Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings Inc. (SBH)

Q1 2009 Earnings Call Transcript

February 05, 2009 at 11:00 am ET

Executives

Gary Winterhalter - President and Chief Executive Officer

Mark Flaherty - Senior Vice President and Chief Financial Officer

Karen Fugate - Vice President of Investor Relations

Analysts

Grant Jordan - Wachovia

Emily Shanks - Barclays Capital

Todd Harkrider - Goldman Sachs

Karru Martinson - Deutsche Bank

Carla Casella - J.P. Morgan Chase & Co.

Peter Grondin - O.S.S. Capital Management LP

Linda Bolton Weiser - Caris & Company

Jill Caruthers - Johnson Rice & Company, LLC

Erika Maschmeyer - Robert W. Baird & Co.

Justin Holt - Chilton Investment Company

Shawn Tesoro - BlackRock, Inc.

Mimi Noel - Sidoti & Company, LLC

Maurice Deian - Genelle Management

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty fiscal 2009 first quarter earnings call. At this time, all participants are on a listen-only mode. Later we will conduct a question-and-answer session. (Operator instruction) As a reminder, this conference is being recorded.

I would now like to turn the conferences over to your host Karen Fugate. Please go ahead.

Karen Fugate

Thank you before we begin I would like to remind you that certain comments on matters such as forecasted financial information, contracts for business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Security Exchange Act 1934. Many of this 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 word 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 Holding SEC filing including this 2008 annual report on Form 10-K. The Company does not undertake any obligation to publicly update or revise its forward-looking statement. The Company has provided a detailed explanation and reconciliations of this adjusting item and non-GAAP financial measures in its earnings press release and on its website. Joining me 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 to Gary.

Gary Winterhalter

Thank you, Karen and good morning everyone. Thank you for joining us for our fiscal 2009 first quarter call. I will begin today's discussion with a high level review of our financial results and business initiatives. Mark will then take you through the results in more detail.

In the fiscal 2009 first quarter, Sally Beauty Holdings performed well in one of the most challenging economic environments in the Company’s history. Although the impact from unfavorable foreign currency exchange added pressure to year-over-year results, in particular to net sales and segment operating profit, we improved gross profit margin in both segments and held our operating margin above 10%. Same store sales as always reported on a consent currency basis ended the quarter slightly positive. While we compare our same store sales results to other retailers’ decline of several hundred basis points, I am pleased with our performance.

On December 12, Standard and Poor's raised its issue level rating one notch and changed our outlook to stable. In light of the global credit crisis, we view this upgrade as a terrific affirmation of the stability of our business.

Now, turning to the financial results. For the first quarter, we reported consolidated net sales of $646 million, a decline of 1.6%. Unfavorable foreign currency exchange of $24.8 million or 3.8% of sales and underperformance in the Sally UK and BSG's franchise business were significant drivers of this decline. Helping to offset revenue pressure was the addition of new stores of 1.3% and acquisitions of 1.8%. Same store sales growth, as reported on a constant currency basis was slightly positive at 0.04%. Net store count was 3,769, an increase of 3.8% or 138 stores over fiscal 2008 first quarter. Our long term growth initiative remains the same, to build our organic store base 4% to 5 % per year.

However, in the near term we will remain flexible to capitalize on potential real estate values and if we cannot find them, we will be prudent with our cash. In light of that, we are widening our 2009 store growth range to 3% to 5%. We are responding to the challenging environment by reducing and controlling cost across the Company. During the first quarter, we implemented the following measures; a temporary hiring freeze, deferred merit increases for upper management, variable expense reductions related to benefits and payroll-related costs were among the many reductions. We anticipate that these measures will help to maintain the operating margins during the back half of fiscal 2009 should the economy continue to be challenging.

Now, turning to segment performance. Sally Beauty Supply had a slightly positive sales growth of 0.2%. Same store sales as reported on the constant currency basis were down slightly by 0.21%. Although year-over-year sales growth was favorable in Sally North America, unfavorable foreign currency exchange and weakness in the UK business negatively impacted revenue growth. The weak economy in the UK is having a negative impact on our business. However, there are opportunities to improve our performance. We recently made leadership changes in our UK business. This new team has identified several areas of improvement such as: optimizing our merchandising strategy in our existing stores to better serve both our retail and professional customers. A detailed review of our store portfolio was underway to determine the need to rationalize any redundancy that may still exist from our major acquisition two years ago, further emphasis on integrating our warehouse and administrative functions, also from the acquisition, to improve operating margins.

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