Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings, Inc. (SBH)

F1Q13 Earnings Call

February 7, 2013 11:00 AM ET

Executives

Karen Fugate – IR

Gary Winterhalter – Chairman, President and CEO

Mark Flaherty – SVP and CFO

Analysts

Simeon Gutman – Credit Suisse

Meredith Adler – Barclays

Jason Gere – RBC Capital Markets

Taposh Bari – Goldman Sachs

Joe Altobello – Oppenheimer

Erika Maschmeyer – Robert W. Baird

Olivia Tong – Bank of America Merrill Lynch

Linda Bolton-Weiser – B Riley Caris

William Reuter – Bank of America Merrill Lynch

Jill Caruthers – Johnson Rice

Pat Dimeglio – Deutsche Bank

Presentation

Operator

Welcome to the Sally Beauty Holdings Fiscal 2013 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation. Instructions will be given at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to our host, 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, 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 the words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe and similar words or phrases.

These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings’ SEC filings, including its most recent form – annual report on Form 10-K for the fiscal year ended September 30, 2012. The company does not undertake any obligation to publicly update or revise its forward-looking statements. The company has provided a detailed explanation and reconciliations of its adjusting items and non-GAAP financial measures in its earnings press release and on its website.

With me on the call today are Gary Winterhalter, Chairman, President, and CEO; 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 2013 first quarter earnings call. I’ll begin today’s discussion with a high-level review of our financial results and business initiatives. Mark will then take you through the fiscal 2013 first quarter in more detail.

As you may have seen from our press release this morning, fiscal 2013 is off to a good start considering the difficult year-over-year sales comparisons. Consolidated sales in the first quarter grew 4.7% versus 9% in last year’s first quarter. This sales performance is attributed to net new store openings and consolidated same-store sales growth of 2.8%. Same-store sales growth was challenged by the record growth rate of 7.1% we achieved in the fiscal 2012 first quarter.

Considering these difficult comparisons, we are pleased with our financial performance this quarter and remain confident we will achieve our objectives for the year. Gross profit margin in the first quarter expanded by 30 basis points to reach 49.1%, and SG&A as a percent of sales improved by 10 basis points. Both of these improvements led to operating margin expansion of 40 basis points. Net earnings in the first quarter were $59 million with earnings per share of $0.32. Our store base increased by 3.7%, or 162 stores, ending the quarter with a total store count of 4,525.

Turning to segment performance, starting with Sally Beauty Supply: Same-store sales growth for Sally Beauty was 1.6% versus a record high of 8% in the prior year. Net sales grew 4.2% to reach $559 million. Sales growth at Sally was somewhat softer than we anticipated, primarily due to the handful of merchandise categories that continue to be a challenge.

Our Beauty Club and customer acquisition programs performed well, driving traffic and higher average ticket in our U.S. stores. Beauty Club Card memberships increased to 6.9 million and sales from our BCC members increased 13.4%.

The ongoing shift in product and customer mix drove gross profit margin expansion of 50 basis points to reach 54.4%. Operating earnings grew 5% to reach $106.1 million, with operating margins of 19%, improvement of 20 basis points from the prior year.

In the UK, our new warehouse initiative is on schedule, and we expect the facility will commence shipping by the end of March and be fully operational by the end of April.

Now turning to our BSG segment: BSG had strong same-store sales growth of 5.6% versus 5% in the fiscal 2012 first quarter. Net sales grew 5.5% to reach $346.6 million. This growth is attributed to solid performance in our corporate and franchise stores, as well as in our full service business. BSG’s gross profit margin was 40.4% flat over the prior year.

Operating margin at BSG improved 90 basis points to reach 14.1%. This strong performance was primarily due to sales growth and SG&A leverage.

To summarize, Sally Beauty Holdings performed well during the quarter considering the challenging year-over-year sales comparisons. We expanded gross margin and realized SG&A leverage, which led to high-single-digit earnings growth.

We executed on our share buyback initiative by purchasing approximately half of our $300 million authorization from October 1 through January 31.

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