Sally Beauty Holdings, Inc. (SBH) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2013 fourth quarter and full year financial results. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the call over to Karen Fugate, Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contracts of business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of the words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Holdings -- Sally Beauty Holdings' SEC filings, including its most recent annual report on Form 10-K 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 Gary Winterhalter, Chairman, President and Chief Executive Officer; and Mark Flaherty, Senior Vice President and Chief Financial Officer. Now I'd like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our Fiscal 2013 Fourth Quarter and Full Year Earnings Call. I will begin today's discussion with a high-level review of our full year financial results, and Mark will then take you through the fourth quarter in more detail. As you saw from our press release this morning, we had a challenging year due to comparisons against record-breaking growth in fiscal 2012 and soft traffic in our Sally U.S. retail business. Nevertheless, our overall performance was solid, and we executed on our strategic initiatives, including our IT projects in the U.S. and Europe, as well as our new U.K. distribution center. We generated $310 million in operating cash flow and repurchased approximately $510 million or 19 million shares of our common stock. Consolidated sales in fiscal 2013 exceeded $3.6 billion, or growth of 2.8%. Same-store sales growth was 0.8% compared to record growth of 6.4% in 2012. We attribute our sales growth to our BSG and International businesses. Gross profit ended the year at $1.8 billion, growth of 2.6%, achieving a record gross profit margin of 49.6%. Gross margin expanded 10 basis points, primarily due to the shift in customer and product mix in both our businesses. Consolidated SG&A, including unallocated expense, was $1.2 billion, an increase of 2%. SG&A as a percent of sales was 33.2%, a 30 basis point improvement over the prior year. Included in the Sally Beauty Supply segment in fiscal 2012 was a $10.2 million charge related to litigation settlement. Excluding the 2012 charge, our 2013 SG&A as a percentage of sales would have been flat. Operating margin improved by 20 basis points to reach 14.4%. This increase was primarily the result of gross margin expansion in comparison to the 2012 operating margin, which included the unfavorable impact of the $10.2 million litigation charge. Net earnings were $261 million, compared to 2012 GAAP net earnings of $233 million and adjusted net earnings of $267 million, an increase of 12.1% and a decrease of 2.3%, respectively. Earnings per share were $1.48, compared to 2012 GAAP earnings per share of $1.24 and adjusted earnings per share of $1.42, an increase of 19.4% and 4.2%, respectively. 2013 adjusted EBITDA crossed the $600 million mark and ended the year at $612 million, an increase of 3.5% over fiscal 2012. We generated $310 million in operating cash, which funded our investments in company growth and our stock buyback initiative. We continue to grow our store base through organic store openings and acquisitions. We increased our store footprint by 3.8% or 170 stores for a total count of 4,669. We now operate 3,831 stores in the United States and 838 in 10 countries outside of the U.S. New store productivity across the business, including Sally U.S., remained strong, with returns that are characteristic for our company. Turning to segment performance, starting with Sally Beauty Supply. Net sales were $2.2 billion, or growth of 1.4%, compared to record growth of 9.2% in fiscal 2012. Sales growth is attributed to new store openings and international growth, offset by weakness in Sally's U.S. retail business. Same-store sales were down 0.6% versus growth in the prior year of 6.5%. Same-store sales comparisons were negatively impacted by weakness in retail traffic and the record performance of 2012. Gross profit margin at Sally Beauty expanded 30 basis points for the year to reach a record 54.9%. This performance reflects the continued shift in product and customer mix. Operating earnings grew 1.7% to reach $437 million. Operating margin was 19.6%, a 10 basis point improvement over prior year. For fiscal 2013, sales from our Beauty Club customers increased 7.6%, and average ticket for both non-Club and Club members were up year-over-year. Our loyalty club memberships exceeded 7.4 million for growth of 10.2%, and member sales accounted for 53% of our retail sales. As of July, we returned to our original direct marketing approach and mailed out almost 8 million direct mailers to approximately 2 million potential customers from July through October. Since it takes 3 or 4 mailers before a potential customer visits a store, we did not expect to see results from these efforts in our fourth quarter. Sales from our Beauty Club Card members in the fourth quarter were up 3.8%. However, BCC transactions grew by 5.1%. We continue to believe that the change in our marketing tactics from a quality-based to a quantity-based approach was the principal reason for the decline in non-Beauty Club Card traffic. Most recently, we've seen retail traffic trends slightly improve, and we remain optimistic this positive trend will continue as we attract new customers. We are in the process of bringing in a CMO and other key positions to increase our marketing capabilities. As I mentioned last quarter, Sally stores in the U.S. gained distribution rights to several well-known professional brands. And if you read People StyleWatch magazine, you may have seen our advertisements for these popular brands. We introduced TIGI Pro hair care in September, followed by the CHI Elite electrical appliances in October. Just this month, we introduced OPI nail polish, and we'll kick off the full product launch on December 1. We are excited to offer OPI to our customers. OPI has been the most requested brand not carried at Sally for several years. We believe the addition of these recognized brands, combined with their associated retail advertising, will help draw new customers into the stores. During the year, we completed the rollout of our new point-of-sale system in the Sally U.S. stores. A significant benefit of the new POS is that our Beauty Club Card renewal rate increased 1,400 basis points year-over-year to reach 53%. The combination of the new POS and the upgrade of our CRM database will provide our marketing team with a deeper understanding of our customer's buying behavior, and in turn, we can increase our relevance with that customer. Now turning to BSG. BSG had a great year with same-store sales growth of 4.2%. Net sales reached $1.4 billion for growth of 5.1%. This strong performance was driven by growth in same-store sales, as well as in the full service business, and the addition of 55 new stores, including 12 from an acquisition. BSG's gross profit margin was up 10 basis points to a record 41.1%. Gross margin performance was primarily due to the shift in sales to stores, which now represents 65% of BSG's total sales. Operating margin at BSG improved by 60 basis points to reach another record high of 14.4%. This performance was primarily due to gross margin expansion and strong operating leverage. Our strategy at BSG will continue into 2014: to expand both organically and through acquisitions and to increase our brand footprint and penetration in existing geographies. Before I turn it over to Mark, I'd like to highlight a couple of corporate changes. First, I'm pleased to announce that Tobin Anderson assumed the role of President of the Sally Beauty U.S. and Canadian business on November 12. In Tobin's first few months, he has spent a great deal of time in the stores with our employees, customers and suppliers. His bottom-up approach to understanding our business demonstrates that he is an effective operator, as well as a skilled merchandising and marketing executive. I am confident that Tobin has the talent to take Sally to the next level. Second, in light of Kathy Affeldt's retirement from our board, John Golliher, the president of Beauty Systems Group, has been elected to the Sally Beauty Holdings Board. John brings over 30 years of experience in the professional beauty industry and will add a tremendous amount of value in the strategic direction of the company. We wish to thank Kathy Affeldt for her many years of excellent service. In summary, 2013 was a challenging year due to comparisons to our record growth in 2012 and soft traffic in our Sally U.S. retail business. The highlights for the year include outperformance in our BSG and International businesses and several strategic achievements, including our IT projects and a new U.K. distribution center. Looking ahead to 2014, we will remain disciplined in our investments for growth and capital management to further enhance shareholder return. Now Mark will provide more financial detail for the fourth quarter. Mark?

Thanks, Gary. Consolidated net sales for the fourth quarter increased 2.7% to $906.4 million. This increase is principally driven by the addition of new stores, strong performance in the BSG full service business and consolidated same-store sales growth of 40 basis points. Gross margins in the fourth quarter declined 30 basis points to 49.6% over the fiscal 2012 fourth quarter. This decrease was due to a difficult year-over-year comparison of a record high gross profit margin at BSG attributable to the timing of vendor allowances. Fourth quarter SG&A expenses, including unallocated corporate expenses, were $301.9 million or 33.3% of sales, a 130 basis point improvement from the year-ago quarter. As a reminder, the fiscal 2012 fourth quarter includes a $10.2 million charge related to a litigation settlement. Excluding the 2012 charge, our fourth quarter SG&A as a percentage of sales would remain favorable over the prior year. Unallocated corporate expenses, including share-based compensation, were $117.1 million, finishing the year at the lower end of our guidance range. Consolidated operating earnings in the fourth quarter increased 8.7% to reach $128.1 million. Operating margin was 14.1%, a 70 basis point increase over the prior year. The fiscal 2012 fourth quarter performance was negatively impacted by the $10.2 million litigation charge. Interest expense net of interest income for the fourth quarter was $27.2 million. Interest expense increased by $2 million over the prior year due to a higher outstanding balance on the ABL facility during the fiscal 2013 fourth quarter and the additional $150 million of long-term debt acquired in September of the fiscal 2012 fourth quarter. For the fiscal year 2013, our effective tax rate was 36.7%, a 130 basis point increase versus the 35.4% in the prior year. This year-over-year increase is primarily due to an income tax benefit related to an international tax planning initiative of $10.3 million that we recognized during the fiscal 2012 fourth quarter. For the fiscal year in 2014, we expect our effective tax rate to be in the range of 36.5% to 37.5%. Net earnings for the fiscal 2013 fourth quarter were $64.8 million, compared to the fiscal 2012 fourth quarter GAAP net earnings of $65.6 million and adjusted net earnings of $72.2 million, down 1.2% and 10.2%, respectively. Earnings per share were $0.38 compared to the fiscal 2012 fourth quarter GAAP earnings per share of $0.35 and adjusted earnings per share of $0.39. Looking to the components of our balance sheet. At September 30, 2013, inventories increased by $73.1 million or 9.9% compared to the ending inventory on September 30, 2012. This year-over-year increase is primarily due to the additional inventory from new store openings and the introduction of new product offerings specifically related to the new brands introduced at the Sally U.S. business. Inventory growth was higher than we typically like to experience, but we are taking measures in fiscal 2014 that we believe will align inventory closer to our historical run rates. Capital expenditures finished the year at $85 million, which is the lower end of our guidance range. For the fiscal year 2014, capital expenditures, excluding acquisitions, are expected to be in the range of $85 million to $90 million. This includes capital associated with the initial rollout of our new point-of-sale system for Beauty Systems Group. As of September 30, 2013, our debt, excluding capital leases, totaled approximately $1.7 billion. This $1.7 billion excludes the $200 million of additional senior notes raised in October to take advantage of favorable market conditions. The net proceeds of the issuance were used to pay down the outstanding ABL balance of $91 million, and the remainder of the proceeds will be used for general corporate purposes. Including the $200 million of debt at 5.5%, our blended long-term debt rate is now approximately 6.1%. Gary?

Thanks, Mark. Let me wrap up by summarizing our thoughts for fiscal 2014. We expect 2014 to be a year of gradual recovery for the Sally U.S. business as our customer acquisition program gains traction and our year-over-year comparisons get easier. I'll provide some high-level expectations on some of our key operating metrics for 2014. We expect consolidated same-store sales growth of 1% to 3%. This guidance includes a gradual improvement in the Sally U.S. business throughout the fiscal year. On a longer-term basis, we believe that the consolidated same-store sales growth should be in the range of 3% to 4%. Gross margin expansion is anticipated to be in the range of 30 to 40 basis points. This guidance also includes a gradual improvement in retail traffic for the Sally U.S. business. Consolidated SG&A, including unallocated corporate expenses, are expected to be in the range of 33.3% to 33.5%, higher than 2013, due to: investments made to enter new countries; higher compensation, due in part to expanding Sally's marketing initiatives and staff; and continued expense related to our international IT project. Unallocated corporate expense, including share-based compensation, is anticipated to be in the range of $135 million to $140 million. Share-based compensation is expected to be $19 million, flat when compared to fiscal 2013. Beginning in 2014, unallocated corporate expenses will include approximately $5.6 million associated with the U.S. Sally and BSG customer service and credit collection departments that were previously reported in these segments. We expect organic store growth of 3% to 4%, with almost 40% of our growth coming from outside the U.S., including our entry into Peru, with 2 stores opening by the end of December. We are happy to have 2013 in the rearview mirror and look forward to opportunities in 2014. I believe that we've embarked on the right initiatives to gradually improve retail traffic in the Sally U.S. stores and continue the strong performance at BSG and our international businesses. As always, thank you for your interest in Sally Beauty Holdings. And now we will turn it back to the operator to take your questions.

[Operator Instructions] Our first question comes from Simeon Gutman with Equity Research Analysts. Simeon Gutman - Crédit Suisse AG, Research Division: So Gary, first question, on the sales side. Prior to this year, the business grew 6 percentage on the same-store, at least the Sally side. And it's probably above what you would probably argue that the natural run rate of the business has been. And then you had this year, which was slightly negative. You uncovered a marketing issue. I'm curious how you get confidence that this digestion period, which looked like 2013, doesn't last longer, like another year or so. And how confident -- looking back, was it the marketing issue versus just tougher compares, a little bit less innovation, et cetera?

Well, Simeon, one of the things that I said in the remarks was the -- this thing does come back gradually, and I say that looking back at the history when we first fired up that whole marketing campaign. So I think the -- this year will be a gradual improvement for Sally, so I think that's part of it. We also are -- the comps get easier, obviously, to compare on the Sally side throughout the year. And just looking at very recent trends in traffic, I think we're on the right track. Now as I also said last call, we didn't just assume that 100% of this was the marketing campaign. And we've looked at a lot of other areas. In my comments, I said we're really ramping up our marketing department under Tobin on the Sally side. And we are going to be doing a lot more with social media and a lot more with what some people would consider more traditional advertising, only from the standpoint of, with some of the brands we've recently brought in, they are recognizable names. And as you and I have discussed many times, part of the problem with Sally -- it's good and it's bad. It's bad in that we don't have the milk and eggs or Coca-Cola that you can put out there at price and drive traffic. It's good because we -- that kind of is a wall of protection around us as well because nobody else can jump into this particular niche and do it with those type of recognizable brands either. However, bringing brands like OPI and CHI and TIGI, which are much more recognizable, gives us the opportunity to throw out some brands that I think are going to be traffic drivers. Simeon Gutman - Crédit Suisse AG, Research Division: And so the 1% to 3% for next year, is that just cycling the tougher compares and you have some product drivers coming back? But how much of that is the marketing spend helping in that equation?

Well, the marketing spend will be pretty consistent through the year, starting right now. But again, looking at the history of when we ramped this [indiscernible] back in '09 and '10, I expect Sally comps to get sequentially better throughout the year. I expect BSG comps to be relatively consistent through the year. However, there are some minor calendar effects on BSG. And BSG could have higher comps in the front of the year than the back, but it won't be significantly different. And international is comping quite well. All the countries that we're in right now are comping really well. And I think that's going to be pretty consistent as we continue to add new stores and the new stores we've added in the past year start to comp.

Our next question comes from Olivia Tong of Bank of America Merrill Lynch.

On sales growth from your Beauty Club Card customers, clearly, that decelerated again. And I would assume that a lot of that had to do with fewer new customers. But are you -- obviously, we've heard a lot about consumer slowdown and things like that in HBC. Are you seeing any shift in purchasing patterns within that Beauty Club Card customer? Or is it really just the funnel of new customers coming in?

Yes, the majority of it is the funnel, Olivia. And obviously -- and you're right about comments from other retailers about traffic being slow in centers. That doesn't help us. But a lot of what we do to generate traffic is generated by us, and it's -- it becomes a destination stop. Our existing customers, particularly the professional and the Beauty Club Card customer, it's very much a destination stop. And the whole customer acquisition plan is built around bringing in new non-Beauty Club Card members, but it's also from a direct contact, so it becomes sort of a destination. But the amount of traffic that -- which I think is a relatively small percentage of our traffic, that just kind of wanders in because they're in the shopping center, sure, shopping center traffic is down slightly. It's going to have some impact on that particular piece of our traffic.

Got it. And then it sounds like, with the addition of TIGI and also OPI and a couple of other brands, it sounds like maybe you went a little bit too far in your own-label product expansion. First, is that a fair -- is it a fair characterization, do you think? And also, then, should we expect you mix between your own label versus branded to start turning the other way? And what might that imply in terms of your margin progression, both this year and going forward?

Well, first of all, that really isn't the case. We have not been offered OPI and TIGI and these brands in the past. Now I think I said last call that this is an interesting coincidence that we have some very recognizable brands all wanting to get into the Sally distribution at the same time. So it wasn't really like we had a choice of whether or not to bring these brands in. We would have brought them in at any time they were offered to us in the past. However, most of these professional brands are typically wanting the BSG distribution, at least in the initial years of their life. And some of them, given time, will migrate over to the Sally distribution. But in light of that, we built our business around assuming we weren't going to be offered a lot of those brands. And honestly, prior to this year, we haven't had a major professional-only, so to speak, brand come into our distribution in a long, long time. So it's a bit coincidental. It should work well for us, but it will not change our marketing efforts or our intent on building our own brands because, keep in mind, the Sally consumer, professional and retail, doesn't look at the brands we own necessarily as private label. They look at them as professional brands, and that's the reason they don't see them in other channels, not because they're private label.

Our next question comes from Chris Ferrara with Wells Fargo.

Gary, I guess, just following up on that concept. I guess, I feel like the economics of the Sally model has been tied to the fact that you have somewhat of a unique brand distribution. And when you start to bring in brands from the outside, it necessitates things like marketing. And I thought you might have mentioned that earlier. Now I think you're saying that your bringing in TIGI and bringing in OPI doesn't affect your marketing. So can you just talk about that a little bit? I mean, does it change anything from how you have to market to consumers?

No, I did say that having some very recognizable brands gives us the opportunity to do things like we've been doing the last 3 months in People StyleWatch magazine. Prior to having a name like OPI or TIGI or CHI, what are you going to put in StyleWatch magazine that's recognizable to a non-Sally customer to bring them in the door? We really didn't have that. We can sell the Sally concept of professional products, but it isn't like putting something out there that is highly recognizable that will be a -- drive the traffic draw. And I have mentioned in my comments that OPI has been the single most requested brand that Sally hasn't carried for many years. And having that -- it's a very recognizable brand. Having that available today through Sally not only to the consumer, but to the professional, who has a difficult time finding consistent supply, sometimes, of OPI, is significant for us. So we will have the opportunity, and we will invest more in that type of advertising, again, because we have something that somebody can say, "Hey, they got OPI. I know OPI, I use OPI. I can now get it at Sally" sort of a thing. But don't misunderstand that to think that we are not going to invest heavily, continue to invest heavily, in our customer acquisition program. We still believe that the profiled customer, with or without these new brands, is still the direction to go, as opposed to mass retail advertising. Even though we have some brands now that will work there, they still are not low-end brands that general consumer mass advertising would pay off for.

That's helpful. And look, I don't want to make too big a deal out of a couple of new brands in there, but I guess the question is around the economics of it, right? So if you're going to be dipping your toe into the water on traditional mass advertising and continuing with the customer acquisition sort of marketing you've been doing, and now you're saying you're going to be marketing more into 2014, like what's your view of the returns on bringing stuff in like that? Do you just view it as a top line driver and that's what you need right now? Or...

No, no, absolutely not. First of all, the TIGI Pro brand is not the same TIGI that you see in the grocery stores or in the salons. It's just -- it's a brand that we have partnered with them on, and it is their brand. So the margins in that are actually very good. OPI, keep in mind that we buy OPI as a distributor, just like a BSG would, but then we sell some of it to the professional customer, which is a BSG-type margin in the low 40s, but we will sell a lot of it to the consumer at a significantly higher margin. So the OPI, in particular, is right in line with our own brand margins. The CHI is not quite as good. That, there's a lot of competition out there because they have the CHI home products as well, which is their retail brands that you'll see in Target and some other mass places. That's not what we're in. We're in the TIGI Pro -- I'm sorry, the CHI pro brands, and there's just a lot of competition on those through indirect channels. And obviously, CHI and Ulta have done a nice job. They do a lot of advertising for CHI, and we have to be competitive with that.

Our next question comes from Oliver Chen with Citi.

Regarding your statement on the traffic trends and the helpful details about recent slight improvements. Could you just let us know your thoughts on why that's happening? And within the quarter, as you engaged in strategic changes to your marketing program in July, did you notice a sequential improvement in traffic throughout? I was also curious about your comp guidance. Does that include a flat AUR? And given that your guidance is for 1% to 3%, does that -- where do you -- where does that stand with respect to occupancy leverage or deleverage?

Well, as you saw in our comments also, the SG&A leverage will be relatively flat to slightly down this year. Now there's a lot of reasons for that. I mean, I don't mean down in a positive way. Our SG&A is going to grow slightly faster than sales based on the comments I made earlier. Now there's a lot of reasons for that, and some of them are the cost of entering some new countries, which I mentioned, the cost of continuing the ERP rollout in Europe and starting BSG on the POS conversion here in the U.S. Now granted most of both those projects are capital, but there are expenses associated with them. We are beefing up the marketing department here significantly in body count and in spend. And we will -- as I said on the earlier call, we will be investing probably a little more on a percent of sales basis in advertising to take advantage of the brands that we've brought in, plus getting back to the normal expenditure that we were making on the customer acquisition program. We don't want to back off that because we believe that's the right way to attract new customers. And it was working really well for us up until about 18 months ago, when it was changed. Now having said that, relative to the comps for the year, as I said earlier, I think that BSG and International will be relatively consistent through the year. The big driver will be Sally getting gradually better. Now obviously, if we're going to be 1% to 3%, and if you just take 2% as an average of that and you break it down with BSG and all that, it would tell you that Sally is going to slowly improve quarter-over-quarter. And if we want to end at 2%, we're going to have to probably end the year a little north of that if we start the year a little south of that. And I'm not saying that as a prediction to the first quarter. We're actually quite pleased with the way the quarter had started. However, the first quarter -- as you can well imagine, even though we're not very seasonal at all, the first quarter is still very much driven by December.

And at -- in the quarter that elapsed, though, are you seeing the momentum that you, like, you want to see with respect to the sequential movement in traffic, and it's similar to how you're thinking about how the full year might proceed?

I missed the very first part of that. Are you asking about the current quarter or the fourth quarter?

The quarter that just elapsed, like in terms of the sequential dynamic with traffic.

In Q4?

Yes.

No, Q4, I -- we weren't expecting much of anything to happen. And it was a relatively fat -- flat quarter. And as you saw, the comps were down slightly. It was really a continuation of what we saw in Q3, but we expected that, again, based on seeing what's happened in the past with these marketing programs. And it just takes a little time for people to react to them, and then it seems to build a head of steam. And hopefully -- I don't expect that we'll get back to the comps that we had in 2011 and '12 because you not only had the customer acquisition program working really well, you had some really great innovation in some of the categories that we sell. So business in some of our categories was unusually strong, coupled with the customer acquisition thing, which gave us, for example, growth last year of 9% in Sally and comps of in excess of 6. So that's just -- as I said to Simeon earlier, I've said all along, that's just not a normal comp range for us, keeping in mind that this company is going to be 50 years old next year.

Got it. And I just had one quick follow-up. The inventory level growth, you guys gave us good information about why, but should we be concerned about merchandise margin pressure as you take measures in '14? It sounds like it must be embedded in your guidance, your strategy to kind of rein that in.

No. First of all, always keep in mind we don't sell less. We rarely mark down inventory because we need to get rid of inventory. We have great relationships with suppliers. When something's not selling, we either have markdown programs with them so it doesn't impact our margin or we send it back. Now I will tell you that we have some significant promotional events based around our 50th anniversary coming in the back half of Q2 and the front half of Q3, so you're not going to see a lot of inventory improvement in the first half of the year, in particular, but our goal is to get our inventory essentially back to where we ended '13 by the end of this fiscal year. But it's going to be up and then down.

[Operator Instructions] Our next question comes from Linda Bolton-Weiser at B. Riley & Co.

So Gary, you made some commentary just now about same-store sales growth not really being what it used to be. And some of your commentary relates to things that seem like industry factors rather than company specific. So how much of your lower growth right now -- I mean, can you just comment on, like, so do you think you're losing market shares to other retailers versus that the whole industry that you participate in has slower growth? And can you put any numbers around industry growth and how it has come down? And anything along those lines would help.

Well, the last numbers we -- that we have are really for calendar 2012. And we believe that the industry, based on that, is growing at about 3%. Now there has been significant challenges within the industry, particularly in the nail category. I don't believe that we're losing share to mass on that because the numbers that you see from mass and the comments that I just picked up from Coty's call recently are that there's a lot of de-stocking or inventories coming down in mass because a lot of these Gelish polish fads and some this other stuff is just anniversary-ing, and it's softening a bit. I don't believe that the nail category is any -- has any longer-term issues. It's still all about nails, so to speak. I just think that it was a little irrational exuberance, maybe, over the last year to 18 months. And we're just paying for a little of that now. Now having said that, it -- having a brand like OPI come into our Sally stores is really great for us. The interesting thing for us and what we'll be watching very, very closely is, are we just switching from some of the other brands we carry into OPI, or is the addition of OPI going to be very beneficial for our entire nail category? That's obviously what we're hoping.

Our next question comes from William Reuter with Bank of America Merrill Lynch.

I have a question on your expectation, longer term, that the category -- or your same-store sales should grow 3% to 4%. I'm curious what's embedded in that in terms of inflation and how we think that inflation versus units are -- would be there. And then additionally, if you were seeing any differences in price points, meaning better -- kind of the higher-end products are doing better or the lower end, whether there's trading down.

I think we would probably stick with what we've always said regarding inflation, that it's probably 1% a year. And looking at the 3% to 4% longer-term comp guidance, that assumes that BSG, which has been a very, very consistent 4% or 5% comp business, continues. And given that, that's all professional, I don't really see a reason for that not to continue. It also considers -- or assumes that we continue opening a lot of new stores outside the U.S., in which there's almost no cannibalization. So you get true good comps the second year they're there. And as I said in my prepared remarks, about 40% of our store openings this coming year or the year we just started will be outside the U.S. And in general, international comps will be high single or low double digit when you look at it in total. So having said all that, if you look at Sally down the road, the Sally U.S. business only needs to comp 2% to 2.5% to get us in that 3% to 4% range.

Okay. And then, I guess, with regard to just changes in price points, meaning within the spectrum, are you seeing strength at the higher price points or lower ones?

Oh, I'm sorry, I neglected that part of your question: Not really. We're seeing a little of that in the short term because of bringing in the CHI iron. It's on the higher end of our flat irons and the higher end of our dryers. And the Curl Genius, which has been a great item for us, I think it'll be a terrific item through the holidays, that's a $100 price point, which is, again, on the high side of electricals. When you look at other categories, no, I don't think that, that's the case.

Our next question comes from Meredith Adler with Barclays.

So I'd like to go back to the question that was asked about traffic and was it -- was it related to what was going on externally. And I'm kind of confused because, based on what you told us, 47% of sales at Sally Beauty U.S. are coming from people who don't own -- who don't have a card. And that's a pretty big percentage. I'm assuming that most of the slowness, the negativity, is in that group. And I guess I'm just trying to understand what else would be driving it if it's not just sort of what's happening to all retailers. Any thoughts?

Well, first -- yes, absolutely. First of all, you're absolutely right, about 47% of our retail traffic. Now keep in mind that, that is probably only about 30% or 32% of our total traffic is non-BCC or nonprofessional. That is the -- and you hit it right on the head. Our Beauty Club Card traffic is up mid single digits, but our non-Beauty Club, just raw retail traffic, is down a little more than that. So it's really offsetting the increase in Beauty Club Card traffic. And when you don't -- when we're not driving these new retail customers in via the customer acquisition program, it impacts us 2 ways. First of all, what you just said. We don't have the non-Beauty Club Card retail customer walking in the store, which also says we don't have the opportunity to convert that customer because they're not coming in. So I think that you're absolutely right. And I said earlier that to think softer shopping center traffic isn't having some impact on us would be foolish. But I think, when you look at we have the professional business, which is very destination; we have the Beauty Club Card business, which is also, I think, very destination; and the 2 of them are close to 2/3 of our business. So that other third, part of that is coming in through our customer acquisition program, or has been historically, and it's starting to come back. And the balance of that is -- can be affected by -- if you were to tell me that shopping center traffic in mass is down 2%, I would say, okay, but that 2% is really only affecting 1/3 of our business. So if you looked at 2% of 1/3, that's, what, 1.75% could be traffic. And I'm certainly not saying that if we had stronger traffic in shopping centers, it wouldn't help us, but not to the magnitude that it would other mass people in the shopping center because, again, we have a different customer base in our Beauty Club and our professional business.

And then I had another question. I've been thinking a lot about the customer acquisition. And I'm -- one of my concerns is that, because that, I think we're saying, 32% of total sales is just slower. The customer acquisition program is kind of going to get one person at a time, hopefully more than that, right, but it doesn't change the behavior of the average person. Now you've talked about increasing your marketing. Is that in part because you want to drive traffic for the non-Beauty Club Card member and get to them some other way other than the customer acquisition?

Well, of course. But to drive non-Beauty Club Card customers, especially ones who have never been in Sally before, takes a reason. And by profiling these customers, we at least know that if we give them the right reason, they're more likely to react to it than just the general public. And when you say one at a time, keep in mind that we're mailing close to 2 million of these profiled customers a month now. So you don't need much of a return on that to be bringing new customers in and then convert them, hopefully, into the Beauty Club Card program. So again, I think that another way to bring not necessarily highly profiled customers in, but other customers that may be familiar with OPI and TIGI and CHI, is another way to do that.

Okay. And then I'd like to switch to BSG for a second. You talked about the weakness in the margins there this quarter being primarily tied to the cost comparison. I'd like to understand just a little bit how better allowances work and why they were so particularly high in the fourth quarter last year. But also, just want to confirm that you didn't have to do any special amount of marketing or promoting to drive the sales that you did achieve, so that gross margin is not due to promotional effort.

No, it's not due to that at all, Meredith. It's completely due to the timing of some rebate programs and some allowance programs, some of which are centered around our holiday, when the inventory comes in and when we get the allowances for that. It's -- you'll see it come back in this quarter.

Okay. And so there's nothing -- there's no substantial change in the amount of rebates or promotional monies you're getting?

No, no. Not at all.

Our next question comes from Jill Nelson with Johnson Rice. Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division: Just a clarification. I know you've talked a lot about the non-member, getting the new customer in the store. Could you talk about that loyal customer, particularly one that purchases the hair care? I mean, is -- has that -- have those sales moderated quarter-over-quarter? Or have you seen that pretty consistent, so we're seeing a further deterioration in the new customer -- in the non-member, I guess?

Yes, that's been fairly consistent. However, we did say that the Beauty Club Card member sales were down again a little bit in Q4, but traffic was actually higher than sales. One of the reasons for that ties back to the renewal going up to 53%. If you remember, we've always said that the Beauty Club Card member spends more in their first year than they do in subsequent years. And when your renewals start going up, it dilutes that a little bit. Now long term, that's a great thing. We'd love to get that renewal rate up into the upper 60s. And I think, potentially, with the new POS system, we can, but that might mean for a while as, until that levels out, that we see the memberships and we see Beauty Club Card traffic actually growing faster, at a faster rate, than sales are. But the average ticket to the Beauty Club Card, which is really kind of what we watch, was up slightly, as was the retail ticket. Our average ticket on all pieces of the business went up a little bit last year, which is normal. Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division: Okay. And then just last question, kind of your thoughts going into the holiday. And I know you're less of a holiday play, but you -- in the past, you've had some good traction on gift giving, gift-with-purchase type deals. And just kind of your thoughts, especially since the holiday's a bit more compressed, with 6 fewer shopping days and things of that nature.

Yes. That's an obvious concern, I think, for everybody out there. It is a very compressed holiday season. I think we're well prepared for a holiday. I do think that this Curl Genius is going to do extremely well. We have a special holiday pack from Coty, on OPI, that I think will do extremely well in conjunction with our launch on OPI, which is really the month of December. And then we have our normal promotions, as you mentioned earlier, a lot of the gift-with-purchase and some of the bag promotions that we do. So I think we're as well prepared for holiday as we've ever been. Whatever the impact is on the compressed season, that's going to be -- remain to be seen for us and everybody else. And it also puts more time prior to Thanksgiving, and I'm not sure what the impact on November will be there.

Our next question comes from Ike Boruchow with Agee. Tom Nikic - Sterne Agee & Leach Inc., Research Division: It's Tom Nikic on for Ike, actually. I had a quick follow-up on the BSG gross margins. So I understand the timing of the vendor allowances and all that, but the decline in gross margin this year in Q4 was actually larger than the increase in gross margin in Q4 last year such that gross margin, on a 2-year basis, is actually down 20 basis points. I'm just wondering if there's something else that we are sort of missing there. And then looking ahead, what do you see as the drivers of the gross margin improvement in fiscal '14?

You're talking specifically for BSG? Tom Nikic - Sterne Agee & Leach Inc., Research Division: For the entire business.

Okay. Well, the BSG -- you have to be careful with BSG margins in the fourth quarter because of a lot of allowances that come in and out. And a lot of that is based on timing. I would encourage you to look at annual margins for BSG. And they tend to tick up slightly each year. Not as much as Sally because, again, BSG doesn't have the own brands, doesn't have the retail business, but we do have the pretty consistent migration of sales into the stores, which is the main driver in BSG's margin increase year-over-year. I expect that to continue. And the last part of your question, please repeat for me. Tom Nikic - Sterne Agee & Leach Inc., Research Division: I was just asking about the -- so you guided gross margins up 30 to 40 basis points for fiscal '14. I was just wondering what you see as the drivers for that improvement.

Well, the drivers are assuming that BSG remains relatively the same, between 4% and 5%. It assumes that international stays in these upper digit -- upper single digits. And it assumes that Sally, throughout the year, gradually gets better. Tom Nikic - Sterne Agee & Leach Inc., Research Division: Okay. I also just wanted to ask quickly about your capital structure. You really bought back a lot of stock in fiscal '13. I was just sort of wondering, can you repeat that level of repurchases? And how willing are you to lever up to your purchase-back?

Well, I -- it's not going to be the same as it was this year, obviously. I don't think -- Mark, do you want to take that?

Yes. I think, first, to be clear, is our commitment to share repurchases has not changed from the previous year. We have no change in our commitment or mandate from the board. We are still very committed to the program that is underway at this point. But to -- what Gary was alluding to is just that our program last year was very front end-loaded in the first quarter, and it was very opportunistic, to say the least. And I think what you saw is, as we matured into the second program during the year, you saw a very consistent cadence. Now with that said, certainly, we're very opportunistic in terms of our share repurchase strategy. So I think that you will see very consistent behavior, as you saw in the back half of the year. However, to the other part of your question is, is we're very comfortable with the financial targets that we've put forth out there in terms of kind of operating at that higher end of the 2x to 2.5x. Certainly, we're a little bit above that right now, and we're very comfortable with being above that. However, I do not anticipate us levering up the business in order to just do shareholder-friendly activities. I think that, first and foremost, our use of capital has not changed. It is to grow the business, first and foremost, both organically and through acquisitions. And then certainly, as we exhaust those investment theses, we certainly turn around and return our free cash flow to our shareholders to reward them for their loyalty and believing in the business. And I don't see that strategy changing.

Our final question comes from Mark Altschwager with Robert W. Baird. Mark R. Altschwager - Robert W. Baird & Co. Incorporated, Research Division: I just wanted to follow up on guidance. You said a couple of times that the guidance does assume that Sally U.S. gets gradually better, presumably as the direct mail changes are taking hold. I'm just wondering, I know it's early, but at what point do you get a sense of whether that's moving the needle? And then how much flexibility do you have on the cost side to hit the margin targets, should you not see that improvement? I ask because it sounds like you've committed to a step-up in SG&A and the marketing and International side, so trying to get a better understanding of where there are still some levers.

Yes. Well, keep one thing in mind, and I didn't mention this earlier. Part of the SG&A reset is about $7 million that goes into this year's budget that assumes that we make our plan and that we pay bonuses. Our bonuses were about $7 million under what we would have liked to have had them for fiscal '13. So to more directly answer your question, if we're not hitting our targets, obviously, we won't be paying out the bonuses. But I also think, if you look at fiscal '13, you'll see that both sides of our business did a pretty damn good job of controlling expenses. We were only up 2% in SG&A on a sales increase of 2.8%. So, if we're not hitting those targets, we still have the normal flexibility. When you're not hitting sales, you watch payroll very closely, you watch margins very closely and, obviously, you pick up, which I hope we don't, the unpaid bonus accrual. So I've always said that we can get positive leverage in this business, really, at a 0 comp. And I believe we would be this year if you took out the bonus accrual, if you took out the IT investments and if you took out the buildup we're doing in the marketing department, which, obviously, if we ran into some real issues, some of those plans could change as well.

That concludes our questions for today.

Thank you, operator. In summary, we ended the year with solid financial results, despite the challenges we had in our retail business. We anticipate that fiscal 2014 will be a recovery year for the Sally U.S. retail business and we can gradually return to the historical performance we've come to expect. Thanks again for your interest in Sally Beauty Holdings. And we look forward to seeing all of you in the new year.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.