Sally Beauty Holdings' CEO Discusses F2Q 2012 Results - Earnings Call Transcript

Sally Beauty Holdings, Inc. (SBH)

F2Q 2012 Earnings Call

May 3, 2012 11:00 am ET

Executives

Karen Fugate – Investor Relations

Gary G. Winterhalter – President, Chief Executive Officer and Director

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

Analysts

Simeon Gutman – Credit Suisse

Meredith Adler – Barclays Capital

Jason M. Gere – RBC Capital Markets Equity Research

Olivia Tong – Bank of America/Merrill Lynch

Joseph Altobello – Oppenheimer & Co.

Linda Bolton-Weiser – Caris & Company

Jill Caruthers – Johnson Rice & Company

Jacob Ross Zitter – Robert W. Baird & Co. Equity Capital Markets

Presentation

Operator

Ladies and gentlemen, thank you standing by and welcome to the Sally Beauty Holdings' Fiscal 2012 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session instructions will be given to you at that time. (Operator Instructions) And as a reminder today’s conference call is being recorded.

I’d now like to turn the conference over to 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, 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 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 the Sally Beauty 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 item 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 G. Winterhalter

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2012 second 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 2012 second quarter in more detail.

As you may have seen from our press release this morning, we had an exceptional second quarter across both business segments. Consolidated same store sales growth reached 9.1% over positive comps of 6% in the second quarter last year. This record growth was primarily driven by higher traffic and average ticket as well as the benefit of an extra day in February and milder weather relative to last year. Consolidated sales were $889.3 million for a strong year-over-year growth of 10.9%. This strong growth led to significant SG&A leverage of 130 basis points, and operating margin expansion of 160 basis points or 14.8%.

Net earnings in the second quarter increased by 37.6% to $67.8 million or $0.35 per share. We ended the quarter with a total store count of 4392, an increase of 185 stores or growth of 4.4% over last year, of which 4% was organic.

Turning to our segment performance, starting with Sally Beauty Supply. Same store sales growth for Sally Beauty hit a record high of 9.3% versus 6.2% in the prior year. Net sales reached $554 million or strong growth of 12.9%, an increase in total transactions and higher average ticket continue to be the primary drivers behind our strong sales performance.

Gross profit margin at Sally Beauty ended the quarter at 54.2% versus 54.4% in the year ago quarter, a decline of 20 basis points. On a sequential basis, gross margin was up 30 basis points over our 2012 first quarter gross margin of 53.9%. Gross margin expansion during the quarter was dampened by our initiative in the UK to transition to a new distribution center. We expect this transition will negatively impact our UK gross margins over the next couple of quarters.

Operating earnings reached $111.3 million or growth of 18.5%; operating margin was 20.1%, an improvement of 100 basis points over last year’s second quarter. Operating margin improvement was due to strong sales performance and SG&A leverage in our North American businesses.

During the second quarter, our Beauty Club Card memberships grew 24.3%, sales from our Club members were up 31.5% over prior year, and were a key contributor to transaction growth and higher average ticket.

Now turning to our BSG segment. Our BSG segment had same store sales growth of 8.7% with net sales of $335.3 million, growth of 7.8%. This strong performance is primarily due to higher transactions and continued success in adding new brands and territory rights in more of our geographies.

BSG’s gross profit margin was up 70 basis points to 40.8%. Gross profit margin performance was due to favorable customer and product mix. Operating earnings increased by $12.1 million or 36% in the second quarter, operating margin improved by 280 basis points to reach 13.6% for the quarter. This strong performance was due to gross margin expansion and SG&A leverage.

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