Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings Inc. (SBH)

F1Q2012 (Qtr End 12/31/2012) Earnings Call

February 2, 2012 11:00 am ET

Executives

Karen Fugate - VP, IR

Gary Winterhalter - President, CEO & Director

Mark Flaherty - SVP & CFO

Analysts

Michelle Tan - Goldman Sachs

Meredith Adler - Barclays Capital

Gary Balter - Credit Suisse

Erika Maschmeyer - Robert W. Baird

Karru Martinson - Deutsche Bank

Bob Spencer - Bank of America/Merrill Lynch

Jill Caruthers - Johnson Rice

Kevin Coyne - Goldman Sachs

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Sally Beauty Holdings fiscal 2012 first quarter earnings results. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. I would now like to turn the conference over to your host, Ms. 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 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 Sally Holdings’ SEC filings, including its most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2011. 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, 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 2012 first quarter earnings call. I will 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 2012 first quarter in more detail.

As you may have seen from our press release this morning, fiscal 2012 is up to a terrific start with strong performance from each of our business segments. We delivered consolidated sales growth of 9% and record same-store sales growth of 7.1%. Gross profit margin expanded a 100 basis points to reach 48.8%. We achieved SG&A leverage in the quarter which contributed to our 20% EBITDA growth.

Adjusted net earnings in the first quarter increased by 36% to $55.7 million or $0.29 per share after adjusting for an aftertax charge of $25.6 million. This charge is due to the issuance of our new senior notes and the reduction of our 2014 senior and 2016 senior sub notes. Including this $25.6 million charge, GAAP net earnings were down 26.4% to $30.1 million or $0.16 per diluted share.

We ended the quarter with a store count of 4363, an increase of 185 or growth of 4.4% over last year of which 4% was organic growth.

Turning to our segment performance. Starting with the Sally Beauty supply. Same-store sales growth for Sally Beauty hit a record high of 8% versus 6.4% in the prior year. Net sales reached $536.4 million for a strong growth of 11.5%. The primary contributors of this strong sales performance include higher transactions and higher ticket in Sally North America driven by our CRM program as well as improvement in our international businesses

.

Gross profit margin at Sally Beauty ended the quarter at 53.9%, up 70 basis points. Gross margin expansion was primarily due to the continued shift in product and customer mix. Operating earnings reached a $101.1 million for growth of 21%. Operating margin was 18.8%, an improvement of 140 basis points over last year’s first quarter. Operating margin improvement was fueled by gross margin and SG&A leverage in our domestic and international businesses.

During the first quarter, we reached over 6 million Beauty Club Card memberships. We believe our targeted marketing initiative and BCC customer conversion efforts will continue to lead to transaction growth and higher average ticket in fiscal 2012 and beyond.

Now turning to our BSG segment. BSG had same-store sales growth of 5% with net sales growth of 5.1%. As a reminder, we anniversaried the acquisition of Aerial this quarter which brings about tougher comparisons to our fiscal 2011 first quarter. BSG’s gross profit margin was up 90 basis points marking the fourth consecutive quarter to reach over 40%. Gross margin performance was due to favorable customer and product mix. Operating margin at BSG improved by 200 basis points to reach 13.2% for the quarter. This strong performance was due to gross margin expansion and SG&A leverage.

To summarize, Sally Beauty Holdings performed very well in the first quarter. We achieved record results across the business and continued our efforts to lower our cost of capital.

Now, Mark will provide more financial detail for the first quarter. Mark?

Mark Flaherty

Thanks Gary. Consolidated net sales for the first quarter were $864.8 million, an increase of 9%. This increase was primarily driven by 7.1% growth in same-store sales and 2.1% in new store growth.

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