Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings (SBH)

Q3 2013 Earnings Call

August 01, 2013 11:00 am ET

Executives

Karen Fugate - Vice President of Investor Relations

Gary G. Winterhalter - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Mark J. Flaherty - Chief Financial Officer and Senior Vice President

Analysts

Simeon Gutman - Crédit Suisse AG, Research Division

Meredith Adler - Barclays Capital, Research Division

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

Taposh Bari - Goldman Sachs Group Inc., Research Division

Olivia Tong - BofA Merrill Lynch, Research Division

David Luke Eller - Wells Fargo Securities, LLC, Research Division

Karru Martinson - Deutsche Bank AG, Research Division

Spenser Samms

Celeste Everett - Goldman Sachs Group Inc., Research Division

Linda Bolton-Weiser - B. Riley Caris, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings' Fiscal 2013 Third 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 Karen Fugate, Vice President of Investor Relations. 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 of business or 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 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 information in its earnings press release and on its website.

With me on the call today are: Gary Winterhalter, Chairman, 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 G. Winterhalter

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2013 third 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 quarter in more detail.

I'm sure you saw from our press release this morning that sales performance for the quarter was mixed. Sales growth from our BSG, Sally International and Sally U.S. Beauty Club customers was strong. However, traffic from the Sally nonclub customer was down and impacted overall sales growth. Although we are disappointed with the performance in our Sally U.S. business, we have identified several opportunities to improve customer traffic that I will discuss in a moment.

Despite soft revenue performance, our overall financial execution was good with a 50.1% gross margin, 50 basis point improvement in SG&A leverage, and double-digit earnings per share growth. Our consolidated same-store sales increased by 0.7% after growing 5.2% in the third quarter last year. Although we knew third quarter comps would be softer than the fourth quarter, this performance was well below our expectations.

The driver that led to the shortfall was the decline in our Sally U.S. non-Beauty Club traffic. Consolidated gross profit in the third quarter reached 50.1%. This performance represents the second time in company history that gross margin reached over 50%. The first time was last year in the third quarter.

Now turning to segment performance, starting with Sally Beauty Supply. Same-store sales for Sally Beauty declined 0.8% versus growth of 5.2% in the prior year. This underperformance is primarily due to the decline in traffic from our nonclub customer. We believe the primary reason for this decline is due to a change in our marketing tactics. Historically, we took a very targeted approach to identifying a potential customer. We sent direct mailers with incentives to entice this profiled customer to visit their nearest Sally store.

Several months ago, we changed our marketing approach to reach a broader audience of potential customers, which proved to be less successful than our prior approach. Consequently, as of July, we've returned to our original approach. Since it generally takes multiple direct mailers before a potential customer visits a store, I expect it will take a few months to get back to positive traffic growth from this customer segment.

Another potential traffic driver is the new product and brand additions that will roll out in Sally U.S. stores over the next few months. You may be aware of a new curling tool called Curl Genius. It is now available at most of our Sally U.S. stores. We had terrific success with the professional version of this appliance at BSG and expect it will be well received by the Sally customer. In addition to Curl Genius, we are expecting several new brands to be available at Sally stores in the near future. I am optimistic that the return to our original marketing program and introduction of new products will boost our nonclub traffic and increase Beauty Club Card conversions.

Net sales for Sally Beauty Supply reached $559 million, an increase of 1% versus growth of 7% in the prior year quarter. Sales performance at Sally was also impacted by the difficult comparisons of 12% growth in the nail and hair extension categories last year. The sales comparisons for these categories should be easier in our fourth quarter, as growth was under 3% in the fourth quarter last year. Beauty Club members remained loyal as evidenced by a 6% sales increase this quarter. Club membership also grew 9.6% to 7.2 million.

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