Sally Beauty Holdings, Inc. (SBH)

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Sally Beauty Holdings Inc. (SBH)

F2Q08 (Qtr End 03/31/2008) Earnings Call

May 08, 2008 10:00 am ET

Executives

Sandy Martin - VP of IR

Gary Winterhalter - President and CEO

Mark Flaherty - Acting CFO and VP

Greg Coffey - VP and Treasurer

Analysts

Karru Martinson - Deutsche Bank

Todd Harkrider - Goldman Sachs

Reid Kim - Merrill Lynch

Mike Schultz- Wachovia

Linda Bolton Weiser - Caris

Chris Tibollo - Bear Stearns

Duncan Vise- AIG Investments

Justin Hott - Bear Stearns

David Cumberland - Robert Baird

Laura Richardson - BB&T

Henry Papillon - Oppenheimer

Emily Shanks - Lehman Brothers

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Sally Beauty Holdings conference call to discuss the company's fiscal 2008 second quarter financial results. (Operator Instructions).

Now, I would like to turn the call over to Sandy Martin, Vice President of Investor Relations for the company.

Sandy Martin

Thank you. Before we begin, I would like to remind you that certain comments, including comments on 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 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.

The company does not undertake any obligation to publicly update or revise its forward-looking statements. The company has provided a detailed explanation and reconciliation 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, Mark Flaherty, Acting Chief Financial Officer and Vice President, and Greg Coffey, Vice President and Treasurer.

Now, I would like to turn the call over to Gary.

Gary Winterhalter

Thank you, Sandy, and good morning, everyone. Thank you for joining us for our fiscal 2008 second quarter earnings call, and as always thank you for your interest in Sally Beauty Holdings.

Today, we reported an increase in consolidated net sales of 5.6%, compared to our fiscal 2007 second quarter, and a same store sales increase of 2.8%. Our net earnings for the second quarter were $12.4 million or $0.07 per diluted share. After adjusting for $5.5 million in noncash interest expense, due to changes in the fair value of our interest rate swaps, our adjusted net earnings for the second quarter were $17.9 million or $0.10 per diluted share.

We also reported second quarter adjusted EBITDA of $79 million, an increase of 10.6% from the $71 million in the second quarter of '07. Given the soft macro economic environment for retailers, we are pleased with our second quarter performance.

Turning to the segments, Sally Beauty Supply's second quarter net sales were $406 million, an increase of 6.3% versus the year ago period, which included incremental acquisition related revenue of $11 million or 2.8%. Same-store sales for our Sally segment strengthened in the second quarter to 1.4%, which compares favorably to our first quarter number of 0.3%.

Given the generally weak retail environment during the first quarter of fiscal '08 and with similar trends continuing into January, we made the decision to increase marketing efforts. In March we successfully employed additional print and radio media into key market places of southern California, Florida, and Arizona, targeted specifically towards the professional and Hispanic customer. These incremental promotional efforts, combined with the fact that Easter occurred in March, pressured gross profit margins in the Sally segment.

During the second quarter we grew the Sally Beauty Supply store base by 13, and have added 97 new stores over the past 12 months. The Sally segment reported second quarter operating margins of 16.7% of sales, down from the year ago quarter of 17.7%. Our second quarter decline in operating margins, compared to the first quarter of '08 and the prior year quarter, was due to increased promotions in advertising for the Sally stores, higher fuel costs, higher freight costs due to fuel surcharges, and the dilutive impact of our Sally International business.

In the first six months of 2008, Sally USA and Canada represented 82% of segment revenues, and Sally International represented 18%, as compared to 87% and 13% in the first six months of 2007.

As we have discussed, the Sally Salon Services stores located in the UK, are generally stores with 85% professional sales and 15% retail sales, thus producing lower gross profit and operating margins. Our plan is to improve margins over time by integrating the businesses and similar to Sally US stores, to grow our retail customer base, while increasing exclusive label product sales.

Yesterday, we completed the acquisition of Pro-Duo Beauty Supply for EUR19.3 million or approximately $29.8 million. Pro-Duo is located in Belgium, and operates 40 stores in Belgium, France, and Spain. This business had fiscal 2007 revenues of approximately $31 million. And we see this acquisition as a critical step in our Sally Beauty Supply international growth strategy. The acquisition of this company allows us to gain an important geographic foothold throughout key areas of Western Europe.

Turning now to BSG, second quarter '08 revenues were $237 million, up $10 million or 4.5% from the prior year. Same-store sales increased 6.9% in the second quarter. This continuation of strength in our same store sales reflects our broad and diverse assortment of professional exclusive brands represented in our BSG stores. As evidenced by our results, the BSG segment has recovered all of the revenues lost following the L'Oreal contract changes at the beginning of fiscal 2007.

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