Sally Beauty Holdings, Inc. (SBH) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings Fiscal 2016 Fourth Quarter and Full Year Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Karen Fugate. 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 or business, and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the 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. Furthermore, during this call we’ll reference certain non-GAAP financial measures related to the company’s performance. The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are Chris Brickman, President and CEO; and Janna Minton, Group Vice President, Controller and Interim CFO. Now, I would like to turn the call over to Chris.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2016 fourth quarter and full year earnings call. I'll take you through the important financial details of the quarter and the fiscal year and then discuss our 2017 guidance. We achieved solid financial results in fiscal 2016 with consolidated full year adjusted EPS growth of 12%. Consolidated sales reached nearly 4 billion, with same store sales growth of almost 3%. And despite the unfavorable impact for foreign currency exchange, gross margin expanded 20 basis points. SG&A as a percent of sales for 2016 including special items associated with the data security incidents and executive separation expenses was 34.6%. Excluding these special items, SG&A as a percent of sales was 34.1%, 10 basis points higher than the prior year, although below our guidance range of 34.3% to 34.4%. Cash from operations was $351 million, which enabled us to invest in the business and return a substantial portion to our shareholders by acquiring 7.8 million shares of stock totaling $207 million during 2016. Capital expenditures ended fiscal 2016 at $151 million, exceeding the high end of our original guidance range of $125 million to $135 million. We allocated additional capital towards an acceleration of our Sally store refresh initiative, merchandizing resets, new store opening and key IT projects in order to put this work behind us and focus on sales improvement going forward. During the year, we restart 5,000 stores openings and ended the year with 5,119 stores for growth of 3.1%. Inventory ended fiscal 2016 at $907 million, up 2.5% over the prior year. And finally adjusted EBITDA grew 2.5% to reach $628 million. Now, turning to segment performance for fiscal 2016 starting with Sally Beauty, sales grew 1.5% at Sally to reach $2.4 billion. This increase is attributed to same store sales growth of 1.7% and new store openings. Unfavorable foreign currency exchange impacted sales growth by 200 basis points. Gross margin expanded by 40 basis points despite unfavorable foreign exchange in Mexico and Canada. This growth is primarily due to the profit improvement initiatives we launched early in the year including selective price increases and vendor negotiations. Operating earnings were 410 million, a 60 basis points decline from the prior year. Fiscal 2016 was a busy year for our Sally team. We implemented new in-store merchandizing across cosmetics, hair care and brushes and combs in over 2,800 stores. In addition we completed the upgrade to our own brand packaging and introduced new brands and products. On the marketing front, we completed our migration to the improved CRM and email platform. As a result traffic in sales from our Beauty customers has improved and we’re optimistic that our tactical marketing issues from the third quarter are now behind us. Our Sally store footprint increased by 3% to end the year with 3,781stores. We accelerated our store refresh initiative in the back half of the year and to date approximately 1,500 stores have been updated with new flooring, LED lighting and signage. In fiscal 2017, we intend to take a pause on store refreshes to focus our attention on our customer engagement initiatives. Our BSG business had another great year. Sales were up 5.5% with same store sales growth of 5.5%. Unfavorable foreign currency exchange impacted sales growth by 70 basis points. Gross margin expanded 20 basis points to reach another record high of 41.5%. BSG made terrific progress in expanding their CRM capabilities. This initiative should enable us to develop customized messages to licensed professionals based upon their shopping patterns and unique needs. Our beauty app for Stylus is due to be released in January. The app is a comprehensive business tool for Stylus and includes a link to our e-commerce platform for the Stylus and their customers. In late September we acquired Peerless, a small professional beauty company with 15 stores in Utah and Idaho. In addition to the store footprint we also gained exclusivity to brands that we did not have in that territory. For the fourth quarter, our consolidated sales results were softer than we anticipated primarily due to slower sales performance in July across both businesses. Sales trends improved in August and September and we ended with sales growth of 1.3%. The impact from unfavorable foreign currency exchange offset sales growth by 130 basis points. Consolidated same store sales grew 1.2% in the fourth quarter. BSG same store sales were up 1.9%, compared to 7.4% in the prior year, while Sally same store sales growth was slightly under 1%. Gross margin was 49.5%, a 20 basis point improvement over the prior year driven by gross margin expansion, Sally and BSG of 40 basis points and 10 basis points respectively. SG&A as a percent of sales including special items associated with the data security incidents and executive separation expenses was 35.4%. Excluding these special items, SG&A as a percent of sales was 34.1%, 10 basis points higher than the prior year. GAAP net earnings in the fourth quarter including special items of approximately 8 million net of tax was 52.6 million and earnings per share was $0.36. Excluding special items, net earnings were 60.5 million with earnings per share of $0.14. Looking ahead to 2017, our operating goal is to drive profitable sales growth. We’re excited about our upcoming sales initiatives and I’ve challenged the team to reallocate spending to the highest return initiatives and rationalize expenses wherever possible. In Sally, our in-store investments are mostly behind us and the team is focused on the next phase of customer conversion and engagement. In the coming quarters, we intend to leverage our CRM capabilities and introduce new brands to the stores. In addition, we will continue to find new and creative ways to communicate our unique value proposition through digital and social media as well as traditional media. Finally, we’re now rolling out our new selling model to all store managers and associates and this will provide them with the skills they need to cross sell categories and drive units per transaction. For BSG we expect to gain share-on-share through acquisitions and brand exclusivity. We’ll continue our efforts to become the indisputable partner of choice for Stylus and manufacturers through innovative ideas like the Stylus mobile app and our advanced CRM capabilities. Beginning this year we’re adjusting our full year guidance disclosure to place an emphasis on consolidated company metrics while moving away from business specific metrics. We believe this change aligns with our objectives to drive long-term shareholder returns through consolidated earnings growth, strong cash flow and disciplined capital deployment. Having said that our consolidated 2017 financial goals are straight forward, we expect revenue improvement from same store sales growth of approximately 3% and organic store openings of 2% to 3%. Gross margin expansion is expected to be 30 basis points to 40 basis points and should offset higher SG&A expenses resulting from the increasing cost in labor and IT investments. We believe the combination of sales growth and gross margin expansion will lead to mid-single digit operating earnings growth. Capital expenditures are expected to be below 135 million. In fiscal 2016 we accelerated a portion of our capital investments, but expect a decrease in fiscal 2017 and beyond. Looking past 2017, we believe we can build upon our earnings growth momentum as labor cost inflation and IT spending taper off overtime. This should allow for SG&A leverage and higher earnings growth in future years. Before I turn it over to Q&A, I would like to finish by welcoming Don Grimes to SBH as our Chief Financial Officer and Chief Operations Officer. After a thorough and deliberate search, we are thrilled to have Don join our team. He is an accomplished executive with significant financial and operational expertise in the retail industry. His broad experience will be an asset to us as we build upon our strategy and prioritize our opportunities for a long-term growth. Now, I’d like to turn it over to the operator for Q&A.

Thank you. [Operator Instructions] And our first question will come from Simeon Siegel with Nomura Instinet. Your line is open.

Hey, this is Gene Vladimirov on for Simeon. Thanks for taking our question.

No problem. Good morning.

Good morning. Can you talk a little bit about BSG? It looked like the comp in GM probably came in a little late. Do you think the BSG comp as a product of lapping tougher compared to last year? And if so, how should we be thinking about the 1Q comp? And then just long-term, should we think about that as a kind of a mid-single digit range?

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

Great and then just a quick housekeeping item, how should we be thinking about currency impacts for fiscal ‘17?

We don’t really know. I don’t want to predict currency. But the reality is that we took a lot of hit from the Canadian currency last year, hopefully that will slow down. Mexico, I think, is a bit unpredictable, so.

Great. Thank you very much. Good luck for holiday.

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

Good morning. Thanks for taking the question. Maybe just to start out, could you dig into some of the drivers in the Sally comp, maybe the BCC versus the list performance and what you are seeing with professional and international? And then separately on the marketing fronts, any update on where you are at with the fixes that were put in place and what effect you believe those had in the comps in the quarter?

Yeah, overall BCC growth improved sequentially and so we feel like we are past some of the marketing migration mix that could happen as we changed database providers and managers there. List actually slid backwards a little bit but not a lot. It’s kind of more on a long-term trend. The Pro has been declining for a while in Sally. Honestly I think some of that will continue as they are better served now through [indiscernible] and through other venues. But I do think it will kind of move closer to zero to one kind of negative, maybe around 1% negative we’ll see overtime. That being said, if you think about international, international slowed a little bit in the fourth quarter. I think there was some conservatism there. My guess is that’ll rebound although I do worry a little bit about how South American markets and Mexico markets will be in the next year or so.

Great. So, maybe, I mean rolling that altogether, I mean, consolidated comps have been pretty stable near 3% in the last two years. But they have decelerated to that one to two range in recent quarters and as you alluded to in the last answer, the comparison is a little bit more difficult in the first half of ‘17. Maybe just help us get comfortable broadly with this reacceleration back to the 3% range and what you see as the key drivers will be over the course of the next several quarters?

For the 3% total same-store sales growth, which is where we effectively finished last year just right around that, we are not doing - getting in the segment’s specific comps. That being said, I think the reality is we’ve moved past a lot of the initiatives that were disruptive in store whether that would be some of the store resets, whether it would be packaging changes or whether that would be our marketing changes. With that result, all that is we are expecting less disruption as we go into next year and we’re expecting more benefits from all the changes we’ve made. So, we feel good about a total comp of 3%. We think it’s conservative and we think that’s what we’re focused on hitting.

That’s great. Thank you so much and best of luck.

Thank you. Our next question will come from the line of Simeon Gutman with Morgan Stanley. Your line is open.

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

Yeah, I don’t think there is much risk of that, Simeon. I think there is a band there and I think we feel pretty comfortable under control. We are still dealing with some labor costs inflation that’s baked into our budgets and we are working on mitigation factors and approaches that will interest that. But the reality is we see 3% sales growth is doable. Our same-store sales growth is doable for us. We see mid-single digit operating earnings, which is quite doable. And there will be some focus on margin improvement as well, which we need in this lower growth environment to make sure we are offsetting the cost inflation.

Okay and then just stepping back bigger picture on SPS. Can you put like together whether looking back or looking forward, just where that business is in terms of its evolution you mentioned slowing some things down next year to focus on execution, just kind of big picture. Where does it stand in terms of the progress and the guidepost that you have for that business?

Yeah, I think that’s a really good macro question to me. And I think the reality is the business, we’ve changed a lot in the business. We’ve changed a lot about the store. We’ve changed a great deal in marketing. We’ve changed a great deal about our allocation of media and obviously a great deal about our CRM capabilities. All of those things, although absolutely necessary or disruptive to some extent, and so I think we feel good about the progress we’ve made and now what we really want to do is make sure that shows up in front of the customer every time they walk in the store. So, we’re putting a lot of focus right now on training our associates and a great deal of focus on getting full leverage out of the CRM and marketing capabilities we’ve built and that’s the real genesis of that, which is, let’s reduce some of the disruptions including some of the IT project disruptions and really focus on improving the execution at the store, so the customer has a different experience in store.

Okay. Thanks.

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

Hi. Thanks and welcome Don as well. Regarding the monthly cadence, Chris, between July, August, and September, what’s your rationale when you kind of postgame July versus August and September? And were there shifts that you could have done tactically to kind of address what happened there? And then as you look at the big opportunities on improving both comps, is it mainly traffic contextualizing how we think about next year and the capability of your guidance versus this past quarter?

Yeah. So, I don’t know if I have a deep answer for you on July, Oliver. The reality is it just - it was bad across both businesses, which was surprising. And August and September were strong across both businesses. So, I don’t know if we know what drove that change. In terms of the overall business, the reality is we continue to see units per transaction up and total ticket up, but traffic down. And so, we’re struggling. Then what we are really thinking about as we go through our marketing approach for next year is obviously we want to train our associates and continue that trend towards a higher UPT and we’re making great progress on that by the way. But we’ve got to drive the traffic issue better and we’re really honing in on this advocacy-based marketing model. This focus is much heavier on social media and social media influencers, as well as digital marketing is the way to do that overtime. And that’s really the focus of the team. And one of the reasons we want to reduce the complexity of initiatives going into next year is to see if they can really focus harder on that.

Okay and just a quick follow-up. This does kind of beg the question about competition in the marketplace, which is broad, yet intense. Can you update us on - are there any revised thoughts on what you are seeing and how that’s maybe interplaying with traffic? And on the BSG side, what should we understand about new brand addition to the portfolio or not that compares [ph] there? Thank you.

Yeah. I don’t know if I have much inside of what’s really changing with our competitors. I’ve been to a number of them recently. I don’t see anything dramatically different in the Beauty’s category that makes me think that that’s driving our month-to-month sales. So, I don’t think I have much of a comment there. I don’t see much different in the marketplace. With BSG, we’ve got - the bomb obviously really kind of hit very much towards the end of last quarter and it’s going to be fully rolled out in this quarter, as well as we’ve got some additional new products that are rolling out in this quarter. So, I feel very good as well, obviously their holiday sales inventory is rolling out. So the net result of all of that is we feel good about BSG long-term. They're in a great market position. They have terrific market share and they should be well positioned to succeed over time. And they've got some terrific CRM capabilities coming on line that they're continuing to build on. So, I expect continued growth in BSG. I don't see any reason it'll slow it down, but we did comp of very big quarter last quarter.

Okay. Thank you. Best regards.

Thank you.

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

Thanks for taking my question. Chris, just going back to your 3% comp store sales guidance for the year, is there any more color you can provide in terms of how you're thinking about the trajectory for this upcoming year? I know earlier in the year you have much more difficult comparisons.

Yeah. I don't think we think about it from a trajectory standpoint. I think what we're excited about is that we've gotten so much work behind us, our core ERP financials are now converted over to an Oracle ERP. We've got an obviously a lot of work done in our Sally stores, as well as our BSG CRM and Sally CRM. And so, a lot of the distractive work has had to happen and it was necessary work, but much of the distractive work is now behind us and we can really focus on sales execution in store and that's what gets us excited about going into next year. We've got good plans. We've got solid marketing. I think we've learned a great deal about how to market to the Sally customer in an affordable and efficient way and we’ll be pulling those plans in and driving them as we go into the next coming quarters and we'll link that in-store activity that should also drive UPT and same-store sales as well. So, we feel pretty confident those are good conservative numbers and that allows us to drive the mid-single digit earnings growth that we're really focused on for the organization.

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

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

Okay, great and then switching topics to gross margin, so past two year it's been more challenging to drive more than 20 basis points or so gross margin expansion. Just want to get a sense of as you look at this year, what are the key drivers that drive that 30 to 40 basis points expansion?

Yeah. The reality is actually we got really close to it last year. We just lost some of it back in the form of foreign currency transactional hit, foreign currency in Mexico and Canada. This year the big focus is on selective pricing activity that we’ll be doing in our stores, as well as some mix shift in categories and then finally global sourcing is playing a much bigger role this year. We've gotten all of our teams aligned around a global sourcing strategy and we're driving significant upside there. So, I think that will be a big contributor next year, much bigger than it has been in the past two years.

Great, thank you.

You bet.

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

Okay. Thanks. Good morning. Hey, Chris, just a couple of questions, I guess the first one, if we can talk maybe about some of the categories inside the Sally store, I know in past quarters it was kind of nail and I would say hair appliances that were in the weaker side, but hair coloring and shampoo, I think, was a little bit stronger. So, can you talk about what you saw during this past quarter if there was any change there and maybe tie into some of the innovation that's coming through that might be able to jumpstart some of these categories?

Yeah. I think that we had a couple of anchors that were really affecting us early and in the middle of the year. Those were hair extensions styling tools to some extent and nails. What we saw as we got towards the end of the years is nails is flattening out or getting closer to kind of more of a flat category and we've got some good innovation there. We've already added C and D to our Sally store and we've got another brand coming next year, which is terrific. So, that will really give us actually the best assortment in nails of any beauty retailer. I’m really excited about where that will land us in the future. Styling tools, we've got some good innovation coming this quarter actually and we saw that start to flatten at the end of last year. Hopefully, we'll see some growth as we go into this year. We've got a new eye on magnesium line that we've developed ourselves to bring more innovation of the category and hopefully we'll see that start to take that category up. Hair extensions has continued to be a problem. It did slow. I guess adolescent is a problem as we got towards the end of last year. My guess is we'll continue to see it flatten out. But as of yet, we don't know if that category is a long-term winner or not. We may see us allocate more of that category to our multicultural category, which has been killing it for most of the year and we continue to expect to invest there as it's growing demographically, as well as it's a category we’re winning it. Another winning category is, we saw hair care continued to rebound after the big reset. So, we expect more of that going forward and we'll continue to build on our success in cosmetics as we go into next year as well. So, lots of changes going on in these categories. I expect extensions may still be a negative next year, but the other two nails and appliances we expect turnaround.

Okay, great. And the second question I just wanted to talk about BSG and maybe looking at the balance between the margins and the comps that you're delivering; how do you - how are you balancing it? Because it seems like BSG keeps pushing higher and higher into the margin. I mean once upon a time, it was 14% operating margin. Now you're at 16. So, how do you think about the combination of two? Do you feel that you have to do a little bit more promoting at times to kind of keep that comp in the 3 to 4 range? Or do you feel that just with the assortment that you have out there that you can get both simultaneously?

BSG is not a heavy promotional-driven business. It really comes down to having the right products in the right lines in store and obviously we've made a lot of progress on that in the last couple of years. Most of the bottom operating earnings leverage you're talking about is coming through SG&A leverage as they continue to grow the business, while holding costs in line. There is some gross margin growth and I can expect that continue to be small kind of 10 to 20 basis points or so. But most of that is due to reducing discounts that are unnecessary discounts that sell through either our full service area and better controlling that, as well as just making sure that we are launching exclusive lines where we can and finally some private label penetration and what I call things like sundries in those categories. So, I expect some gross margin expansion in BSG, but not a lot. And then most of the leverage will come as we derive top line growth and leverage our SG&A.

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

I mean it will be - the bottom line is we continue to return cash to shareholders. Our board looks at this consistently and makes this decision every quarter and we have a 10b5 in place, as well as we do open market purchases. So, the net result is I would say, it's a top priority for us. But we don't disclose specifically what we do. We manage that as opportunities come up each quarter.

Okay. Fair enough. Thanks for answering my questions.

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

Hi, everyone. This is Lauren Frasch on for Ike. Thanks for taking my questions. Well, Sally investments are largely behind us. It sounds like IT investments are going to continue the way on SG&A next year. Could you give us a little color as to what those investments are, if they have potential to be traffic drivers?

Yeah. I hope more of them will be in the future. So, we finished up most of our AX investment in 2016. So, it's nice to have most of our internationally ERP done. We did the first phase of core financials for the U.S. last year as well. So, that's a big chunk and a big hurdle to get over. We've done a lot of investments in security and a lot of investments in our IT infrastructure as a whole. I expect that will wane especially in 2017 and then further from that and then we’ll focus on investments that really drive top line growth or cost control. So we're focused obviously on a lot of investments around CRM and e-commerce next year and I think you'll see us make investments in other technologies that help us manage inventory better or order and forecast better. So, you'll see a shift. It will decline and there will be a shift and more of it hopefully will drive comp bottom line performance as opposed to more in the past was really just making sure our infrastructure would hold up.

Got it, thanks so much guys.

Thank you.

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

Thanks very much. You’re recognizing that you don't want to give expectations by division, but if you plan to continue to report the two divisions going forward, so it’s the first housekeeping question.

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

Got it, okay. So I guess you have been asked a few times so far in this call what is going to drive the 3% growth for next year and you said that, we have done it for this year but you also said that BSG expected growth 3% to 4% which would imply let's call it, 2% to 3% comp store growth for SBH and that obviously has not kept up with that level so perhaps can we just focus on what is going to drive the improvement in Sally Beauty supply because if you look at a three year stack basis keeping the rate that you are right now which is just sort of slight maybe 20 - 30 basis points of growth in the first half of fiscal ‘17.

Listen am not going to go segment by segment even the BSG when I was talking about what a long term growth trajectory for BSG is supposed than next year's growth trajectory for BSG. The reality is we are not going to disaggregate it but yes I will say that there will be little bit of slowing in BSG and some acceleration in Sally it is not a lot, we are not being overly aggressive, we expect some rebound and strengthening in Europe and we are cautious in South America and Mexico given all the turmoil that is going right now.

Okay thanks, and then you obviously have been the big winner with OPI a few years back and Coty has talked publicly about their desire to get a brand more so on, so in terms of not specific to that relationship but just being an example, how much can you partner with your vendors and play a part in their expansion?

We do this quite a lot and obviously we are working with Coty and his extensive bases about additional brands, we can carry from them and expand and we are working with other vendors such as Revlon as others who has now agreed to put CND in our stores that we think that will be a nice win for Sally stores. We have got another brand, we are looking at in the nail category for early next year that I think will be a win and we are actually looking at color brand that we might add to Sally for the first time in a number of years, it will be a new brand that we would bring into Colorado. So there is a lot of opportunities to talk to all of our vendors about expansion, we are taking our relationship with them and dealing with much more on a global level growth in terms of how we get brand expansion and how we work with them on marketing and I think that’s going to overtime open up new opportunities for us to bring additional brands to both businesses our BSG business, our Sally business as well as international businesses.

Got it and then you mentioned that there is a 1,500 doors that had been refreshed, what's the plan for the other 3,500, is it eventually get back to sort of on the refreshing angle or is there something else planned for those other 3,500 doors?

Remember it is not really 3,500 because it is a lot of BSG stores and international stores in there as well. The real focus was on the 2,900 or so, Sally stores and remember a lot of those stores that haven’t been refreshed were newer stores anyways. So our thought as we went in next year since we accelerated quite a bit of work on refreshing stores into this year was to try and allow our stores and teams in store to get trained, learn the new selling model and focus on driving new PT and build momentum and then we will come back and start attacking where might there be some gaps in stores that we want to still remodel and refresh.

Great thank you.

Thank you. Our next question comes from line of Kelly Halsor with Buckingham Research Group. Your line is open.

Hi, Chris. Thank you for taking my question.

Hi, Kelly.

I guess it is fair to assume than that you are kind of similar to the cadence of the comps guidance last year given the comparison and both concepts are more difficult in the first half of the year that we should expect it to be kind of improve throughout the year. How we should be thinking about the guidance?

I don’t think so, I think we are basically just setting a conservative full year guidance for our business that we think we can head. We don’t have any specific inside into one quarter being better worse than others. And our goal is just drive consistent on this growth overtime.

Okay and then just on - when you said the missing of digit growth that so EPS growth, that’s not your operating income growth so we should assume. I

That guidance is operating earnings growth.

So it is a mid-single digit. Okay EBIT growth. Okay and then just lastly around your kind of marketing expenditures and trying to focus on your driving traffic to the store has been, could you give us an idea where your penetration are in marketing is currently at Sally and could we expect that to kind of tick up here as you focus more there and then also any color around potentially changing your loyalty program?

Yeah, so a couple of things, so there is not a lot of growth in total marketing budget, at Sally there is a little bit. We are spending some money to test a new loyalty program which I will get into more to answer your second question. The real issue we are dealing in Sally is having to learn it for the last couple of years what doesn’t work and what works we are really focusing the market being budgeted at Sally. So you are seeing an increase in digital media and digital spend and increase in social and social influencers as well as then we will continue on with a more normalized level of direct mail and CRM spend. And then finally we are pulling back on some of the more broad based TV and radio and then finally we are upgrading - we are working on a test upgraded loyalty program. Now let me talk about that in a little more specific, we are going to test in two states next year. It does require investment to test and but we do think that it is necessary to think about the next generation of what loyalty can be because it is taking more and more time to resell cards and as a result although we are still growing our BCC program we believe we can grow it much faster. So we are going to test a free card, it will be a new loyalty program that is based on points and earning credits based on purchases and we hope this will drive more repeat purchases from customers but we need to test that thoroughly in 17 before ever think about rolling out it in 18 or beyond.

Okay and then just two quick ones, just going back to clarify so, we are supposed to assume that the share repurchases are going to be above and beyond your guidance today. You are not including any share repurchases into that?

That is correct

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

There is still is more opportunity, I think you will see as do west zone pricing activity this year. Which was the large activity I think you are referring to that happened early last year? We will do a lot of tactical pricing activities as well as reduced discounts and promotional activity and then finally global sourcing will become a much better piece of our margin improvement strategy going forward and that will be the big difference. So there will be a little reduction in some of the pricing activity we took last year but then we will make that up through other activity that we will contribute to our margins.

Okay thank you very much.

Thank you.

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

Thanks. Hi, guys, good morning. I guess first I want to go back to the marketing question, I know you guys have done a lot of experimentation this year, so as we head into fiscal 17 do you feel like you found the right marketing mix or is there more experimentation that is going to happen in this coming year or you feel like you got it right at this point?

I don’t think if everything you got it perfect, I expect the experimentation will go down. So we think we are honing in on the right model for Sally, we think it is more of an advocacy based model which means there is a lot of tailored digital and social media spend; the Target’s people who are actively searching for our categories and for products that we can provide to them. It is also a significant kind of what I will call a learning around our direct mail spend we made last year and what is the right level for that, we cut it back a little too far that we got about right now and now you will see us push into a lot of advocacy where we put more money against PR and social activities, bloggers and social media influencers who can recommend Sally to their friends in a credible way and then finally there will be a little bit of additional spend as I mentioned on rethinking and revamping our loyalty program.

Okay but it is more tweaking than really kind of shifting in a significant way.

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

Okay and just going back in July and I know Chris you kind of glossed over this a little bit but it seems like if I math is correct July probably comped negative for Sally and probably close to zero for BSG and I am curious I know you didn’t feel like you had an good answer as to why that happened but what were your store manager telling you at that point in terms of what caused that slow down?

Yeah, I won't get into the detail data by moth but the reality is we don’t really have an answer, we didn’t hear anything from the stores, we didn’t feel like any marketing mix or promotional mix missed anything. There was a negative calendar, the way the calendar laid out and we expected some of that but it was actually little bit worse than we expected and we don’t really have a good reason why. But the good news is it strengthened in August and September and set us up as we went into the New Year.

Okay just one last one just to make sure I have my math correct, was traffic at both Sally and BSG down in the quarter?

No, the traffic is down in Sally although UPT and Ticket are up and total transactions are little down in Sally but BSG continues to be positive.

And how concerned are you that customer who seems to have migrated away a little bit given the confusion I guess what is going on the last 12 to 18 months, how concerned are you that sheen doesn’t come back.

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

Okay, thank you.

Thank you.

Thank you. Our next question comes from the line of Stephanie Wissink with Piper Jaffray. Your line is open.

Thank you good morning everyone. This is a follow up on traffic, and some of your marketing initiative. Could you help us appreciate what the KPI's are, what are you looking for on a quarterly basis and emphasis that our marketing is effective look at social and some of the influence to base marketing.

Okay. So you got to break it down right because your KPIs are different based upon what you are looking at if you look at your CRM activities such as your direct mail you are looking at response rates. If you are looking at digital CRM you are looking at email open rates but then also visit rates and purchases that are made so those have very concrete metrics for the very same as digital spend, it really comes down to how many people actually engage with digital spend you are doing there as well as what shows up in store and you can track that as long as you have a BCC card or as long as they flow through your ecommerce side. And then some of your other stuff such as social media influencers you have to really look at impressions and thinks like that. You can't really look at it, does it turn around and buy in the store because in many cases those customers you don’t have any data on them to track whether they showed up in your store but you are looking and do the actually engaged with those post and are those social media influencers recommending your brand to a broader audience and people and as a result you are getting more impressions.

And [indiscernible] traffic at the store levels for SBH in particular, how should we think about the recovery and the traffic curve, does it tend, does your loyalty customer base tend to be fairly responsive to some of these new marketing initiatives or do you think it is going to take some time for there to be a shift in that traffic path and as a derivative can you just talk a little bit about your ecommerce strategy and how that might be tied into some of your new CRM testing initiative?

And I think the answer is little bit different. I would say your loyalty customer, your BCC customer and even your list customer tends to be quite responsive to some of the promotional activity you may put out for your emails. So the net result is that can turn traffic fairly quickly if you get the promotional strategy right. For this social influencers and for your digital marketing spend it tends to be a slower built, it is more of a grass roots build through social media where people are recommending your brands or recommending trying certain products that you carry in your stores and that takes longer to build. So there is a mix of shorter term activity and long term activity as you are working on at the same time. On our ecommerce side we are really targeting faster growth rates in ecommerce we would radically improve the website we offer, we are making a much more user friends we've seen terrific improvements in traffic, we haven’t seen the corresponding improvements in conversion yet. It is positive but it is not positive to the level we want and our team continues to think about how do we make the site more usable as well as we how do we link that to our digital advertising and social media activity to draw more traffic and better conversion to the site.

Okay good, thanks and just one follow up on your comment. Should we assume then that the first half of this year you are going to be little bit more promotional to take advantage of the near shield opportunity and traffic and then as the digital initiative start to take hold in the back half which you think about may be a step down in promotion in relative to your gross margin?

I don’t think so, I think we have a constant stream of promotional activity that we are trying to tailor to our user group to basically bring them to store and inspire them to come. I have seen the calendar for first half of the year I would say it was a normal calendar.

Thank you, best of luck.

Thank you. Our next question comes from the line of Linda Bolton Weiser with B. Riley. Your line is open.

Hi thanks.

Good morning Linda.

Hi, you want to talk on number of initiatives this past fiscal year and I was wondering if you could share how the ROI were on the different initiatives and if there were any big differences between what you expected and what you are achieving in ROI for any of those things that you did this past year, thanks.

Linda that’s such a broad based question, because there are so many different things we changed. Obviously we did a lot of merchandize and resets that did affect us and some of those are significantly out sourcing [ph], for example cosmetics, multicultural those categories are significantly performing better than previous years. Nails, I think it has gone through a kind of overall seismic change in the category as we extended products, cannibalize some of the gel products. So even though we are seeing good transactions there the reality is sales have been down. It is a very big question I think what we are excited about overall as that we are passed a lot of the disruptive activity so as I mentioned earlier the migration of our CRM platform, the upgrades is so many category, the upgrades of so many stores. The change over and the packaging we felt was necessary to establish our brands as a long quality brands all of that is behind us now, which allows us to focus much more on in-store. We are actually cascading out a selling model to all associates to every single store in the country right now and we see that as a real positive that will help us with UPT and as we get UPT up that gives us a little bit of time to work on using our social media and advocacy based model to drive traffic over time.

Thanks.

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

Good morning guys. You had an earlier question that dealt with competition and you guys noticed you said you weren’t seeing a whole lot of changes, was this meant to imply with regard to brick and motors specifically did it include online competition as well and I guess specific with regard to like channel meaning specialty versus mass or food and drug.

I think it was more brick and motor and I think that’s right. You are seeing obviously significant investment in online channels that being said it is not penetrating much in to the pro-side but I do think online channels are pushing fairly largely into the retail side and we expect that to continue which is one of the reasons why we are investing so heavily on our own e-com platform right now and really upgrading that. So my reference is really on the brick and mortar side, I don’t see much in terms of difference as to how our major competitors are playing the game and let's be clear right. On the Sally side the major competitors are mass competitors and we trade those customers up and it is long quality solutions from Max. I don’t see much change there obviously those competitors are relatively slow growth, they are upgrading their categories to some extend but to most of them already done that. And then what I would say on the BSG side we have one primary competitor there are long centric, I don’t see a big difference and no much change in strategy there. And then finally there is the e-com side, and there I think we have to continue to up our game to compete in that world.

Do you disclose what percentage of your sales I guess on the Sally side are done through ecommerce or what your growth rates are there?

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

Okay and just lastly from me, is there any update in terms of your target leverage?

No, we are not changing that at all. We continue to be comfortable with range ahead.

Okay I will pass to others thank you.

Thank you.

Thank you. And we'll go to the line of Karru Martinson from Jefferies. Your line is open.

Good morning, when we think about the comp trends that you had, how much do you feel has come from the pricing and the tactical price that you take in, in terms of driving that top line number?

I'd say a little bit our total price increase as we took across the whole business was well under 1%. So I don’t think it is a huge leverage point, it contributes to some extend but not a great deal.

Okay and when we look at the store base here the 1500 that have been updated, how was their performance trended over the course of their updates versus the rest of the store footprint?

They have trended better but I think it is important to note that those were also some of our let's call it worst looking stores and in many cases we went to markets and to store bases where we knew we had a problem in terms of ageing store base. So if not surprising that those stores would get the most out of that investment. It is not clear to me; some of the newer stores in the newer market will get us much benefit from that.

Alright and congrats to Don on the new spot.

Thank you very much for that.

Thank you and with that I'd like to turn it back over to you for any closing comments.

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

Thank you. And ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.