Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings, Inc. (SBH)

F3Q 2011 Earnings Call

August 4, 2011 11:00 AM ET

Executives

Karen Fugate – VP, IR

Gary Winterhalter – President and CEO

Mark Flaherty – SVP and CFO

Analysts

Simeon Gutman – Credit Suisse

Crew Hartson – Deutsche Bank

Emily Shanks – Barclays Capital

Meredith Adler – Barclays Capital

Linda Bolton Weiser – Caris

Erika Maschmeyer – Robert W. Baird

Carla Casella – JPMorgan

Joseph Altobello – Oppenheimer

Jason Gere – RBC

Jill Caruthers – Johnson Rice

Presentation

Operator

Good morning ladies and gentlemen, and welcome to the Sally Beauty Holdings Conference Call to discuss the company’s Fiscal 2011 Third Quarter Results. All participants have been placed in listen-only mode. After management’s prepared remarks I’ll facilitate a question-and-answer session.

And initially each caller will be limited to two questions. Additional instructions will be given at that time. As a reminder today’s conference is being recorded for replay. I would like to turn the call over to Karen Fugate, Vice President of Investor Relations.

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 or 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 for the fiscal year ended September 30, 2010. 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 on its earnings press release and on its website.

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 2011 third quarter earnings call. I’ll begin today’s discussion with a high-level review of our financial results, followed by a review of our business initiatives. Mark will then take you through the fiscal 2011 third quarter in more detail.

As you may have seen from our press release this morning we delivered another strong quarter of top and bottom line growth in both our businesses. On a consolidated basis same-store sales were up 5.9% and net sales grew 12.6%, marking our sixth quarter in a row for double-digit growth.

Gross profit margin was 49.1%, up 50 basis points. Adjusted net earnings in the third quarter increased by 35.6% to $55.8 million or $0.30 per share after adjusting for an after-tax credit of $13.4 million from a litigation settlement, net of non-recurring expenses. Including this $13.4 million credit GAAP net earnings grew 68.2% to $69.1 million or $0.37 per diluted share. We ended the quarter with a total store count of 4262 an increase of 276 stores or growth of 6.9% over last year of which 4.8% was organic growth.

Turning to our segment performance starting with Sally Beauty Supply. We continued to realize year-over-year growth in our international business. The initiatives we launched in the UK are coming together nicely and yielding positive returns. To-date 50% of our UK store base has been updated and rebranded. We believe our increased visibility and brand awareness to the retail consumer drove higher traffic, sales growth and gross margin expansion. Same-store sales for Sally Beauty Supply grew 6.1% versus 3.6% in the prior year. Net sales were $517.3 million, growth of 10.6%.

The primary contributor of this strong performance was growth in same-store sales and new store openings. Gross profit margin at Sally Beauty ended the quarter at 54.4% up 100 basis points over the prior year quarter. Gross margin expansion was primarily due to the continued shift in product and customer mix and low cost sourcing. For the first time in a quarter, operating earnings for Sally Beauty Supply hit the $100 million mark reaching $103.3 million or growth of 21.3%. Operating margin also reached a quarter high of 20%, a 180 basis point improvement over last year’s third quarter. We believe our CRM program continues to be a key contributor to the consistent growth in sales and gross margin.

During the third quarter, we reached out to over 5 million perspective new customers through our CRM initiative which contributed to 21% growth in Beauty Club Card memberships.

Now turning to our BSG segment. BSG had same store sales growth of 5.3% compared to 7.4% in last year’s third quarter. Net sales were up 15.9% to reach $319.4 million. This performance was primarily due to acquisitions, growth in same-store sales and new stores. BSG’s gross profit was $129 million, growth of 15.9%.

Gross profit margin was 40.4% equal to the prior year quarter. Operating earnings for BSG were $56.7 million, growth of 88.4% with operating margin of 17.8% a 690 basis point increase. BSG’s operating results reflect a net positive impact of $19 million from a litigation settlement and non-recurring charges.

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