Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings Inc. (SBH)

F4Q2012 Results Earnings Call

November 15, 2012 11:00 AM ET

Executives

Karen Fugate - Investor Relations

Gary Winterhalter - Chairman, President and CEO

Mark Flaherty - Senior Vice President and CFO

Analysts

Meredith Adler - Barclays

Ike Boruchow - J.P. Morgan

Simeon Gutman - Credit Suisse

Erika Maschmeyer - Robert W. Baird

Olivia Tong - Bank of America-Merrill Lynch

Karru Martinson - Deutsche Bank

William Reuter - Bank of America-Merrill Lynch

Jill Caruthers - Johnson Rice

Presentation

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Sally Beauty Holdings Fiscal 2012 Fourth Quarter and Full Year Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions will be given to you at that time. (Operator Instructions)

I would now like to turn the conference over to Karen Fugate. Please go ahead.

Karen Fugate

Thank you. Before we begin I would like to remind you that certain comments including matters such as forecasted financial information, contractor business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities 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 file today. The company does not undertake any obligation to publicly update or revise its forward-looking statements.

The company has provided a detailed explanation and reconciliations of its adjusting item and non-GAAP financial measures in its earnings press release and on its website.

With me on the call today are Gary Winterhalter, Chairman, President and CEO; and Mark Flaherty, Senior Vice President and CFO.

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 2012 fourth quarter and full year earnings call. I will begin today’s discussion with a high level review of our full year financial results and Mark will then take you through the fourth quarter in more detail.

As you saw from our press release this morning, Sally Beauty Holdings had another very strong year, delivering record results in both businesses. Consolidated sales in fiscal 2012 exceeded $3.5 billion for growth of 7.8%.

This strong sales performance was primarily the result of same store sales growth of 6.4% and new store openings of 1.8%. The impact of unfavorable foreign currency exchange of 70 basis points partially offset this growth.

Gross profit ended the year at $1.7 billion, growth of 9.3% achieving a gross profit margin of 49.5%. Gross margin expanded 70 basis points, primarily due to the shift in customer and product mix in both our businesses.

Consolidated SG&A including unallocated expenses was $1.2 billion, an increase of 8.5%. SG&A as a percent of sales in fiscal 2012 was 33.5%, up 30 basis points over the prior year. Included in the Sally Beauty Supply segment in fiscal 2012 is a $10.2 million charge related to a potential settlement of litigation.

In fiscal 2011, SG&A included a favorable impact of $21.3 million credit from a litigation settlement, net of non-recurring charges. Excluding the 2011 credit, fiscal year 2012 SG&A as a percentage of sales would have been favorable to the prior year.

Operating margin in fiscal 2012 improved 50 basis points to reach 14.2%. This increase was primarily the result of gross profit margin expansion.

GAAP net earnings were $233.1 million, up 9% over last year with earnings per share of $1.24. Adjusted earnings per share excluding the unfavorable impact of refinancing charges and charges related to the potential litigation settlement were $1.42, growth of 33%.

Fiscal 2012 adjusted EBITDA ended the year at $591 million, an increase of $89 million or growth of 18% over fiscal 2011. We generated $298 million in net operating cash, which funded our investments in company growth and our stock buyback.

We ended the fiscal year with a global store count of 4,499, an increase of 4.4% or 190 net new stores.

Turning to segment performance, for the fiscal year 2012, starting with Sally Beauty Supply.

Net sales reached $2.2 billion for strong growth of 9.2% driven primarily by higher transactions and average ticket in Sally North America, as well as strong growth in our European and Latin American businesses.

Same store sales for fiscal 2012 grew 6.5% versus 6.3% in the prior year. In the fiscal 2012 fourth quarter, same store sales growth for Sally U.S. was challenged by three categories, to be more specific, in the nail category we are anniversaring a couple of major launches that occurred last year.

In our hair extension category, we are adjusting to significant cost increases in human hair and electricals are transitioning from flat irons that support the long straight hair look to curling irons as curly hair is becoming more popular. Our core categories hair care and color performed very well during the quarter with double-digit growth.

Gross profit margin at Sally Beauty expanded 60 basis points for the year to reach a record 54.6%. This strong performance reflects the continued shift in product and customer mix.

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