Sally Beauty Holdings, Inc. (SBH) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank for standing by, and welcome to the Sally Beauty Holdings First Quarter Results. [Operator Instructions] And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Harkins. Please go ahead.

Thank you, Cynthia. 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 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Many of these forward-looking statements can be identified by the use of words such as believe, project, expect, can, may, estimate, should, plan, target, intend, could, will, would, anticipate, potential, confident, optimistic and other similar words or phrases. These statements are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K. The company does not undertake any obligation to publicly update or revise its forward-looking statements. The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are Chris Brickman, President and Chief Executive Officer; Aaron Alt, Senior Vice President, Chief Financial Officer and President of Sally Beauty Supply; and Brent Baxter, Group Vice President and Principal Accounting Officer. Chris will provide a brief overview of our performance for the quarter and give you an update on our first quart efforts against our transformation plan. Aaron will then discuss our first quarter financial results, highlights and key changes within our North American businesses and then offer some thoughts around maintaining our full year guidance. Now, I'd like to turn the call over to Chris.

Thank you, Jeff, and good morning, everyone. We are making steady progress against our transformation plan and remain on track for our key initiatives for the remainder of this fiscal year. For the quarter, we delivered positive consolidated same-store sales both business segments continued to improve. We are also pleased with our results on the bottom line while acknowledging that we still have a runway in front of us. If you think back to our last earnings call, we called out four primary objectives for our businesses for fiscal year 2019 enhancing our focus on our defensible categories of hair color and hair care, improving our execution of basic retail fundamentals, advancing our digital service platforms, and optimizing our cost base. We're making good progress against these efforts, and our first quarter results reflect that, particularly in the North American portions of Sally Beauty Supply. That said, we have significant work ahead of us and our second and third quarters, we'll see fundamental change at Sally Beauty Holdings. We remain firm in our belief that our efforts are putting Sally Beauty Holdings on the right track for long-term success. I'd like to highlight some of the steps we took in the first quarter and so far in the second quarter. First, playing to win in our differentiated core of hair color and hair care. Sally Beauty Holdings businesses have differentiated core, differentiated core tied to our assortment and our expertise in hair color and hair care. This manifest itself in a number of ways; first, our assortment is anchored by a higher margin owned and exclusive brands and we are constantly looking for additional opportunities in this area. For instance, for the first quarter of fiscal year 2019, owned and exclusive brands comprised approximately 46% of Sally Beauty Supply's revenue with the majority of those sales being owned brands. Similarly, owned and exclusive brands comprise roughly 53% of Beauty Systems Group sales with the vast majority of those sales being exclusive brands, meaning popular third-party brands for which we have exclusive wholesale distribution rights within defined territories. Our differentiated assortment is essential to our success and we continue to focus our efforts against this core strength. Here are a couple of examples of how we are doing that. Ion is Sally Beauty's largest own brand, borrowing from its sister business, Beauty Systems Group successfully launched high quality ion electrical appliances in the first quarter. Sales have been excellent thus far. You may have noticed that two weeks ago Good Morning America ran a segment which highlighted our ion Titanium Pro Curling Iron on the air, as a good house-keepings top pick for Curling Irons regardless of price. This item which is available in both Beauty Systems Group and Sally Beauty Supply demonstrates the quality of our own brand product. BSG is exploring options to quickly add more own brands in adjacent categories. In color and care, Beauty Systems Group focus will remain on our partnerships with our exclusive brands. Also in Beauty Systems Group, we have added to the portfolio by rolling out the prestigious hair color line Pravana in November, and then followed it up with the launch of Pravana hair care in January. Pravana is known for its groundbreaking innovation, particularly its vivid colors and has a loyal following among stylists, and we are seeing genuine excitement from our customers associated with this launch. Despite some early vendor supply chain issues with Hankel, we are ahead of plan with respect to our Pravana sales. Beauty Systems Group also reinforced to existing lines with innovation. Namely, Guy Tang's #mydentity hair care products, and the new reformulated Wella hair care color line, Koleston Perfect. Guy Tang is a well-known professional stylist with over 2 million followers on Instagram. His new hair care products are an expansion of his current hair color brand and are designed to prolong vibrant color tone. We reformulated - the reformulated Wella Koleston Perfect line uses any plus technology designed to reduce the risk of developing hair color allergies while delivering pure and balanced hair color results. These products are now available throughout the entire Beauty Systems Group network in the U.S. and Canada. While we had some great wins in Q1, we are already making progress in this area in Q2. Beauty Systems Group just completed two small acquisitions, acquiring exclusive wholesale distribution rights for Joico in the Boston area, and for exclusive wholesale distribution rights for Paul Mitchell in the Hawaiian market. We are assessing further opportunities of this sort, whether through new partnerships, acquisitions or expanding current distribution agreements. And as we mentioned previously, BSG has signed an exclusive distribution agreement with the Swedish vegan hair care brand Maria Nila. This is an important assortment gain for BSG as Maria Nila is a rising premium brand that appeals to recent industry trends around natural products. We will get this product to shelf before the end of Q2. Not to be outdone Sally Beauty supply is also raising its game. During the first two quarters of fiscal 2019 Sally Beauty will launch 14 new brands in color and care. With the focus on influencer linked brands. In January Sally Beauty launched a new vegan, cruelty-free hair color line, Good Dye Young co-created by Hayley Williams, the lead singer of the Grammy Award winning band Paramore. Williams also has more than 2 million followers on Instagram. Good Dye Young is now available nationwide on sallybeauty.com and is also in select Sally Beauty stores. We anticipate a full launch across all Sally Beauty Supply stores by the end of the third quarter. At the same time, Sally Beauty continues to see success with its partnership with the Arctic Fox vivid color line. In January Sally Beauty expanded the full color palette to all stores and anticipate other potential brand expansion opportunities in the future. Finally by way of update as you know in late September we launched the new color kits or box color options online and in all U.S. Sally Beauty Supply stores. This new opportunity for Sally Beauty has proven to be incremental to our basket and we continue to be fully pleased with the results of the launch. We will be adding an additional 10 shades to the color assortment during Q2 and more shades in Q4. We will also be expanding our sales efforts to our Canadian operations. Now retail fundamentals turning to progress our efforts to improve our retail fundamentals. On this call I'm going to highlight our work against loyalty stores experience and technology and then Aaron will touch on supply chain later in the call. In late October, Sally Beauty Supply completed the national rollout of its new loyalty program Sally Beauty Rewards to all U.S. and Canadian stores. The new program allows customers to enroll for free and accumulate points for a $5 reward certificate for every $50 of spent. Initial results have been promising and I want to provide you with a couple of proof points. The transition has been smooth and has not resulted in any noticeable disruption to our national business. The national rollout is tracking consistent with the results of our year-long test in Florida and Georgia. We are seeing adoption rates in many stories, there are almost twice as high as adoption of our old program. At the end of the quarter, we had 14 million members in the new loyalty program. Finally approximately 60% of transactions and 70% of sales in the U.S. and Canadian stores are now tied to a Sally Beauty Rewards membership. The program has only been in place for roughly 90 days. So we are pleased with these initial results whilst focused on using our closer connection to our clients to drive more traffic. Retail fundamentals, our store experience. We view our 5,100 stores to be a competitive advantage. As I've mentioned in the past, we are designing and testing both new store concepts and update packages from both business segments in one city, which is Las Vegas. We have moved from design and concept to construction. We are rolling out all of our changes from assortment to store layout to marketing to technology. Importantly by targeting one city, we will be able to assess synergies between Sally Beauty and CosmoProf. Construction has begun and we expect all Sally stores will be complete by the end of March and the BSG stores will be complete soon after. Next, technology. We have moved from concept to reality as part of implementing a new Oracle point of sale system in both business segments. Testing in stores has begun in a number of territories. We will expand our rollout over the next three quarters and expect to be in approximately 1,400 stores by the end of this fiscal year. The combination of our CRM implementation, which is already complete, our loyalty program, our new digital commerce website and apps, which are coming soon and the new systems means for the first time Sally Beauty and BSG will be able to identify our customers regardless of channel, we'll be able to serve them on an individualized basis and we'll be able to remove friction from the shopping experience for them. There are many moving pieces, but this is a really big deal for us. Lastly, a quick update on our JDA implementation. During Q1 we completed a web live with Phase 1 of the JDA merchandising and supply chain platform implementation, which included product setup and maintenance, stores facing and floor planning. Our effort will continue for the remainder of this year as we track a conservative implementation plan based on test again and deploy onto our third objective, having a robust digital service platform. As we have stated in prior quarters, we have already completed the ecommerce investment in the Sally Warehouses and began the marketing efforts around our two-day shipping capabilities to over 95% of the U.S. and one-day shipping capabilities to over 30% of the U.S. We continue to see improvements with over 30% year-over-year growth in both our U.S. and international e-commerce businesses driven primarily by increased conversion rates. We have moved into a big quarter for us. The quarter in which we finalize and deploy, the new sallybeauty.com and get ready to launch the mobile app. At the end of this quarter, in partnership with IBM and Blue Wolf, we will fully deploy our update in e-commerce capabilities for Sally Beauty Supply. We will quickly follow the e-commerce launch in March, with the launch of the Sally Beauty App in April. The BSG launch of the updated websites and commerce based app are also on track. These new user experiences and platforms are important transformation proof points for us. Next, cost optimization as our quarter results demonstrate, we have aggressively pursued cost savings initiatives, while proactively addressing headwinds from labor and much needed investments. Our cost reduction program will continue to be focused on finding additional operating efficiencies and improvements to direct and indirect sourcing. During this quarter, we expanded the implementation of our sourcing store labor and G&A optimization to our European and Mexican operations, which helped to offset top line pressure in those geographies during the quarter. In addition, we completed the integration of our Mexico and South American operations into one Latin American operations team in order to gain further efficiencies and more consistent execution across the territory. We have more to do here and continue to work hard against our cost takeout plans. Our cost optimization efforts over time will permit us to make necessary investments in the business and provide us with additional flexibility based on the needs of our business and the transformation plan. To summarize the first quarter showed solid progress on our transformation plan. But we recognized that we still have work to do. With our key accomplishments from the quarter, we are confident that we are moving in the right direction. Now I will turn it over to Aaron to discuss a couple of topics in more detail.

Thank you, Chris and good morning everyone. I want to start today with a call to our store associates regardless of whether they are located in Florida, Hawaii, Chicago, Monterey, Lima, Toronto, London or Paris. The Sally Beauty, CosmoProf, and Pro-Duo teams are doing a great job of managing through all the change that comes with the transformation. I have three objectives today; to provide a brief summary of today's announcement of our supply chain modernization efforts to review the consolidated financial details for the first quarter along with segment results and finally it's confirmed that we are maintaining our full year guidance. Before jumping into the numbers, a couple of broader observations. We have a plan. We're pleased to be able to report some initial success against the first steps of our plan. We have a lot of work yet to do. We remain on target for the next several steps of that plan. I'm going to start today by highlighting one of the announcements you would have seen in our earnings release, phase one of our supply chain modernization plan. Our supply chain is the product of acquisitions conducted over many years. We have 15 distribution centers across the United States and Canada. Our network is a really complex, subscaled by node and many of our facilities lack automation or efficient processes, which have become common in today's economy. We have too much inventory in the wrong places to allow us to optimize our inventory purchases, speed our placement or fulfillment and move goods through our network as efficiently as possible. As a result, our team has been assessing our options in the context of the overall transformation of our business and how best to support our customers across both the retail and wholesale channels. In an effort to improve our stocks, optimize inventory levels, reduce cost and explore new replenishment and fulfillment options, today we are announcing the first step of our supply chain modernization plan which includes the closure of our existing distribution nodes in Denton, Texas and Anchorage, Alaska by the end of the second quarter and closure of our distribution node in Lincoln, Nebraska by the end of our third quarter. The company is also announcing the search for a 500,000 square foot location within Texas, construction of a new automated and concentrated distribution center which will serve as Sally Beauty Supply stores and e-commerce sales as well as a Beauty System Group stores, full service sales and e-commerce sales. This new facility will be designed to utilize more advanced technology and operate with greater efficiencies and will be the first example of our consolidated inventory being serviced from under one roof. The company will also be upgrading its e-commerce capabilities at its distribution facility in Columbus, Ohio. The capital investments for these initiatives is already baked into our estimate for fiscal 2019. In addition, reflecting the breadth of our company's physical footprint and the acid it is for us, over the next several quarters, we will be further upgrading and integrating our enterprise technology capabilities to allow in-store inventory to be accessed by digital clients as part of testing, buy online pick up in store, buy online deliver from store and shift from store initiatives. By the end of fiscal year 2020, our supply-chain will be more efficient and will better support all elements of our business. With that, I will turn to the numbers. First quarter consolidated revenue was $989.5, a decrease of 0.6% versus the prior year with an increase in consolidated same-store sales of 0.3% offset by an unfavorable impact from foreign exchange translation of 70 basis points, fewer stores reduction in sales for our Beauty Systems Group full service business. Sally Beauty Supply delivered vases same store sales driven by the progress in the U.S. and Canadian business, which was partially offset by weakness in the U.K. and Europe. We continue to see improvement against the supply-chain issues that have an impact in the Beauty Systems Group segment over the last few quarters. While that segment same-store sales are modestly negative, we did see progress against the vendors supply-chain issues that have been lingering now for a couple of orders. The direct unfavorable impact of sales from external supply-chain issues was not material. Importantly, we did take steps to ensure we would have enough inventory for key launches and my comment that the direct impact was immaterial does not include those customers for whom we need to rebuild our relationship given prior supply-chain disappointment something that will require some time to accomplish. Our consolidated gross margin for the quarter was 48.6%, which represents a decrease of 30 basis points compared to the prior year. Increases in the higher margin North American business of Sally Beauty Supply were offset by gross margin challenges in Europe and within Beauty Systems Group. Selling, general administrative expenses including depreciation and amortization expense were $367 million in the quarter, a decrease of $4.3 billion or 1.2% from the prior year. The benefits from our transformation efforts and tighter controls over discretionary expenses across a portfolio were as expected and planned, partially offset by investments made in storages and technology. We have excluded restructuring charge from - rechargers from both the adjusted operating earnings and adjusted diluted earnings per share. Additionally, we have excluded the one-time tax benefits from the prior year from adjusted diluted earnings per share. Adjusted operating earnings and adjusted operating margin were $113.7 million and 11.5% respectively compared to $115.3 million and a 11.6% respectively in the prior year. Adjusted diluted earnings were $0.57 per share, growth of 11.8% compared to the prior year's $0.51 per share, driven by the impact of U.S. tax reform and on our consolidated effective tax rate and a reduced share count from past share repurchases. The company continues to generate strong cash flow from operations, which was $50.3 million in the quarter and operating free cash flow which was $26.5 million in the quarter. Inventory was up 4.4% from the prior year to $982.5 million, driven by a couple of factors, namely the impact of new product launches, the expansion of distribution rights for Beauty Systems Group, partially offset by a stronger U.S. dollar and a our quarterly inventory levels. We will manage this down over time in connection with our efforts with our vendors, our supply chain modernization and proactive steps by merchandising. Lastly, there were no stock repurchases made in the quarter and the outstanding balance on our asset base revolving line of credit remained at zero at the end of the quarter. In addition, cash and cash equivalent were $102.8 million at the end of the quarter, an increase of $23.5 million or 30% over the prior year. As we have stated before, we will prioritize needed investments in our business, that we believe, will deliver value for our shareholders, then focused on measured debt repayment within our readings ratings guidance and only then will we consider return of capital to shareholders. We are still in a leverage position toward the higher end of our preferred leverage ratio of 2.5 times to 3 times EBITDA. We remain committed to making progress against our leverage levels overtime. Turning to brief segment performance, in the first quarter, our Sally Beauty segment generated revenue of $580.6 million, a decrease of 0.8% compared to the prior year. Foreign currency translation had an unfavorable impact on the segment's revenue growth in the quarter by 90 basis points. Same-store sales increased by 0.7% for the quarter with larger increases in the U.S. and Canadian business partially offset by meaningful declines in Europe on the uncertainty surrounding Brexit and protests in Continental Europe. We also continue to make meaningful progress with Sally's U.S. and Canadian e-commerce business in the quarter, which helped deliver e-commerce revenue growth of 40.6%. We expect to continue to invest aggressively improvements to the overall online customer experience. The story in Sally Europe was similar with e-commerce revenue up 34.2%. Gross margin for the segment was flat at 54.6%, driven primarily by improvements in the U.S. and Canada from optimized pricing and promotional activity, which was offset by weakness in Europe. Segment operating earnings were $90 million in the quarter, an increase of 3.9% versus the prior year, primarily driven by lower selling, general, and administrative expenses from our transformation efforts partially offset by the decline in total revenue related to a lower store account versus the prior year. Now turning to the Beauty System Group segment, BSG's revenue in the quarter was $408.8 million, a decrease of 0.1% versus the prior year, driven by a same-store sales decline of 0.6% at an unfavorable impact of foreign currency translation of approximately 40 basis points, mostly offset by a full quarter of revenue contribution from the acquisition in Canada that closed in December 2017. BSG's gross margin was 40% in the quarter, down 80 basis points from the prior year driven primarily by category mix shit, increased promotional activity and timing of vendor funding related to process changes made by the BSG merchandising team. I want to emphasize that approximately half of the decline in gross margin was driven by the unintended consequences of our merchandising transformation and it is addressable as we move through the year. The remaining dilution was driven by mix shift and purposeful promotional choices as the business reacted to soft sales results early in the quarter. The margin at BSG is receiving intense focus within our team. Segment operating earnings for BSG were $62.3 million, down 3.5% in the prior year driven by lower gross margin partially offset by lower operating expenses from our transformation efforts. Now let's turn to our guidance for fiscal year 2019 and it's a very simple story. We are maintaining our full year guidance for fiscal 2019. We had a decent quarter. We had a lot to do. We are cautious of the macro environment in which we're operating. However, the first quarter did demonstrate solid progress and we saw signs of traction on key investments in parts of our business that can give us confidence in maintaining our guidance for the year. Finally, I'm going to close my comments with some accounting housekeeping especially the impact of two new accounting standards, revenue recognition and leases. In May 2014, FASB issued ASU 201409, revenue from contracts with customers which introduced new guidance on how they should measure revenue in connection with sales good services to a customer based on the consideration expected in exchange for those goods and services. At the beginning of this fiscal year, we adapted ASU 2014-09. The new standard did not have a material effect on our consolidated financial statements or on our internal controls or financial reporting nor do we believe that the new standard will have a material effect on our consolidated financial statements on an ongoing basis. In February 2016, FASB be issued ASU No. 2016-02 Leases, which will require most leases to be reported on the balance sheet as a ready to use asset and lease viability. The new guidance further requires that leases be classified at inception as either finance basis or operator basis. All of our leases are expected to be classified as operating leases. We will adopt the new lease guide in October 1, 2019 and have completed a preliminary assessment. As at December 31, 2018 adoption of the lease guides would have resulted in recognition of a right of use asset and the estimated amounts of approximately $525 million and a lease liability for a similar amount in our consolidated balance sheet. Importantly, based on what we know today, we do not believe adoption of the lease guidance, at the start of the next fiscal year we'll have a material impact on our consolidated results of operations or consolidated cash flows. Our Principal Accounting Officer, Brent Baxter has joined us to answer any additional questions on these topics during the Q&A. In summary, we remain confident that we're doing the right things to continue to improve the business and set Sally Beauty Holdings up for long term success. We understand the challenges, we understand the need to execute, and we are marshaling our resources in such a way as to promote success of our plans. Thank you for your time this morning. Now I'd like to turn the call back over to Chris.

Thank you, Aaron. And with that, I will turn it back over to the operator, so that we can take your questions.

[Operator Instructions] And our first question will come from the line of Rupesh Parikh with Oppenheimer. Your line is open.

So, on the Sally Beauty business, really it sounds like Europe was a drag during the quarter. Is it fair to say maybe the U.S. business could be up 1.5% or 2% or is there any more color you can provide?

Rupesh, we don't break apart those segment results, but obviously you've got multiple puts and takes in the Sally Beauty segment, you've got lapping the hurricane out of Puerto Rico. You've got some accounting benefit with the loyalty program although it will be neutral for the year. And finally you've got the negative associated with Europe, net-net that's about a wash, it's a slight tailwind. And overall though we're really pleased with the progress Sally made, it had a great quarter and hopefully we'll continue to see those trends.

And then as you look at the Europe business, how long do you think that that drive will last and as you look at the environment this past quarter, were there more promotions clearance activity, is that will wait on your gross margins?

I think what we would say is far be it for us to predict when Brexit will truly resolve itself or when the civil unrest in France will come to conclusion, it has had an impact on retail as well of our own results. The good news is we are making progress on optimizing our business and we are actually seeing the benefit of the actions we've taken in the last year. So that as we pull levers, we can respond to the challenges we see.

And my final question, on your free cash flow, it was down more than 50% year-over-year. It sounds like inventory was one drive, but just curious were some of the other drivers were there contributing to cash flow or the decline year-over-year.

Yes. I wouldn't read too much into it to be honest. We did make a couple investments over the course of the quarter or a small M&A as well as the investment inventory. We're confident in the overall guidance for the year.

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

Following up quickly on the Sakkt? Beauty comp, I'm wondering if you could just give us a sense for how much traffic contributed to the improvement in North America versus higher AUR related to the new two tier pricing structure?

We saw improvements in traffic trends without quantifying it. We also saw higher AUR as you call out.

And then on the loyalty, exciting to hear you're capturing data on 60% of the transactions with the new program what inning are you in, in terms of having the systems and processes in place to leverage that data within your marketing program? Is that a story for this fiscal year or something to look forward to next year and beyond?

We would say we believe that the loyalty program is already having an impact a positive impact on our guest experience as well as the traffic trends we're seeing that said it's only 90 days in, so we have more to do. We're going to continue to invest behind it from a guest experience perspective as well as the data science that goes with. Now having such a close touch point with our customers and our thinking about how do we further deploy across our network as well as rapidly ramp-up the execution of our plan on loyalty, but so far we're very pleased.

Just to add to that Mark, I mean, there's two parts of the program that build over time and you call out both. One is the number of people in the program, which we hope to continue to build that number significantly. And the second is your ability to then use the data to offer more relevant offers both of those will build from here. So, we've certainly, not seen the full impact or anywhere close to it at this point.

And then, just one last one switching to BSG. The comp decelerated a couple hundred basis points on a two-year basis despite some of the recent brand wins and it sounds like them the less severe supply chain pressure. So maybe, if you could just help us better understand some of the puts and takes on the comp there, how to think about the progression through the remainder of the year and just maybe any color on category level trends at BSG? Thanks so much.

Aaron why don't you build on this? I think the reality is it did show some sequential improvement quarter-to-quarter. Part of this is self-inflicted, so we've obviously as we mentioned had some change in our merchandising organization and we're working our way through that. We think we're making good progress on it. Some of it we believe is some lingering impact associated with the fact that we had significant supply chain disruption and we disrupted some of our guests and we're probably paying a little bit of a price for that. Over time, we expect that will fade away. And then, last is we've got to bring more innovation to market, which you'll see is doing in the next couple of quarters. So I think although we're disappointed with that result, we think it will get better from here and we're working hard on it. Aaron, I don't know if you want to add it to.

I would just observe that the comp was a 68 basis points improvement over prior at the same time as well as a quarter-on-quarter movement, still negative, still work to do, but we're pleased with the progress the team is making there, but leads to regaining the customers that we disappointed from not having the inventory thereafter in the earlier couple of quarters.

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

Chris, on the traffic question, how would you assess the traffic trends at Sally versus BSG and where you see opportunity there? And as you do identify customers, one of the key opportunities is unlocking traffic, what are your thoughts about the building blocks and timing and what will be - on some of the bigger ideas to help with that traffic? And Aaron, supply chain changes are quite innovative and really seem like a good path to digitization. Could you talk to us a little bit about the sequencing of the events and how you've thought about sequencing to minimize risk with the closures and openings and also on the JDA side which is another big change to managing risk during change? Thank you.

There's lots there. So I'm going to take up - kick it start then I'll hand it over to Aaron to pick up on that. You know, first of all I think you know as Aaron mentioned traffic trends at Sally have been improving. You know there's lots of components to continuing to make that, that continue for the rest of the year and future years. Some of its loyalty as we discussed, some of it's building a stronger loyalty database and in our ability to market that database. Some of it will be our marketing and media and we're working on that in terms of how we advertise. Some of it will be promotions, so as you heard, we've been pushing a fewer, deeper, bigger promotional strategy where we try and break through the clutter with a fewer promotions but deeper ones, when we go to break through the clutter that the consumer sees. And all of those play a role and obviously all the new products that we're bringing in that differentiate us and bring new consumers to our stores. So all of those are going to play an element and obviously we're working on the longer term pieces as well such as our digital platform and our Vegas task in terms of new stores. So lots of moving pieces relative to driving traffic and we're at early stages and what we want to do is continue the trend. At BSG, as we mentioned part of it has to be - we have to rebuild our relationship with some of the customers we aggravated and disappointed during the supply chain issues, we're working on that. I think the team's in a much better position now than they were three or six months ago and we'll work with our vendors on that. And then part of it is bringing new innovation to the store is whether that'd be new color lines, new hair care lines and also new exclusive innovation whether that'd be with our vendors or through our own brands. So, both of those - all that playing a role, I know there's a lot there, but I think overall we're in a good position as we knockdown some of the challenges and some of the - as well as some of the initiatives we're tackling in order to move the business forward. Aaron, I don't know if you want to add to that or and also move on to the supply-chain piece?

I'll move onto the supply chain piece. Thanks for the question. Here's how I described it. With respect to our supply-chain, those are - those things that we do to ourselves and those things that are done to us in the context of that which we've done to ourselves. There's a physical infrastructure of our supply chain network is overly complex, the product of decades of acquisitions and it's never been rationalized, optimized or integrated across the businesses. And so, the building closure - building closures we're announcing today they are standalone. They don't require changes to our systems that don't require integration with third parties. These are efficiency opportunities that are right in front of us that will help us to be more efficient with our vendors on, where we put our inventory, how much inventory we have and the cost of servicing our stores as well as our e-commerce business. It's also the case in the cash flow what we've done to ourselves as we've got subpar technology in the buildings and across the network overall and you've heard us talk about the JDA implementation, which will certainly help. The further callout today around OMS and our ability to get to a place, where our supply-chain is flexible that we will build into overtime, we have a road map there where we're feeling good about what this will look like and it will tie in to a broader vision of integrating across our channels, across our businesses with one seamless supply-chain. The cost is what's been done to us from a supply chain perspective. It's the case that we haven't had the vendor accountability that we should have for retailer of our size and we have been cautiously testing with a couple of key vendors what that looks like as we carry forward making good progress that will also support and help de-risk the changes we're making to the distribution nodes that we announced today. And the other piece I would put on this is the merchandising transformation. We've been at it now for six months or nine months in that way, learned a lot as we went through and we've had some unintended consequences that we've actually been adding talent to that team under the direction of our chief merchant and we're feeling good about where we're going there and how that will then tie in from planning and allocation perspective into our supply chain and where we carry forward. So, just to summarize quickly, the building announcements we're making today, these are quick wins. We don't need to do anything else to get quick benefit from making those changes. We are testing extensively across virtually every element that is touching our supply chain and in particular with system changes like JDA what I tell you is we are being very cautious on the implementation. The team is getting somewhat tired of how cautious we're being from a test and learn and we will then take the next step perspective. But, we think it's the right way to approach such a material change to our operating systems.

Our last question is about merchandising and how do you think your product in merchandising will evolve in the context of the supply chain changes as well as fewer, bigger, deeper and also acknowledging how much private label penetration plus expansion opportunities there are because what do you see happening with the SKU breadth and what you think the customer wants in terms of balancing new versus existing as well as product mix and making sure your relevant younger customers would love your thoughts because product is kind of touching a lot of different aspects of how you are engaging and change?

I think however, I think the truth is that our merchandizing organization was not as properly mature as most other retailers and so, we're making a major investment as Erin mentioned and talent in that organization. I don't think, SKU breadth will go up because we have a lot of debt skews that probably need to come out. We were not really very good at that sun setting skews that had been launched years ago, and had lost their effectiveness or efficacy and so, there's a chance to prune those while we bring in new merchandise. And you're right, we will be very focused on bringing new exclusive brands, as well as new own brands into the market. And our goal obviously is to create excitement first in our core category, so you're going to see a lot of innovation in color and care and that will be a mix of exclusive relationships more BSG and own brands as well as relationships with influencer linked brands that Sally and then you'll see other innovation outside of that where we might bring in more known brands or widely distributed brands in some of the other categories that fit well into the fewer deeper bigger strategy of promoting those brands to bring traffic into the store.

I think, I would add to that, that differentiation for us from a strategy perspective is critical and we understand that, and that will have a number of elements. You heard Chris talk at some length around the innovation efforts that have been underway. You're going to hear more from us that in quarters ahead as we carry forward because we understand that our assortments is a key part of who we are and why our clients are coming to excel the beauty versus going to mass or elsewhere. With respect to SKU breadth, while we'll constantly have innovation and we're going to be very careful on what that means from an inventory confusion perspective with our clients. And actually we've got initiatives underway to bring our SKU breadth down as you would expect with good fiscal management. Particularly as we launch, the new concepts in Las Vegas where we are testing and learning on how far can we go in that respect to get a pop, which comes from the differentiation, but not to over invest in inventory. So I'm quite excited about what we have underway with Sally from a merchandizing prospective. I think it's going to - the investment for us is going to be well worth it as we carry forward.

Thank you. The details are really important. Solid quarter. Best regards.

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

This is the [indiscernible] for Simeon Gutman. We just wanted to kind of dig into the U.S. improvement a bit more and think about how box color is doing on a sequential basis. Is it kind of driven by better marketing or better product? You kind of mentioned that box color is incremental, but more - any color on that?

So here's how you should think about box color. Box color for the first reason for us to launch box color is to add items to the basket for a significant, significant portion of our customers who were already in our stores and who were leaving our stores to buy box store for elsewhere because they were somewhat intimidated by pro color at home, right. We have seen success in that respect and we're quite pleased with the launch of box color. In our stores, we are running ahead of our internal plan relative to sales of that product. The second strategy for box color is to at some point start to reclaim or gain customers from Mass and other people who are buying lower quality box color somewhere else. We've started initial steps in that respect as well. You'll start to see marketing popping up around the country calling out our capability there, put again our quality, but for the moment our emphasis is in-store execution or our own online execution or boxed color to really add to the basket. Like I said, we're tracking ahead of plan and we have not disclosed what our internal plans are, but so far so good.

And just one small add, as I mentioned on the call, we're adding 10 additional shades for a total of 20 that will go in before the end of Q2 and it was really important to us that we got to a full palette of shades before we start that second flag to the strategy that Aaron mentioned which is to begin to recruit mass customers. So at this point, it's more about serving current customers who were leaving the store to buy color elsewhere.

And then just as a quick follow-up, just wanted to ask a bit more about the cost savings opportunity, how much more is there through the year and as we think about kind of other headwinds, you've kind of invested already in wages, are there any other kind of big headwinds remaining on costs?

Look what I would say is we have not yet achieved full run rate of the savings we've already identified. We will get there towards the end of this year although some of those will lead into 2020. And so what you should from that is that we continue to have opportunity coming our way that we're actively tracking and pursuing out in the business and as evidence of that I would point to some of the progress against SG&A that the business made it even in Q1 that we're quite pleased with and I now forgot the second part of your question.

Well, first was just kind of the buckets of the cost savings and then on the other side, are there any other kind of headwinds like people have been investing in wages?

The two primary headwinds that we saw from an SG&A perspective as we walked into this fiscal year was going to be the need for further investments in wages given the labor environment in which we're operating as well as the significant investments we're making in business. For us, the investments for 2019 are known and we're on track against those plans. We have - deviation and so I wouldn't call those a headwind. I would call them they're part of our plan consistent with our guidance. And labor we continue to monitor literally every month with our stores teams but we are addressing that as we need to also drive into further efficiencies and how we plan on the labor we deploy across our network. And we're making great - the stores teams were making great progress there as well. So, all I can say is, we feel like we've got our arms wrapped around it. There's nothing different so far than what we were expecting and we're comfortable in saying that we're confirming our guidance on that basis.

My next question will come from the line of Olivia Tong with Bank of America. Your line is open.

First, just want to kind of revisit cash flow because I know you said you don't read too much into it and you're confident on reaching your full year target. But obviously, the magnitude of the decline relative to last year is pretty meaningful. So can you help us build the confidence that you have with the slower start and free cash flow generation and how you get there through the remainder of the year?

Very happy to. Yes, there - in addition to the investment inventory, I think I called out during our guidance in the Q4 that we were also - we're taking steps with respect to our AP and I suspect the difference you're seeing is driven by those two factors.

So you're expecting that that's a particularly heavy investment right now and that'll obviously dwindle as the year progresses and - is that the key factor that's driving improvement?

It's quite one of the things going on. I mean there is a multitude out there. From a - maybe fill little more color around the AP story, as we optimize the P&L, right, while we have the opportunity to us to obtain further discounts and prove our cost of goods, right. And we are investing I guess that is I called out during our older guidance.

And then can you talk about some of the initiative - you've got a bunch of great initiatives that that you talked about during the call. Are you already accruing for the cost of some of these initiatives, whether it's a click and collect or something other things that you're doing? Or should we expect overall that costs will continue to increase as you - as you fund those initiatives?

I think it's going to be - it's all in our plan. And I don't think many of those initiatives are technology initiatives, they're store initiatives and obviously there're some initiatives such as service delivery model initiatives and obviously our digital platform initiative. So, many of those don't drive significant changes in OpEx or spending. But the reality is they're going to be investments as we launch them. So, it's all laid out in the plan, it's all in our guidance for the year. We're tracking them rigorously. We have a team that basically tracks every single week how the progress we're making and manages any deviations accordingly. So, I don't - I don't think it should drive us in any way off of the - our current trajectory.

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

So, first question, just a housekeeping item. You mentioned earlier that you did feel a bit of a benefit on the accounting side in the transition to the new loyalty program. Could you quantify how much of that helped the Sally comp in the quarter?

No Joe. Aaron jumping here Joe. With the answer I gave earlier is the answer we can give really which is there were some puts and takes in the quarter. We were laughing obviously the hurricane of Puerto Rico. We had a small benefit from the accounting benefit associated with the shift to loyalty. And we had a pretty significant headwind associated with Europe and the net of all of those is a slight tailwind.

So, it wasn't a major impact on the comp in the quarter.

No. I would add qualitatively as President of Sally in U.S. and Canada that I was quite pleased with the same-store sales results of Sally in U.S. and Canada.

And then secondly you guys talked a few times this morning and over the last few months about revamping the promotional strategy, fewer deeper promotions and you've got a customer base that I think is pretty well set in their ways sometimes. How have they taken to that new strategy? It sounds like pretty well at least given the indication we saw this morning. But any issues with that in terms of the customer base being a little put off by the new promotional strategy?

No. I think we're going to be expanding that to BSG as well in coming quarters. The reality is Joe think about it like this as we mentioned in the call, there's a significant portion of our business that is exclusive or own brands and what you're seeing is doing is pulling promotional activity out of those categories that are not as price sensitive or that are not available elsewhere and then investing to go deeper into categories that are highly competitive in order to win traffic from competition. And the last part of that is bigger which has been integrating those fewer promotions across all of our media and marketing platforms. That strategy is working very well with our customers and we think it's core to our turnaround strategy and really expand to be BSG in the coming quarters as well.

Our next question will come from the line of Ike Boruchow with Wells Fargo. Your line is open.

This is Lauren Frasch on for Ike. Congratulations on a great quarter. Given the ongoing Europe volatility that you are seeing combined with a bit of BSG weakness. What signs are you seeing that provide confidence that margin headwinds are going to dissipate throughout the year to get to your guidance? Can you still reach that outlook if these will inflect? And could you talk about any steps you're taking to combat these margin trends. Thank you.

We're happy to do so. I think during my earlier comments I observed that half of the 80 basis point margin decline was due to the unintended consequences of our merchandising transformation. I would put within that bucket are things that are well within our control for which we took our eye off the ball things that - things like striking the deal with the vendor before we run the promotion, things like making sure we're paying consistent with our discount terms, things like ensuring that the buying is happening in the right - in the right time period The focus on the BSG margin is relentless internally at this moment because we get it. We understand that that's where our focus needs to be. Changes are already occurring both within BSG, within our merchandising team to ensure that our processes are improved that our technology is enabling where we need to get to and that the focus is in the right place to ensure that as we carry it through the year BSG is able to follow the track that the Sally Beauty segment is on relative to continued margin improvement. And so, I would tell you that it will always be the case that we will track what our customer needs and that we will run promotions from time to time. As Chris has alluded to, we will be optimizing that within the BSG business in ways - Sally as we carry forward so that delayed relative - that is following the Sally business, but there are a lot of things that we just need to do better that we've got a relentless focus on as we carry forward.

We'll go through the line of William Reuter with Bank of America. Your line is open.

In terms of the plan for a new DC in Texas, is that something you expect that you would be building or you're going to be purchasing and existing one, will you lease it, have you, do you have any thoughts on that at this point?

I'll let Aaron dig it. My guess is we will look at all options. So the answer is we'll investigate all of those options. The key is that we will be putting up a large integrated facility that will cover both businesses in the Texas market.

In terms of a 500,000 square foot, DC that seems pretty large. Do you have any sense for context about something like that, what it would cost as I just think about CapEx over the next couple of years?

I do have good context somewhat of a cost that we are well down the design and implementation process in connection with thinking about where our needs are geographically, mechanically, and with respect to the capabilities. We have built into the current $120 million capital estimate for the year approximately $18 million of that will be tied to this improvement and there'll be a much smaller amount in 20 years as it carries forward. The facility will not be operational until 20 years, obviously, but we're starting to work now.

And then, just lastly for me, previously you had mentioned that you would probably not do any additional share repurchases this year as you focus on taking down your leverage metrics. Is that still the focus?

I would say what I said before, which is we're going to invest first in the business and you're seeing examples of that in this earnings call and then we're committed to bringing our leverage down. Stay tuned on that and only after we have those two things accomplished to our comfort level while we repurchase shares. We have I think I have said categorically previously that we have no plans to repurchase shares during 2019 that continues to be the case.

We will go to line of Linda Bolton Weiser with D.A. Davidson. Your line is open.

I believe that two quarters ago you talked about in Sally Beauty some price adjustments to be more competitive. But then last quarter you actually talked about some price increases that helped gross margin. So has the benefit of those price increases continued to carry forward and can you just update us kind of where you are in looking at sort of some of the pricing strategies? Thanks.

So I'd approach it a couple of ways, absolutely it went from a three tier to two tier model was part of the loyalty change, emphasizing a lower price for our pros versus harmonizing our retail price. From a capability perspective, we continue to look at our pricing by category. Where do we have differentiation that supports a higher price versus where are we operating in categories that are much more competitive such that we need to be lower, I would say we're part way down that journey. We are benefiting from our changes to our promotional pricing approaches, there's no doubt about that, but we still have work to do in some key categories where we believe we should be at we should be at parity with other players in some of those categories, and we're continuing to optimize as we carry forward.

And I would say Lynda in general across both businesses the biggest driver of margin will be the shift to a fewer deeper bigger approach to promotions, much more so than individual pricing activity in any one category.

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

Well. Thanks everyone for your questions today. To summarize, we are playing to win by refocusing our business around our differentiated core of hair color and hair care, improving our execution of basic retail fundamentals, and advancing our digital commerce capabilities. We are continuing to drive our costs out of the business at the same time which is enabling the investment in our transformation program. We believe that these strategic investments will accelerate growth in our highly differentiated categories of color and care and keep us on the path to long term earnings growth. Thank you for joining us today.

Thank you. And ladies and gentlemen, today's conference call will be available for replay after 9:30 AM today until midnight February 12. You may access the AT&T Teleconference replay system by dialing 1-800-475-6701 and entering the access code of 461464. International participants my dial 320-365-3844. Both numbers once again, 1-800-475-6701 or 320-365-3844, and enter the access code of 461464. 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.