Karen Fugate - VP, IR Chris Brickman - President & CEO Mark Flaherty - SVP & CFO.

Simeon Gutman - Morgan Stanley Oliver Chen - Cowen and Company Meredith Adler - Barclays Rupesh Parikh - Oppenheimer Simeon Siegel - Nomura Securities Joe Altobello - Raymond James Olivia Tong - Bank of America Merrill Lynch Chris Ferrara - Wells Fargo Mark Altschwager - Robert W. Baird. Jill Nelson - Johnson Rice Steph Wissink - Piper Jaffray.

Welcome to the Sally Beauty Holdings Fiscal 2015 Second Quarter Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Karen Fugate. Please go ahead..

Thank you. Before I begin I would like to remind you that certain comments including matters such as forecasted financial information, contractor business and trend information made during this call may contain forward-looking statements within the meaning of section 21-E of the Securities and Exchange Act of 1974.

Many of these forward-looking statements can be identified by the use of words such as may, well, should, expect, anticipate, estimate, assume, continue, project, plan, belief 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 form -- annual report on form 10-K for September 30, 2014 and it's 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. Now, I'd like to turn the call over to Chris..

Thank you, Karen and good morning everyone. I'll briefly provide an update on our business performance and Mark will discuss our 2015 second quarter results in more detail. We made solid progress on our strategic initiatives in the quarter and we're pleased with our financial results.

Consolidated same-store sales grew 2.8% and gross margin expanded by 20 basis points resulting in 11% year-over-year growth and EPS. SG&A as a percent of sales also proved with a 10 basis point decline over prior year.

We ended the quarter with cash flow from operations of $174 million year-to-date which helped fund our stock repurchases of $60 million or 1.8 million shares. Now, I would like to provide an update on the progress towards our strategic initiatives starting with Sally Beauty.

Our store refresh initiative continued during the second quarter and we're on track to complete 520 stores by June 1. These remodeled stores continue to realize improved cost and transaction growth when compared to the relevant benchmark stores.

In light of these initial positive results, we believe the long-term returns of our investment will remain positive and we intend to move forward with at least 500 more stores to be completed by the end of November 2015. The Nail studio has also been a positive impact on the store experience.

We fully completed the installation of the Nail studio in all of our Sally U.S. stores during Q1 and we're investing to market this winning category assortment during the spring nail season. Building on this, we will be launching the new Lash and Brow studio and replace the cash rap impulse center in June and July.

In our multicultural category, we reset our brand assortment in all stores to better reflect modern consumer needs. Sales performance in this category had been declining over the last several years. However, with the recent changes, we experienced double-digit sales growth in Q2.

The Sally marketing team finished the work required to get our dynamic CRM program fully operational in April and we're very excited about the early results and future potential of this initiative. In addition, traffic to our redesigned Sally Beauty e-commerce site was up 91%, with sales growth of 12%.

We expected, over time, more online visitors will convert to shoppers, as that site becomes a source of information in discovery for the beauty enthusiast. To that end, we're rolling out our content-rich mobile design that mirrors what our customers had access today via their laptop.

In BSG, the new brand integration into our stores is complete and the team is leveraging our Sally experience and functionality in order to extend CRM and improve e-commerce capabilities to our professional business. In addition, we continue to be pleased with the growth our loxabeauty.com site track.

The Loxa team is making terrific progress signing on additional brands and increasing awareness and adoption with consumers. We have developed a strong list of merchandising and marketing innovations we plan to deploy in both businesses during the coming quarters.

I have full confidence in the team to build on the initial momentum so that we can achieve our objectives for this year and beyond. Finally, we have recently replaced the managing directors for our Sally UK and European locations.

We're already starting to identify opportunities for profitability improvement in these businesses and we will share these changes as they become fully developed and ready for implementation. With these new leaders in place, we believe we have substantially completed all of the necessary leadership changes at SBH.

I am very excited about the talent of the team across the enterprise. To summarize, with our progress and our financial results and towards our initiatives, we're pleased that we have now set ourselves up for success for the remainder of the year.

However, despite this progress, we aspire to much more and we clearly have more work left in order to achieve our long-term objectives. Now, I'll turn it over to Mark to provide more financial detail for the second quarter.

Mark?.

Thanks, Chris. Consolidated net sales for the second quarter were $937.8 million, an increase of 2%. This increase was primarily driven by same-store sales growth of 2.8% and 178 new store openings. The unfavorable impact of foreign currency exchange rates was $21.5 million or 230 basis points of growth.

Consolidated gross profit was up 2.4% over the prior year. Gross profit as a percentage of sales was 49.8%, up 20 basis points driven by both our business segments.

Second quarter SG&A expenses including unallocated corporate expenses and share-based compensation were up 1.5% and 33.9% on percent-of-sales basis, a 10 basis point improvement from the FY '14 second quarter.

SG&A expenses increased $4.6 million primarily due to expenses related to new store openings, ongoing upgrades to our IT systems, expenses connected with our ongoing management transition plan and a contingent liability related to our data security incident.

Unallocated corporate expenses including share-based compensation were $32.7 million or 3.5% of sales, despite comparing to the FY '14 second quarter. GAAP consolidated operating earnings for the second quarter increased 4% to $129 million with operating margins up 13.8%, up 30 basis points.

This improvement was primarily driven by higher gross margin and lower SG&A expenses versus the prior year quarter. Interest expense including the amortization of debt issuance cost total $29.2 million, flat to the prior year. For the FY '15 second quarter, our effective tax rate was 38.3%. This is comparable to the FY '14 second quarter.

GAAP net earnings were up 5.2% to $61.5 million and adjusted net earnings were up 5.6% to $62.5 million. Earnings per share on a GAAP and adjusted basis were $0.39, up 11.4% and 8.3%, respectively. Adjusted EBITDA for the second quarter was $154.4 million, up 4.3% when compared to $148 million in the FY '14 second quarter.

Also, during the quarter, we repurchased approximately 1.8 million shares of our common stock or $60.3 million. Now, turning to the business segment performance starting with Sally Beauty Supply. Same-store sales growth for Sally Beauty was 1.4%, versus 50 basis points in the year ago quarter.

Net sales for Sally reached $572.1 million, an increase of 40 basis points over the prior year quarter. Sales growth is attributed to new store openings and same-store sales growth. The unfavorable impact of foreign currency exchange rate offset sales growth by $17.9 million or 300 basis points.

Beauty club card sales and transactions increased over 7% for the quarter. Sales from our list customers or non-beauty club card customers were down in the low, single digits which was an improvement over the prior year second quarter. Club membership grew 8.6% to reach 8.5 million members.

Membership renewal rate was 60.3% and during the quarter, over 60% of our club members made a purchase. Gross profit margins in the second quarter were 55.3%, up 50 basis points primarily due to the improvement in the international business and favorable product mix shift in our U.S. business.

Operating earnings for our Sally business were $106.1 million, up slightly compared to the prior year. This improvement was driven by gross margin improvement, partially offset by higher SG&A expenses. Turning to the BSG segment, BSG had same-store sales growth of 5.9%. Net sales grew 4.5% to reach $365.6 million.

Overall sales growth is attributed to same-store sales improvement in our sales consultant business and new store openings. This growth was partially offset by the impact of unfavorable foreign currency exchange rates of $3.6 million or 100 basis points.

Looking at the sales growth by distribution channel, sales from our store business grew 5.8% while direct sales consultant business was up 2.1%. BSG's gross profit margin was up 10 basis points to reach 41.3% as well as operating earnings at BSG increased by $4.7 million or 9.3% in the 2015 second quarter.

Operating margin reached 15.2%, up 70 basis points primarily due to gross margin expansion and SG&A leverage. Looking at our consolidated balance sheet, inventories were up 2.2%, to $838.1 million when compared to ending inventory on March 31, 2014.

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 half of FY '15 totaled $39.3 million that reflected expenditures to open new stores, expenditures on our solar refresh initiatives and IT specific products.

At this time we believe that capital expenditures for the FY '15 to be in the range of $95 million to $100 million. Now, I'd like to turn the call back over to Chris..

Thank you, Mark. Before I turn it over to the operator for Q&A, I'd like to briefly comment on the statement we issued yesterday. In the statement, we reported that during the week of April 27, we received reports of unusual activity involving payment cards used at some of our U.S. Sally Beauty stores.

Although it's very early in the investigation and difficult to determine the scope and nature of the potential incident, it is our goal to be as transparent as possible throughout the investigation and we intend to provide updates as appropriate. Now, I'll turn it over to the operator to take your questions..

[Operator Instructions]. And our first question will come from the line of Simeon Gutman with Morgan Stanley. Your line is open. .

Chris, first question regarding the top line during the quarter. If we're trying to gauge the impact from initiatives and we know there was some weather, how are you measuring the extent to which they are gaining traction and part of that question, you just turned on CRM.

I think you now have a better mobile app where the previous one wasn't too functional. Then, you have the store refresh itself.

If you could put it all together and maybe sequence for us the store refresh is -- what elements are happening, the timing for some of these other initiatives and understand over what time frame or when we should see the thrust of these efforts?.

First of all, thanks for the question, Simeon and great to hear from you. My thought would be this which is I don't think there was a lot of positive impact from the initiatives in the quarter, just a little bit. The reality is, the Nail studio really actually got finished in Q2 even though the walls were up at the end of Q1, for the most part.

Most of the nail chips and merchandising around it and certainly all the advertising, didn't start until, say the middle of Q2 and will be an emphasis here. The number of stores we had refreshed during Q2 were relatively small, in the 140s and most in the second tranche really won't be done until June 1.

Obviously, there will be more coming throughout the year. CRM did not turn on until April. The e-commerce website positive did actually have impact for most of the period, although one of the things we're seeing is that the massive increase in traffic we're seeing which is way up, is mostly coming through mobile devices.

Up until -- actually -- until another few weeks from now, we won't actually have mobile responsive design. So, I don't think there was much impact from the initiative, maybe a little bit. We'll see most of that coming from the reset in the multicultural category in the second half of Q2.

Most of that we're going to see now begin to hit on a consolidated basis in Q3. Obviously, in Q4 in terms of the weather, we suffered some pretty substantial setbacks in the weather from -- call it -- the end of the first week in February through the end of the first week in March.

There was weather the previous year, so I don't think we need to make any excuses about the weather. The reality the reality, it did affect sales during the quarter. But, our view is that the BSG business was already in the Sally business had a little short of overcoming it.

We have more work to do and we need to get these initiatives fully implemented and demonstrate, again, consistent sequential improvement..

Okay. My follow-up, one, just tied to your response. You could put it all together. Is hair color officially going to be part of the refresh? If so, as of the most impactful and when the timing is? Sorry. Mark, part of the question is a different topic. SG&A, the performance was much better than the recent trajectory.

The incremental margins were strong, as well.

Can you talk about any changes to quarter to quarter? Whether unusual items a year ago and the cadence for the rest of the year?.

Let me take those separately. I will hand the second one over to Mark. The first one, on hair color, first of all, hair color is doing well in our stores. It continues to grow and that's actually a very big positive, in the sense that color is a great differentiator for us. It's our dominant category, where we're highly differentiated.

That category continues to grow. The next category where we will likely change or bring merchandising innovation in, in terms of the big category, will actually be hair care. I think what we'll do, what we've heard from consumers, is that they are a little confused and overwhelmed by our hair care selection.

We may then reorient that more by solution add a little bit less by brand. That will be the next innovation. I think hair color still will be coming, but it's more likely to be a late 2016 innovation or early 2017 rather than we'll go with. Here first for the end of this fiscal year, early next fiscal year.

One of the things that's driving these costs is the fact that while color is growing and we're seeing positive trajectory and multicultural and care and nails, the category is shrinking a little bit. The appliance category hasn't had much innovation for us.

The reality is that overall, it's a decent good news in the sense that it pushes volume more -- growing in the categories where we're more differentiated. But, it's hurting our comps a little bit in the short term because there's not much innovation in the category. Let me let Mark talk about the SG&A question and then will finish that off, Simeon..

One of the things that you saw, about 10 basis points below last year, in terms of our overall performance. That was pretty consistent with the guidance that we set forth for the year, in terms of we felt that our SG&A as a percentage of sales unallocated in there would be flat or slightly higher.

For the metric, we performed right at the metric for FY '14 year. We're still reiterating guidance we set forth for the year. So, I don't know that there's anything terribly inconsistent in one quarter to the next. We did see little puts and takes, in terms of what we saw versus last year for the quarter.

We saw a little bit of favorable expense -- experience with insurance, certainly our healthcare insurance was a little bit less than what we expected. Part of that was that our overall participant rate is a little bit less than what we had planned which is certainly impacting us favorably.

Also, we didn't have anywhere near the heavy loss experience from one-off individual claims this year, certainly benefited from that. Overall, kind of the puts and takes there -- we're pretty well right in line with what we expected and what we set forth at the beginning of the year..

Our next question comes from the line of Oliver Chen with Cowen and Company. Your line is open..

Chris, in relation to the non-beauty club card customers could you just help us understand which of the initiatives may have the most impact to this segment and where you are in the journey to continue to broaden the awareness to the non-beauty club card customer? Our, I had a question on the gross margins.

You said that the product mix impact the GM's positively.

Is that a trend that we should expect to continue? What kind of products manifested to help that outline item?.

I'll hit the first part and then handed over to Mark. What I'd tell you, obviously, as you point out, our mission is to bring the list customer back to the store and make sure we have a healthy new track into the stores we can convert them to BCC, over time. Each of the initiatives is a little different.

As an example, the nail wall, as we talked about, versus our competitors, designed to highlight the point of difference in which we can then we talk to customers and say here's a Regent why to come back twice store.

That's one of the initiatives but clearly, the investment in refreshing the stores is to take out some of the barriers that we heard through our consumer research. In fact, they felt the store with a little bit dark and a little bit old in some cases and we wanted to take away those barriers.

Bedsit have an additive effect over time as we get more stores converted. In addition, as we would be do the hair care studio, toward the end of this calendar year, the reality is one of the things we heard in research was that, in fact, our list customers were confused by the category and found the selection overwhelming.

In fact, our brands -- they didn't know our brands as well and so that by organizing by solution, as an example damage here or dry here, oily hair, that was about a way for her to shut the category and by brand if she wasn't necessarily familiar with.

Finally, even though CRM is primarily focused on the BCC customer and has a big focus their terms of adding to her basket, actually, as we collect more and more email addresses for this customer's, allows us to reach out to the list of customer in a more efficient way.

In the sense that previously had two markets or her through direct mailings which were very expensive, now we can market to her through emails, through text messages, through digital advertising that follows a certain is around the Internet. We could do that at a much more efficient way than we could before. We can create the Sally brand for her.

One last thing I'll add. In the summer months, we'll be announcing some investments and what I would call general advertising around Sally, that our some sponsorships and some key things that we think will be great for the brand. And, as we do those, we also think that will help us bring the list customer back to the store, as well.

All of these initiatives touch to this customer and we need to bring them all to fruition so we really get her back into the store. That's still the primary mission.

Mark, can you handle the gross margin question?.

Simply put, as we talk about our 2230 basis points of gross margin expansion for the year, part of this was the expectation that we'd be anniversarying from genius in Sally U.S. and we did that during this quarter and certainly we expect to do it a little bit -- probably a little bit more modestly into the third quarter Sally U.S. business.

Which, if you remember, those particular product have a little bit of an unfavorable headwind on our margins last year. We've seen kind of what we expected to happen in terms of the overall margin expansion related to those events.

Also, for the remainder of the year, we still expect that continuation, the modest favorable customer mix in Sally and BSD to contribute to this margin improvement for the fiscal year..

As a follow-up, Chris, as we do look at our models on the Sally side, the comparisons get a little bit tougher and the two-year stack decelerated a little bit this quarter.

How should we think about the back half, given that you have so many good initiatives for the awareness built with the opportunity for that Sally comp? Is it going to continue in the low single-digit kind of range or will it sequentially improve as a lot of this demand creation and store changes take hold?.

Oliver, obviously, our goals and objectives are four sequential improvement. Obviously, we can't say exactly how fast that'd come. But, we're working toward that. We see all these initiatives and public pieces beginning to fit together and our expectation is we're going to get sequential improvement in the next few quarters.

We will achieve that more longer term trajectory as we exit the year. That's been our goal all along. We're little bit behind that in this quarter, but, we got word of mouth just beginning to get all those initiatives together. We believe we should be seeing that sequential improvement from here on out..

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

So you were talking about changing the leadership in the UK and Europe. That leaves some opportunities to improve profitability.

Can you go into any detail about what those opportunities are?.

It's a little bit early. Those new leaders are just now in place and I think one has been in place six weeks and the other is more like four weeks. The reality is, they are different in the UK business.

I think there's a big opportunity around getting are merchandising and our assortment right and making sure we're filling our stores, that we have a number of out stocks their we need to eliminate and just putting more discipline around our marketing process.

In Europe, I think we had an entrepreneurial leader there who did a lot in terms of store design as well as in terms of his own brand development but didn't do as much as we wanted in terms of what I call basic operating discipline, whether that be SG&A control and management or whether that be appropriate pricing controls as well as good marketing discipline and merchandising discipline.

It's really more about core operating disciplines that will drive the more immediate profit improvement. But, there's lots of opportunity is. Those workers are leading in getting their agenda straight.

Mark and I have been meeting with them on a consistent basis to help them with those agendas and I expect we're going to see improvement as we go forward throughout this year and certainly in the next year..

Great, because I have another question, just generally about international. Given everything that's happening in the European market, are you seeing the opportunity to bring in new brands? I think you had said that before.

Also, is there any shift in the customer mix, more to retail?.

You know, not really. For the most part, the European business, especially the continental European business is a professional focus business, that's job one. We do get some retail customers that are a little bit gravy on top of that and we get more of those, obviously, when we have locations that have a high level of retail traffic.

For the most part, the primary customer is the professional customer. Again, the European business has actually done a pretty good job of introducing owned brands into the mix which has been very helpful in terms of helping them maintain their margins.

If you look at the P&L of that business, it's been between the line spend and SG&A cost where they haven't been able to weave get the leverage yet or manage that SG&A costs and an appropriate way. The bottom line, the win-win brands our core for us because they differentiate us from the marketplace. They drive superior margins.

They bring those customers back as loyal customers, where is the rest of the professional brands and Europe are mostly open brands that are sold everywhere. I think we're well positioned in Europe. There is a long-term trend. It's a little bit behind the U.S. in terms of the stylist becoming more of a booth renter or mobile stylist.

Our stores stood that trend well. We have plenty of room to grow and grow our store base and get scale, but we need to put in these core operating disciplines now, shift to profitability so we can reinvest back into the base and get scale..

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open..

I want to ask a little bit more about your CRM program. It appears to be operational.

As you think about the CRM continuing to be rolled out and you experiment with that, how quickly do expect it will start to see benefits from some of your actions?.

I think it will build, over time. We're going to get better and better at the algorithms that respond to customer behavior. Like anything else, you have an automated program now that's up and running. At a time a customer buys, you put in an algorithm that says, if this happens, then this. That can be tied to color, tied to hear care.

It could be tied to a season or passed purchase behavior and how this relates to it. It could be tied to categories where she tends to purchase and areas where she doesn't. The first thing you do is define a set of algorithms that basically respond to her behavior and therefore try to add to her basket size.

The reality is, is that you will find, over time, that some of those algorithms are great and we get a lot of response rate to those algorithms and they help expand basket size and we find that some of the algorithms we initially put in a not that great. What I would say, expect there will be short term or medium term impact.

I also think you'll get more and more, over time, as a refined the algorithms and get better understanding what's the right off for her given the purchase he made in the time of year it is an given the other circumstances of her loyalty to us and will get better at defining the algorithms some which will drive more sales over time.

I said at the building process. I hope will get some in the short-term. But, I think will get more, over time. I also think that the other parts of this, it's not just thinking about the BCC customer but also the list customer. The list customer, obviously, as part of the new traffic that's showing up on the website.

We mentioned the 90% plus growth in West side traffic. We want to convert more of those customers to more loyal customers as we have mobile responsive design up and running that will help us with the conversion. Whereas today, really, the website, itself, from the last comp is quite content rich and engaging.

It's not from a mobile device, that will change in the coming weeks. In addition, we're getting better at following those list customers across the Internet, both with social media ads and digital media ads and as a result of that, roughly, will raise are awareness with.

And be able to respond to searches and things that are going on and through her life through that. I see that's all building in the coming months and quarters. Hopefully, that will help us continue to improve our position with the list customer..

Maybe just switching topics to non-BCC customer's. In one product, you've talked about some of the marketing initiatives that you tried to recapture that customer.

Anymore color you can provide in terms of the success of some of your marketing initiatives?.

As we've said over time, we have made progress with the list customer. If you look a year ago or 18 months ago, the list customer was declining high single digits. We're now into the low single digits. That's not good enough. So, we need to get back closer and closer to zero.

By the way, if it's zero, that means it's actually positive because in reality, we're taking some of those customers to be BCC customer's. We're robbing from that pool in order to build our BCC customer list. The reality is, we have made progress and it's showing up in the data. It's just not enough, yet.

As we get towards the end of the year, we're looking for that to be in the low single digits, the minus one, minus two, not the high minus -- the minus three range which is where we're at right now..

Thank you. Our next question comes from the line of Simeon Siegel with Nomura Securities. Your line is open..

Can you give any color on the second quarter's monthly comp cadence in any color on the European or international comp performance and then just to your earlier point, in addition to the product mix, you called out gross margins from international.

So to your early point, to do feel quantifying the ongoing gross margin improvement there and then when do you expect to see that real tailwind from the SG&A hit international as well?.

I'll try and sort through all this because there is a lot questions in there. Let me just say I don't want to give a lot of details breaking apart but obviously, we started up with a great January. We took a pretty good setback in February and it came back in March, especially in the second half.

So, the bottom line is that's kind of what you expect given the weather sequence we experienced. But either way, it's still fell a little below our expectations. We would hope to make a little more progress this quarter and we certainly expect sequential improvement next quarter.

In terms of what was the next part of a question? Was it around SG&A?.

It was on the European and international comp side..

On the international side, all those comps came back a little bit with the exception of Mexico. Certainly, on the European side, comps were down. A lot of that had to do with the leadership transitions and some of the short-term issues we're working our way through there. I think we will start to see that rebound in the coming quarters.

But we need to give the new leadership team some time to get their feet below them in their plans underneath them and start addressing some of the operational issues I mentioned earlier. So yes those were not as much as they help on the comp side as they had been in previous years and quarters.

But my guess is they will be more of a help as we push toward the end of the fiscal year and into next year as those begin piece begin to have an impact. But Mexico continues to be fantastic, and obviously, a bolster for our overall comps.

On the SG&A side, as Mark said, again, we continue to expect gradual improvement in gross margins consistent with our overall target of 20 or 30 basis points for the year, that’s driven by a mix of factors including the shift to owned brands that continues, the shift toward retail which continues and, the shift from full-service to store business and BSG which continues.

So we continue to expect the growth margins will continue to improve and offset that slightly negative headwind associated with converting more customers to BCC from West.

And on the SG&A side as Mark mentioned I think where we're at now is pretty much consistent with where we expect to be for the rest of the year and I don't see much change in our overall guidance there..

Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Your line is open..

I want to go back to the Sally comps for a second. You mentioned that weather was an issue, although I appreciate you guys not really harping on it. The initiatives that you guys are doing really have had an impact, a positive impact yet.

Is our chance that maybe there was some disruption given the nail salon store refresh, that maybe there was some disruption from those initiatives that were actually negative in the quarter?.

I would say it would be fairly muted. Most of the work we do in our stores, whether it be a store refresh or a nail salon or anything else, we try and do on Sunday night before we open on Monday morning. I'm not saying that always happens.

There is, obviously, some store labor associated with this and putting up nail chips -- I was in the stores actually watching the store team put up things like nail chips in front of all the colors. Inevitably, I mean, you are drawing from something. You may be drawing from them serving customers.

But the reality I would guess it would be relatively minor. So, I don't want to say it's nothing, but I would say it's relatively minor. We need to make these initiatives, all of them and hit the consumer on multiple fronts, really come to fruition in the next two quarters and drive sequential improvement, overall..

Okay. In terms of the store refresh, obviously you guys mentioned this morning you’re going to do another 500 stores.

Is this something that you see expanding to the entire store base at some point? Or are there some stores that you might not want to refresh?.

The reality is, yes, they probably are -- first of all there are some stores that are much newer and were effectively already refreshed. So, that's true. In this next round, we’re actually going to target some of our oldest stores in the network.

Up until now we've been doing this on a market by market basis and really hitting the market so that we can turn on some marketing support for the fact that the stores are refreshed. Now, were also going to hit some of the oldest stores in the network so that we take out some of the ones that may diminish our brand imagery with the customer.

I think, over time, we will work are way through the whole network, but how fast we do that will depend on the results we’re seeing from the investment and whether it's really paying out. So far, we don't have anything that makes us want to stop.

But we're going to keep going and see if we can continue to make a difference, especially in those stores that send the wrong message to the customer about our willingness to invest in them and create a good environment in them..

Thank you. Our next question comes from the line of [indiscernible]. Your line is open..

Chris, I guess just quickly, could you comment on Easter? I'm just curious if it had any impact on your SBS comps or gross margin for the quarter, if there is anything worth calling out? And then the second follow-up to that quickly would be, I believe this is the most cash you guys have carried on the balance sheet since the company went public.

Regardless, it's a lot of cash.

And I'm just curious how we should be thinking about that in terms of your capital allocation strategies?.

So overall, I don't think Easter had any impact. The bottom line, it just day shifted. So the reality is that we picked it up later in the month or, excuse me, captured some early in the month and dropped some them later. But the bottom line is that it netted out during the month of April.

As for cash on the balance sheet I'm going to let Mark talk about that one..

That’s pretty good research because I think I came very close during the financial crisis when we parked about $150 million on the balance sheet, I think we got real close to this number. The short and simple answer to this is that our allocation philosophy has not changed. We will continue to use cash first and foremost to grow this business.

Certainly, a little bit of it is a timing issue between quarters, next quarter certainly interest payment quarters in terms of the coupon payments on the debt. So there is a little bit of a timing issue there.

But overall, first and foremost is using cash to invest in the business both organically and if we saw, certainly targets of acquisitions for businesses or brands or whatever, certainly made strategic sense after having a very deep conversation with the board. Certainly, we would pursue those, as well.

And then lastly, our commitment to our share repurchase program has not changed. We're still committed to the program. We’ve said that in our cadence will be a little bit more less predictable than what it has been in the past. But, our commitment to it and our commitment to that our board has to it has not changed.

So overall, our philosophy is still the same. We're just seeing a quarter which we do have a lot more cash than usual on the balance sheet..

[Operator Instructions]. And next we will go to the line of Olivia Tong with Bank of America. Your line is open. .

First question, it sounds like you think that you'll see an inflection on comp store growth on Sally Beauty Supply will come eventually driven by some initiatives rolling out. And it's just taking a little longer to bear fruit. So with that in mind, you now have probably another four weeks or so of data.

So can you give us any color on whether you've seen a pickup since the end of the March quarter? And then also just for the year, how do you think about the contribution of the two pieces of the business.

The Sally Beauty Supply versus the BSG side of the business?.

We're not going to comment in-quarter results. I don't think that would be appropriate. But for the quarter, we do expect sequential improvement and we expect sequential improvement again in the fourth quarter. So that’s all I'll say there. The other side is that the BSG business is obviously doing very well and it's ahead of plan for the year.

I don't see anything that's going to hold them back. They've now fully integrated the additional brands they have acquired into the business.

They are rolling out a number of terrific merchandising and marketing programs in their stores and more importantly, they can now really leverage the technology and capability we’ve built in terms of CRM in Sally and accelerate the process through our IT organization to make sure we can get that up and running in BSG, as well.

With a couple million stylists they serve, there is a terrific to leverage CRM and build the business and have a much more mobile and active dialogue with our stylist community just the same way we want to with our BCC community. So in my mind, BSG is on a great trajectory. They've got actually further room to grow and improve.

I want to see them keep doing that because they're making great progress in the team is obviously playing off their front foot right now.

And as you said the Sally business, we need to keep working on it and keep bringing up more initiatives that make sense, but right now, there is a great opportunity here in this quarter and the next quarter to really bring all of our core initiatives to bear so that we get that full additive effect of all of them.

And, make those works so we begin to get the inflection point in Sally. To me, this is what's great. We have this transitionary quarter where BSG is obviously on the track we want. Sally has made progress but is not quite where we want it to be, but we've got all the initiatives in place to get at there.

And finally then we've made a number of transitions in our European business that should allow us to improve that business in the coming quarters. I want all those businesses to be hitting on all cylinders as we enter next year..

In terms of expenses, it's great to see that improvement in SG&A margin this quarter. Obviously, there has been a lot of chatter around wage inflation particularly for hourly employees. So what's your plan on that and any change in terms of your expectation for this year or is a potentially something that could impact FY '16? Thank you..

No it's absolutely something on our radar screen and a great question to ask, we do expect we'll see some labor inflation at the store level where we respond to competitive retailer activity and probably at the store manager level, as well. We have a full list of actions in places, there is a team that meets here on a regular basis to discuss that.

We’re working on in-direct sourcing, we’re working on global sourcing and finally, we’re working on some very tactical price increases that would allow us to cover that cost. I think the key message would be is that we expect to be able to cover that cost. But it's going to take hard work for us to make sure that we do. That's on our agenda.

We're working on it but we fully expect to be able to cover the cost as we move through this year but more importantly into next year and next year's budgeting process..

And then just one last question, forgive me if I missed this earlier on, but are you still for the full year are you still expecting same store sales to be sort of be in that 2.5% to 3% range?.

Yes. I think 2.5 is probably the better estimate within that range. Our guidance was three. I don't think we're changing our guidance. I'm sorry, I was thinking about segment by segment. If you think overall, our guidance remains the same which is a 2.5% to 3% range..

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

I have to go back to that last one.

Just to be clear, the guidance coming in was for comps that 3% plus for the full year?.

Correct..

Is 2.5% to 3% the Sally Beauty Supply piece is that what you’re saying both of those still--.

Yes. We want to exit Sally above 2.5% is what we'd like to do with the Sally piece and then the overall remains the same..

Okay.

So overall still 3% plus for the full year?.

Correct..

And then Chris, you talked about weather, I guess.

So more specifically, was weather a year-on-year drag for Sally Beauty Supply in this quarter or was it maybe a little better versus last quarter?.

The bottom line is it hit us pretty good, but the bottom line I just don't want to get into this making excuses due to the weather, the bottom line, BSG was able to overcome it and Sally was not quite able to overcome it. And so, we have more work to do in Sally.

We expect that having all of our initiatives now coming together in this quarter and the next should allow us do that. But the bottom line is, we need to get out of this world making excuses based on weather..

I fully appreciate that.

Just making sure, it was a year on your drag, then? Not that you are using it as an excuse, but whether it's a factor or not, right?.

The weather was bad the year before. So, if you want to get into the exact detail, the weather was bad the year before but the bottom line is I don't think that's what made the difference here. What made the difference is we haven't got all of our initiative to market yet..

Okay so that’s the next question to you. Relative to your expectations, the supply side wasn't as good. Did you expect to have the initiatives to market faster than you did? And I apologize if you said that already..

Obviously, we always expect to try and get more impact faster. I think CRM might have been a month slower than we thought, but it wasn't dramatically slower. The nail wall is about on target. I think we, perhaps, I think we underestimated lapping some of the activity, especially in the appliance category.

That category has been a drag on our overall comps. I think we underestimated what it would take to lap that because there just isn't enough innovation in the category right now.

Overall, that's a good thing for us, because it means more of our sales are concentrated and categories where we're highly differentiated, such as color, such as care and nails. But I think we underestimated the lack of innovation in the appliance category and how that would negatively impact are comps..

Thank you. Our next question comes from the line of Mark Altschwager with Robert W. Baird. Your line is open..

I just wanted to follow up real quickly.

Can you confirm that you said comps were negative in the international side, but that you would expect that to move back to positive territory by year-end?.

No. They were not negative, but they were not as high they have been in previous quarters..

Okay.

And then within Sally, can you talk about the trends that you’re seeing with professional customer and how you’re thinking about the growth rate there for the remainder of the year?.

Overall, the professional customer is a fairly low growth customer for us, it's fairly flat. I don't think we expect that to change. We want to maintain that customer in our stores, so that we have that professional heritage and credibility. But we don't really want to grow that customer base.

So that's kind of consistent with our target, in terms of maintaining the professional heritage of the business, and yet, over time, shifting more and more toward list and BCC..

One more quick follow-up, you mentioned some marketing initiatives and potentially new campaign that's rolling out this summer. Would you expect a step up in SG&A related to that? Any additional context there would be helpful..

A little bit. Most of it will fund through reallocation of our marketing dollars. There maybe a little bit of an increase, but it won't be dramatic. Again, what we're hoping is that really helps us with the list customer in terms of bringing more traffic to the stores..

Thank you. Our next question comes from the line of Jill Nelson with Johnson Rice. Your line is open..

I believe your eye on private brand you did a repackaging label free shush.

If you could maybe talk about how that went and your expectations for the brand?.

That's going to take many months to complete. So we've done the first phase of that, where the first set of SKUs went out and changed, we have more coming this quarter and we will continue to do more. As you can imagine, we want to do that in stages so that we don't have a large inventory write off.

So it will take throughout most of this year and even a little bit next year to complete that. But it's our single biggest brand, so that's why it's a fairly comprehensive rollover. But basically, we've updated the packaging on the product.

It looks much more modern and much more premium and I will call it salon quality that was the idea and the intent. My guess is that it will take time for us to get the impact for that, because as we're doing this slow roll over in order to control the cost, it will take time for that impact to roll through.

But, it actually it's great because the bottom line, it will have an impact both of the U.S. as well as these [indiscernible] are very big in Latin America, South America and Mexico. So it's a great chance for us to continue to up our image there as well. So it's something that will roll in over time.

But, I don't think we got a whole lot of impact for the quarter. But hopefully, as we get into next year, it will start to have a building impact..

Okay. And we're seeing quite a few number of professional hair care brands moving to being more open to selling online. I know you've got the brand through Loxa Beauty.

But could you just talk about kind of that shift definitely seeing those brands be more open online and whatnot?.

Yes I think more and more, I would expect that to happen.

Loxa point of differentiation has to be different that, Loxa point of differentiation has to be the relationship between the stylist and the consumer and the ability of the stylist to recommend to the consumer and the consumer to come in, name the stylist and of course the stylist to benefit from that recommendation through a commission.

And that is it's points of different. They are working hard to continue to build more traffic, both to their website as well as among stylist so that they maintain that community. I think expect the idea that Loxa will face increased competition over time associated with more brands being available online.

It's something we expect and our point of difference is going to be around the relationship between the stylist and the customer..

And just last one, could you just give us a bit more update on the data security breach given it seems like it's second one in just over a year? What should we expect? Any higher investments into IT and whatnot? Thank you..

Well, what I'd say, is I think it's way too early to understand that or not. The reality is, we're just investigating at this point in time and indicative analysis that makes us want to make sure that we're protecting our customers. It's very early stages.

We won't know anything for weeks, if not more, in terms of how much investment will be required, if any incremental investment or what the outcome of this will be. I do want to speculate at this time what the definitive outcome will be. We will wait and get there in the coming weeks. And of course we will bring you up to speed on that, as we do..

Our next question will come from the line of Steph Wissink with Piper Jaffray. Your line is open..

Just a couple of questions from us. First, you guys mentioned a couple of times already the benefits of mix and I'm curious if you can just talk a little bit about the categories where you are seeing some innovation. I know you mentioned the electronics side has lacked innovation but maybe some of the areas where you are seeing some excitement.

And then separately, with respect to the store refresh, just curious if your refreshing pools of stores in similar geographies or if it's more just as there is an incidence of lease renewal? If it is more of a concentrated geographic strategy, are you seeing list overall in stores but haven't yet been remodeled just given the refresh package is driving some incremental traffic? If you can just talk a little bit about the geographic strategy of the refresh, that would be helpful..

On the mix side, as you point to a good example of one, right, if the appliance category is down or flat, well color, care and nails are growing, that's a positive mix for us both in terms of the margins in those categories as well as relatively high penetration of owned brands.

So positive mix comes from both the category mix, in terms of which categories are selling, appliances tend to have a slightly lower margin, as an example as well as, the mix of owned brands within that category in terms of if we have a high penetration of owned brands in a particular category, that helps our overall margin, as well.

And those trends are generally positive and where we expect they continue to slowly move that direction. In terms of the store refresh, what I would say is this. We have, up until now, been focused mainly on a geographic roll out.

So, we've done markets such as Columbus and Dallas and Phoenix and Los Angeles and some of those market-based refreshes with the intent of, obviously helping us market to customers in those areas and zones.

In the next round, we're going to work in another tactic which is to also hit some of the oldest stores in the network that perhaps diminish our brand relative to the overall average store. And as a result of that, we can test whether those older stores make -- we get a higher return on the investment in those really old stores in the network.

So we're going to do a mix of stores in the next 500 that will come after June 1..

Okay just one follow-up guys on the mobile adaption, I don't recall the actual date you went live and if you can just give us some insight when or how the adaption curve is looking, particularly related to your loyal customers..

In terms of mobile, we actually haven't gone live yet. We're about to go-live in the coming weeks. So what I’ve been noting is the fact that on our e-commerce business, since we’ve refreshed the site and made it much more content rich, we're seeing a large surge in traffic which is starting to convert to sales.

And we're seeing an increase in our online business which was up 12% year-to-date right now.

But what has been missing from that is that we haven't had mobile responsive design up until now and so as we've gotten all this the traffic, most of which is coming from mobile devices, we haven't been able to offer that content rich shopping environment for the customers.

That's coming in May and so we expect that will continue to help that trajectory in terms of greater conversion of those mobile customers who visit our site looking for answers to their beauty questions..

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

Again just to summarize, we're pleased with the early results of our initiatives and the sequential improvement in our results.

The team and I know, however, that we have a lot of work ahead and we remain extremely motivated by the progress we've made, the positive results we've shown, but more importantly, the sequential improvement and results we expect in the coming quarters and years. Have a good afternoon and I look forward to seeing you soon..

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