Sally Beauty Holdings, Inc. (SBH)

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Industry: Consumer Services
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Sally Beauty Holdings

Q3 2008 Earnings Call

August 7, 2008, 11:00 a.m. ET

Executives

Karen Fugate – Vice President of Investor Relations

Gary Winterhalter, President and Chief Executive Officer

Mark Flaherty – Senior Vice President and Chief Financial Officer

John Golliher – President of SBG

Analysts

Karru Martinson – Deutsche Bank

Joseph Altobello – Oppenheimer & Co.

Todd Harkrider – Goldman Sachs

Mike Schultz – Wachovia

Linda Bolton-Weiser – Caris & Company

David Cumberland – Robert W. Baird

Peter Grandon – OSS Capital

Laura Richardson – BB&T

Jill Caruthers – Johnson Rice

Justin Hott - Chilton

Presentation

Operator

Good morning ladies and gentleman and welcome to the Sally Beauty Holdings Conference Call to discuss the Company’s third quarter and fiscal year 2008 financial results. (Operator instructions) Now I would like to turn the call over to Karen Fugate, Vice President of Investor Relations for the Company.

Karen Fugate

Thank you, Michael. 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,” and “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 statement. The Company has provided a detailed explanation and reconciliations of its adjusting items in 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’d 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 2008 Third Quarter Earnings Call. Before I get started, I’d like to congratulate Mark Flaherty for his promotion to Senior Vice President and Chief Financial Officer. Mark has served as our acting CFO since April, and our Board elected him Senior Vice President and CFO in June. He brings significant financial and operational experience to us and is a great addition to our management team. Congratulations Mark!

I’ll begin today’s discussion with a high-level review of our financial results following by an update on our business initiatives. Mark will then cover the financials in more detail. As demonstrated by our strong financial performance, we continue to execute on the initiatives set forth at the beginning of the fiscal year and delivered strong results. We reported an increase in consolidated net sales of 6.6% compared to our fiscal 2007 third quarter and a same store sales increase of 3.4%, making this our third quarter of sequential improvement.

Net earnings more than doubled over last years third quarter to $29 million or $0.16 per diluted share. Adjusted earnings, a non-GAAP measure, were $25 million or $0.13 per diluted share. We reported record adjusted EBITDA of $90 million, an increase of 23% over third quarter 2007. We believe that these operating results are further evidence that our business is fairly recession resistant and does not fluctuate greatly with the economy. As you know, our industry has never had a down year in the last 20.

Turning to the segments, Sally Beauty Supply had strong year-over-year results with revenue growth of 6%, gross margin expansion of 80 basis points, and operating profit growth of 10%. Same store sales at Sally Beauty Supply grew 2.1%, making this our third quarter of sequential improvement. We believe this growth is attributed to favorable product mix and the marketing initiatives we launched earlier this year. As you may recall, in May we announced our agreement with Paris Hilton to sell her line of hair extensions exclusively in our U.S. and Canadian Sally stores.

The publicity Sally Beauty received since this product launch has been outstanding, and we believe contributed to an increase in same store traffic and website traffic. The impressions from print, television, and online media reached more than 185 million, and we expect similar results as we role out more Paris Hilton products. Our customer acquisition effort uses analytics to identify the highest potential prospects by store segment, region, and demographics. This data is used to reach high potential customers and introduce them to Sally. Although it is a relatively new initiative, the test results to date are promising, and we look forward to expanding the program to other stores.

Our e-commerce site now includes over 1,000 professional products. Our plans are to carry the entire Sally Beauty assortment of over 5,000 products by the holiday season. The new CRM Program we piloted in March was successful. In the stores we tested, Beauty Club card membership increased and sales and traffic also were up. We plan to rollout this program to the entire Sally store base in August.

Our initiative to drive unit growth in Sally continues; and during the third quarter, we grew the domestic store base by 22 and expanded our international footprint by 40 stores through the acquisition of Pro-Duo with locations in Belgium, France, and Spain. The BSG segment had very strong year-over-year results on the top and bottom line. Revenue grew 7.6%, representing the third quarter of sequential improvement.

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