Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings Inc. (SBH)

F4Q08 Earnings Call

November 20, 2008 11:00 am ET

Executives

Karen Fugate – Vice President of Investor Relations

Gary Winterhalter – President and Chief Executive Officer

Mark Flaherty – Senior Vice President and Chief Financial Officer

Analysts

Emily Shanks – Barclays Capital

Karru Martinson – Deutsche Bank

Todd Harkrider – Goldman Sachs

Grant Jordan – Wachovia

Carla Casella – JP Morgan

Linda Bolton-Weiser – Caris & Company

Joseph Altobello – Oppenheimer & Co.

[Duncan Vise] – AIG

Peter Grondin – OSS Capital

Laura Richardson – BB&T Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the company's fourth quarter and fiscal year 2008 financial results. (Operator Instructions) Now I would like to turn the call over to Karen Fugate, Vice President of Investor Relations for the company. Please go ahead, ma'am.

Karen Fugate

Thank you. Before we begin I'd like to remind you that certain comments, including matters such as forecasted financial information, contracts for business, and trend information made during this call may contain forward-looking information with the meaning of Section 21-E of the Securities and 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, is being continued, project, plan, believe, and similar words or phrases. These matters are subject to factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings SEC filing, including its most recent annual report on Form 10-K being filed today.

The company does not undertake any obligation to publically update or revise its forward-looking statements. The company has provided a detailed explanation and reconciliations for its adjusting audience in non-GAAP financial measures in its earnings press release and on its Web site.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer, and Mark Flaherty, Senior Vice President and Chief Financial Officer. Now I would like to turn the call over to Gary.

Gary Winterhalter

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2008 fourth quarter and full year earnings call. I'll begin today's discussion with a high-level review of our full year financial results followed by a review of our business initiatives. Mark will then take you through the 2008 fiscal fourth quarter and full year in more detail.

As you saw from our press release this morning, we had a solid financial result for the year. Both segments executed well on their 2008 strategic initiatives leading to sales growth, gross margin expansion, and strong earnings performance. For the fiscal year we reported consolidated net sales of $2.65 billion, growth of 5.3%. Consolidated same store sales grew 2.6%, in line with our historical trend.

Gross profit margin improved 70 basis points to 46.6%. Adjusted net earnings grew 35% to $81 million, resulting in adjusted earnings per share of $0.44. GAAP net earnings were $78 million, up 74.4%, with earnings per share of $0.42. Year-end total store count was 3,773, an increase of 5.7%, or 205 stores, of which organic growth represented 4.3% and acquisitions 1.4%. We drove unit growth in the Sally division by 150 stores to reach a total of 2,844 Sally stores worldwide.

Our long-term growth initiative remains the same to build our total store base organically 4% to 5% per year, and to make strategic and synergistic acquisitions, both domestic and international, where appropriate. We enter the year with $100 million of cash and cash equivalents, which includes the $75 million drawdown under the ABL revolving credit facility from this September. If you recall, we drew down this money to increase our cash position in order to preserve our financial flexibility in light of the dislocation in the financial markets.

In addition to cash, we ended the fiscal year with $276 million available on our revolver. Had we not drawn down the $75 million in September our revolver outstanding balance would have been $0 at the end of the fiscal year. We believe that our historical earning performance and cash generation, combined with access to the revolver, provides us more than adequate long-term liquidity.

Turning to the segments full year performance, Sally Beauty Supply had year-over-year sales growth of 6.6%, gross margin expansion of 40 basis points, and operating profit growth of 4.9%. Same-store sales for the year grew 1.2%. Sally's growth was somewhat dampened by fourth quarter same store sales performance, which was negatively impacted by the weakening economic environment in the UK and the disruptions in operations from hurricane-related weather in several key states.

We are two months into our rollout of the CRM program and are encouraged by the results. The average sale for a Beauty Club Card customer is consistently several percentage points higher than a non-Beauty Club Card customer. Our objective is to increase the number of cardholders to drive incremental sales. Although it's too soon to measure meaningful results, we believe that going forward both store transactions and sales will realize incremental growth as this program gains traction.

Our customer acquisition program uses analytics to identify potential retail prospects by product category, region, and demographics. In October we launched our direct-mail flyer to 1.1 million perspective customers and to our top Beauty Club customers within 400-store vicinity. The flyer is the first of its kind for Sally Beauty, featuring hair color and color maintenance products with a 20%-off coupon. So far the coupon redemption is higher than we expected.

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