those forward but it’s too early in the process to identify them specifically..

Okay great, and then the last question is a clarification of one of the Simeon’s questions.

Just on the FX when you talked about the $12 million in the first quarter we should expect to see kind of continuation from a transition as that plays - you use current spot rate, is that - just want to make sure that that’s correct?.

Yeah, I think that’s an fair assessment. I mean you see a lot of revisions by a lot of financial institutions forecasts in terms of where they think currencies are going right now but I think certainly using that type of thought process will be very appropriate..

Fair enough, thanks a lot guys..

All right, and next we will go to the line of Ike Boruchow with Sterne Agee. Please go ahead..

Hi, everyone. Congrats and thanks for taking my question. I guess for you when you think about the margin profile of the business any you kind of split it between the U.S. and international, I believe you guys have talked about international being significantly lower margin business.

Can you kind of give us the drivers, the initiatives to maybe bring - how you will bring those margins closer to the U.S. and do you think the international margins overtime can actually reach where the U.S.

profitability levels are today?.

Well, let me just correct one thing or add some context to that. So if you look at the businesses they are truly retail businesses, such as Mexico and South America, actually the margins are not lower than the U.S. they are quite comparable to our U.S. retail business.

Then you have got your businesses in Europe and the UK and in Continental Europe, there are more and majority trained businesses and they are actually are fairly comparable to the U.S. our U.S. B2B business in terms of the margins. In fact the Peru [ph] business generates higher margins than our U.S. trade, our B2B business.

So it is a mix of businesses, I guess would be my point. We are trying to grow the UK business, the retail business in the UK and have a clear Sally Vantage retail which will be higher margin as well as then a small services brands which will be B2B which will be more comparable to BSG’s margins.

Peru [ph], I think margins there are already in the high 40s, which is a substantially higher to what our U.S. B2B is, the issue there is getting the operating disciplines right, to make sure that we can actually deliver bottom line profitability with top line growth.

And then for South America and Latin American business, honestly the margins are already where they need to be and it’s really about getting the scale so we can leverage the overhead associated with those businesses..

Got it, so I guess just as a follow up to that would be specifically within Europe where there seems to be the biggest opportunity.

Can you just talk about some of these specific initiatives that you are focused on right now, whether it be the ERP system or the like?.

Yeah, those all fit together. The reality is the ERP system gives us great insight and visibility in to our business there. We’ve got cost control opportunities and reduction of overhead opportunities.

We’ve got opportunities to get our pricing right across the markets and be more consistent with that, we’ve got opportunities to get the marketing more consistent and across the markets merchandising and mix is a great opportunity and then finally driving owned brands which the team has been very successful at. We want to just continue that.

So that’s why we made the leadership changes. There is a lot of great ideas and lot of innovation. But there is also was the lack of some of the operating disciplines we felt were set to drive long term profitability. So we made a leadership change there in order to drive that.

And then obviously over the time as you open up stores you can really leverage scale on the business. Because we are sitting there at kind of not just under 200 stores today, we think the long term population will be 500 stores or so.

If you really can get to that scale you will leverage those overhead across a much bigger base and that will drive profitability over time. But we wanted to put the operating discipline in first and then drive the scale..

Got it. Thanks. Congrats..

Next go to the line of Chris Ferrara with Wells Fargo. Please go ahead..

Hey, good morning, guys..

Good morning, Chris.

How are you doing?.

I'm good.

How are you?.

Very good..

So, I guess first getting a simple one out of the way, is the SG&A guidance, I think last quarter you guys had said flat to slightly up as a percentage of sales for the full year.

Is that still the case?.

Yes, because as we said, certainly at the beginning of the fiscal year is that we are continuing to make some investments in the business and not only just the investments that Chris has talked about specifically related to Sally and the marketing efforts that we've made but also we are making investments in new business developments as well, particularly Lhasa as well as South America.

And those are still very actionable and will still continue throughout the year. We should start to see improvement over, certainly the overall leveraged profile what you saw in the first quarter versus the second succeeding quarters. But overall the guidance that we gave is still very appropriate..

Perfect and then I guess, Chris the move to revamp that next tranche of stores right, 300 plus.

How should we look at that, is that like a confident move forward based on strong data you saw or is it sort of in the middle type move where you still not exactly sure how this is going, like how do we interpret that?.

Well, I don't think it's a bold move one way or the other. I think it's the right thing to do get our stores to a level that allows us to win back the list customer.

That being said we are seeing good response to the actions we have taken thus far and putting in nice new flooring, and lighting and graphics in the store it's hard to argue that it's a low cost way of making the store more attractive and if our main goal is to win back the list customer and we can make our store more attractive in a low cost way, it's just kind of a no-brainer I guess.

So I don't think we should expect that it's going to change the world. I just think it's a logical thing to do as part of your overall strategy to win back the list customer and honestly I think it's more deferred maintenance than really something radical.

That being said it's part of an overall program, including creating points of difference like the nail studio, trying new marketing mediums and low cost ways of reaching that consumer and then finally refreshing the store to make it look a little more attractive. So that when she walks in she feels more at home in the location..

Appreciate that and then I guess last one on marketing and I know this is kind of trying to pin you down on something but when do you expect list to be positive because I think everyone’s sort of thought process around this is the new marketing channels.

They are clearly different for this model and I think your point that, that has been that, there is more list customers now. You need to kind of be a little bit different than you been before. But what are you using as sort of sign post.

When would be too long for a list to remain negative?.

Well, listen, I'm not sure list will turn positive because I'm stealing - we are all stealing from list to drive BCC.

So the reality though is if it was minus one and BCC was still growing, and both, not only in terms of sales but also in terms of my number of customers that I feel like we were making huge progress, because then you are growing - you are bringing in enough people to convert.

When it's minus five, six or seven you are worried that it's bleeding, that whatever you taking out of it you are also bleeding additional customers and transactions and you are putting them back enough. So at this point in time that's the kind of logical [ph] is to get it as close to zero as possible.

So that means we're bringing in enough customers to give us the opportunity to recruit and grow the BCC population, which then gives us a much more intimate conversation with her through our CRM initiatives and other initiatives..

Thanks a lot..

Next we go to the line of Joe Altobello with Raymond James. Please go ahead..

Thank you. Good morning and congrats Chris on the promotion..

Thank you very much..

First in terms of the refresh, I am just curious what the genesis of the idea was, this has come up in focus groups that some of your non-beauty club customers didn’t like the look and feel of the store and that was the biggest impediment to them coming in?.

I think there was a combination of things. The team had tried some various refreshes. They looked good and they were low cost. We knew that we had deferred some maintenance in the stores and that the look at the stores, if you go out in some cases has gotten tried. And then we heard that in focus groups.

We heard it from our customers but by the way we especially heard it from the list and lapse customers. They told us that the store got a little dark, low crowded and a little tired.

And so it’s a combination of walking in the stores myself and having that reaction as well as our customers telling that they have had the reaction which makes us want to make some of those investments. And then of course getting some positive response to it and data just solidified that view..

Okay, great and in terms of the - you mentioned that was little bit soft.

Was there any reason for that or was it just random?.

Which one, November?.

Yeah.

No, I think we missed some of the - reading the market place with a lot of other retailers. We put a - too much emphasis on Black Friday and the reality is the consumer behavior around that holiday has clearly changed. I think it broke down beginning last year.

It’s kind of completely broken down now and it’s really more of the second half of November and the first half of December is all one big event as opposed to a single day.

So I think we are going to change our marketing next year around that, but I think we misread it this year and made a little too much big of that day and I don’t think we will make that mistake again..

Okay great. Just one last one in terms of the SG&A you mentioned that you had little over $6 million in expenses this quarter but most of that goes away.

But if you exclude that from SG&A it was still up 30 bps or so, so what comp number do you need to see on the Sally side to get leverage on that line?.

Again I think we are shooting for a long term comp line where Sally is 2.5, 3 and total comps are around 4. If we get to that level we should be getting leverage in the business if it is a little above 4. But anyway the point is we are - our long term annual guidance that can deliver leverage for us overtime.

The reality is we have done a really good job of re-thinking how we manage our healthcare programs going forward for the rest of the year, we are past most of the transition cost and I can most and so we should be more at kind of reality of what our long term SG&A growth is going to be at the upcoming quarters and so if we can get Sally back growing again we will be fine..

Great, thank you..

Next we will go to William Reuter with Bank of America. Please go ahead..

Good morning guys. On the last call you guys had touched upon an expense savings initiative and you said it was too early to figure out what the goals of those might be.

Did you guys at this point have a sense for how much you might be attempting to save?.

Yeah, we do. I think there is different pieces of that and some of them we know more about and other we don’t. So we have one initiative which is around indirect spending where over next year we would like to see that reach above $4 million a year. My guess is we will get in front of that this year, but that’s directionally what will happen.

We have got a global sourcing initiative where we are bringing together the sourcing of all of our business units and narrowing our vendor base in terms of what we buy and buying more globally and my guess is that could be probably even larger but we will get very little of it this year, we will get most of it next year.

So the bottom line as we have got a couple of initiatives there we are hoping to use the freed up dollars to make some of the investments and cover some of the investments we are making back in the business. They are on track. We are delivering as we expected. We won’t get a whole lot of that this fiscal year.

We will get some of the indirect spending initiative may be a little bit of the global sourcing towards the tail end of the year, most of it will really hit next year..

Okay and then you provided CapEx guidance for the year and kind of given some buckets like the VSG point of sale, your DCs and some IT, have you guys broken down by dollar amount what the different projects are going to be spent on or where that money is going to spent on?.

No, we have given a little bit of guidance around the store refresh, but as far as actual line item guidance we haven’t really broke that down.

When you look at our overall guidance that we have given we certainly looked at from a timing standpoint some of our IT initiatives and with respect to international ERP and the POS installation and BSG and some of the additional enhancements that are doing on the PLS system for Sally but we haven’t given the specific dollar guidance around those items..

Okay.

And then lastly for me the last time you guys have update on one of your calls your leverage goal is two and five times is there any update to this guidance or are you still in the same range?.

No, there is no change to our view of kind of the overall guidance. We are certainly very comfortable operating above that.

We are currently operating above that right now but we are certainly are not you know we haven’t really changed our overall view of our leverage targets we are very comfortable we have you know certainly arguably we have you know a lot of liquidity to grow the business as well as to continue the cadence that we have with you know our share repurchase efforts so I am very comfortable with where we are at right now..

Okay, that is all for me. Thank you..

Next, we will go to line of Taposh Bari with Goldman Sachs. Please go ahead..

Hi, good morning.

Sort of big picture question on competition that comes up often on these calls but what are you seeing Chris just in terms of mass, food and drug, are you seeing any changes on the competitive front or effectively status quo?.

You know what I would say is I think they all have raised their game over time so you know if you go into a target or you go into a long range of CBS you will see a better unique section then you might have seen a five year ago, there will better merchandize, there will be more assortment and in more selection and yeah there are still similarities where we believe clearly we can win.

And I think you are unlikely to much help or support for systems or advise in any of those stores or locations.

I think we can win in some key categories hence the reason we want to roll out the Nail Studio quickly was we can - put a dominant assortment in front of a customer at the front of store and make hay with it in terms of saying that okay we have more selection more opportunities for the consumer, define the unique color and shade product that’s why for her and we are going to extend that to other categories whether that be hair care, hair color and others where again we want to emphasize the points and difference of having more selection more assortment and better brands and choices for here than anybody else.

So I guess I would say they are going to continue to invest in the overall category. It’s a higher margin category which warrants investment. There are going up our game which means we have to up our game.

That being said we have the opportunity to emphasize the fact that we can provide better solutions better advice and sort of in key category than anybody else and think laser focused on making sure that message is clear to the consumer and I think that’s our winning strategy over time.

I also think they are going to spend a lot more money going after and this is what you see Alta doing in my mind going after department stores to book the cosmetic, fragrance, and maintenance sections, that becomes a big investment for them and that’s really less of another category we play it’s a very small category for us.

And I think department stores that are potentially at risk as they grow those brands and probably more so than we are. So and our value proposition is pretty clear. We are well positioned within the category. We just need to emphasis those point of difference and the reasons why she came back to our store..

That’s helpful.

Anything on the online franchise or e-commerce players out there?.

You know what I think what I would say is that for ourselves we have upping our name in the e-commerce dramatically. I am excited to see what’s happened. We refreshed our Sally sites and [indiscernible] sites. We are going to do that again. We also have responsive designs, you will be able to have them on your mobile phone and iPad soon.

And you know we saw immediately an increase in traffic. We didn’t see an increase in sales right away and now we are starting to get follow in and an increase in sales with the increase in traffic which is great but I don’t anybody that’s really winning uniquely in online.

I think lots of that is unique then in terms of the way we put professional products in front of the customer. I think the number one thing I’d point to you it’s going to be an investment area for everybody and everybody is getting better at it so we have got to move faster than that..

Great, thank you, best of luck..

You bet, thank you..

Next we will go to line of Mark Altschwager with Robert W. Baird. Please go ahead..

Great, good morning and congrats on a solid start to the year. I just want to start with a bigger picture question, looking back at 2014 just any updated thoughts on the present underlying hair care and beauty market, any big surprises from an industry perspective. And then do you anticipate any change in the industry growth dynamic heading into '15..

No, I mean honestly we don't seem to have a change. Our core categories continue to outgrow the rest of our store. And we're seeing continued growth across the business as a whole. I don't think we're getting any huge benefit from the gaps or lean effect or anything else like that. I don't see something that's extraordinarily high.

But in the end of the day our core categories hair care and hair care color is our two biggest categories grow 5.8%. We see that as exactly what we want to see in the business which is that our core categories continue to be distinguished and grow faster than the rest of the business.

So the reality is, I think we set our business as usual around overall GDP and economic growth and then what we want to do is win in the categories where we are truly distinguished..

Thanks. And then in terms of the structural shifts with [indiscernible], what inning are we in there both in the U.S.

and in Europe?.

Well I’d say it's very different between the two, right. I'd say we're well down that path in the U.S. So I'd say 6 or 7 maybe in the U.S.

Europe might be more like 3, and that's one of the reasons where we're excited about the tailwinds that can support our business there because as business grows out of the big salons in Europe and more and more towards either smaller salons or independent stylists, those are more likely store customers than direct customers for either major brands or ourselves.

So the reality is as we see long-term tailwinds in Europe as that trend picks up there which it is happening which gives us the confidence that, that 500 store long-term store base is possible. But I think we're much further down the path in the US. And so probably just very different situations but going the same direction..

Thank you and best of luck..

Thank you..

Next we'll go to line of Steph Wissink with Piper Jeffery. Please go ahead..

Hi thanks good morning everyone. I'll add my congratulations Chris officially..

Thank you very much. I appreciate it..

Just three questions, really short actually, one is just with respect to the store improvements that you're doing and we've had a chance to get some of those in quite nice way. I'm just curious where your vendor support has been for some of the fixed stream.

I mean are you getting any subsidies on some of the brands fixed stream that are working in the stores. And then separately related to that as you look at the continuum of performance across your fleet particularly in the retail business, and talk a little bit about the high to low.

Is that gap starting to narrow that range for you are you seem like you're getting more control over that range of performance on a comp basis and productivity? And then lastly just with respect to the product mix I thought it was intriguing that you talked about using kind of hair emphasis as a point of differentiation.

Just talk a little bit about what your customer insights have shown out, your permission to expand into other categories and really capture greater wallet share. Thank you.

Well Steph, I'm going to ask you to clarify your second question at the end I didn't fully understand but let me get number one and two answered and then we'll do that. So on the store improvements, on the basic improvement where we give flooring, lighting and graphics we don't really get vendor support there.

On something like nail studio or a hair solution studio, we would definitely work with our vendors to support that as they want their brand to stand out in our stores as much we want those categories to stand out. So we would get substantial support from them.

And we're also going to be launching a new lash studio and again the vendor would play a role in that as well. In terms of mix, again for us in terms of which categories we emphasize as an example why they go after the hair solutions studio.

As it comes now the one questions and concerns that the customer typically bring to us, and honestly one of the biggest questions we get is clearly around hair color usually because they messed it up using boxed color and now they want advice on how to do it right.

But in another place we would get it would be as an example I have damaged hair, oily hair or unique hair type or issue and they wanted advice from our associates on how to solve that problem. And we want to be their solutions place for those problems.

So it makes sense for us to be providing solutions and a dominant assortment in nails, a dominant assortment in hair care with various solutions focus, which is what we're going to do in the next year. And then obviously a dominant assortment in hair color with the lots of advice around that category because it’s a major category for us and for them.

And then another type where you like appliances, unique places where we're destination category like extensions and such. But other categories such as fragrance or cosmetics and things like that they're not - we're not destinations for those categories, they are not our core competency.

And so we may sell some products within those categories to drive in post purchase, but you’re not going to see the same level of investment from us around those categories as you will see in our core categories. And I didn’t understand your second there around the range. I didn’t know whether you’re talking about products or stores or what..

Good question. So more with regard to the comp and the productivity. I think in our - perhaps I have discussed with you before you’ve talked about kind of this range of performance from the top end to the bottom end being very wide across your fleet.

Are you starting to see that narrow or do you feel like you have a better grasp on the tails of the curve with respect to kind of the quality of the fleet.

Are you looking to rationalize some of the lower performing units out of the system…?.

Honestly, I don’t know if that was off a different call, but we don’t really have that kind of variance. I know as you can imagine as a CEO one of the first things you ask in retail is are there any stores we can shut that are losing money that we can certainly improve the financials, and the answer really [indiscernible].

So we don’t have that kind of bell curve that perhaps other retailers have. Virtually all of our stores are EBITDA positive. And so shutting stores is not - it would be a nice easy strategy to deploy, but it’s not one that works at Sally.

So we have a much more consistent productivity per store and I don’t think we’ll see any major changes in our store base..

Okay, thank you guys. Very helpful..

You bet..

Next go to the line of Jill Caruthers Nelson with Johnson Rice & Company. Please go ahead..

Good morning. If we could talk about just on a sequential basis Sally Beauty comps did moderate somewhat in the first quarter. If you could just talk about that the underlying multiple initiatives that you’ve got going on in nail studio you had OPI for two more months versus last year.

And just some things and how that factored into the sequential decline?.

Yeah, listen. We expect that, that part of it is as you mentioned some launches [ph] whether that be both OPI as well as we had the Miracle product in the stores in a very big way in last fall and it has fallen off dramatically by this fall. And once we’re past January that really becomes less of an issue or impact. So we expected some of that.

In addition, a lot of our strategic initiatives were still beginning whether that be CRM, whether that be the nail studio, whether it be the store refresh or even the upgrade in packaging on our products or even changing some of our marketing approaches.

We were really, we knew that we wouldn’t have a whole lot of benefit from those going into the first quarter of this year versus what we’ll see second, third, four quarter of this year.

So we expected this, well this is about what we plan and predicted in terms of results and we still remain committed to the full year impact of what we’re working on and expect that we’ll begin to see that both right away here in the second quarter..

Okay. And then just looking into the Sally Beauty segment margin, I know EBIT margins have fallen to the low kind of 17% versus we have seen 20% plus for this segment in the past. Could you talk about, I know you reference, you’re getting some leverage as you saw comps go to 3% or higher.

Just on a segment basis, would you need a higher comp on the Sally Beauty side to see EBIT improvement given the pressures you see on going with the international growth?.

No, I think the reality is that where we predicted our full year estimate on top in sales we should get leverage at those predicted levels.

We’ll start to see a much more moderate increase in SG&A, our expectation is that we will in the coming quarters here and as that moderates and comps improve you’ll start to see some leverage there and obviously we’ll also get some improvement in gross margin and that will start to translate down to EBIT and EBITDA margins as well..

And just clarification that’s on the segment basis as well as consolidated?.

Correct. Yes..

Okay. Thanks so much..

You bet..

Next we go to the line of Linda Bolton Weiser with B. Riley. Please go ahead..

Thanks. Chris can you maybe comment on your view towards the strategy to continue to drive sales from private label, store brand kind of exclusive brands on the Sally side. And sort of related to that, I think there some speculation out there that you could consider buying Procter’s Vella brand which could be up for sale.

But to me that’s counter strategic, because that’s not really a private label exclusive brand, that’s sort of a different animal.

So can you just kind of theoretically talk about your philosophy and the strategy with private label on the Sally side? Thanks?.

You bet. So let me start by saying we never call them private label, because we don’t brand them Sally for the most part the brand in our store brands, they’re just owned brands. [indiscernible] we have terrific retail brands team has developed over many years.

And the number one thing we want to do by the way is make some compelling competitive brands that are as good as any professional brand that could be purchased out there and then really solve the problems of our customers.

We continue to invest in those brands, we’re going to update the packaging, we’re going to be spending more money on marketing for those brands to make them more distinctive and more known, both inside the Sally Community, but the outside the Sally Community.

And I see owned brand as a core part of our strategy long-term, not just in Sally, but overtime in BSG and overtime obviously in our markets like Europe, where we’ve got a substantial base of own brands built [indiscernible] and others. As well as in the UK and in Latin America those brands make up a huge part of our sales base.

So one we’re fully vested in the strategy, we’ll continue to build those brands, we’re going to professionalize and make them look great and obviously continue deliver on the value position. In terms of buying brands I’m not going to comment in any specific target.

I think though acquiring brands that obviously bring us new solutions for customers does make great sense for us overtime. Obviously it has to fit our footprint and it has to be within the range or something we can fiscally report. So there may be some out there that are just two big for us to swallow, which is fine.

There are other ones that aren’t and we will be pursuing those overtime and if the valuations appropriate we will act. But none are right in front of us or none that we should be talking about right now.

There some smaller opportunities that we’re interested and we’ll look at, but honestly, they’re not at a point where we should be coming forward and talking about them publically. So, I guess in summary I’d say all brands are core to our strategy they absolutely will be core to our strategy going forward.

You’re going to see more investment around that strategy in terms of marketing and package design development. But there aren’t any big acquisitions right now that are in front of us, but we’ll continue to look at them overtime..

Thank you..

You bet. Just to close and to summarize, we are pleased with the early results of our initiatives, but we’re absolutely not content. The team and I know we have a lot of work ahead of us.

But we remaining extremely motivated by the progress we’ve made and the positive results the initiatives are showing and we’re excited to get after it and go get it done. Have a great afternoon. I look forward to seeing all of you soon. Thank you very much..

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