Sally Beauty Holdings' CEO Discusses F3Q12 Results - Earnings Call Transcript

Sally Beauty Holdings, Inc. (SBH)

F3Q12 (Qtr End 06/30/2012) Earnings Call

August 2, 2012 11:00 am ET

Executives

Karen Fugate - VP, IR

Gary Winterhalter - President and CEO

Mark Flaherty - SVP and CFO

Analysts

William Reuter - Bank of America

Karru Martinson - Deutsche Bank

Simeon Gutman - Credit Suisse

Meredith Adler - Barclays

Jason Gere - RBC

Chris Ferrara - Bank of America

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings' conference call to discuss the company's fiscal 2012 third quarter results. (Operator Instructions) I would now like to turn the conference 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 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 Winterhalter

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2012 third quarter earnings call. Although we released third quarter results a couple of weeks ago, Mark and I will provide more color on those results and review some of our current quarter accomplishments. I'll start with consolidated results.

Same-store sales growth for the third quarter was 5.2%. For the first nine months of fiscal 2012, same-store sales grew 7.1%. We believe that over the long-term, same-store sales will grow over 4% to 5% versus our historical run rate of 3% to 4%.

Consolidated sales were $887 million, a growth of 6% over last year. Sales growth is primarily due to same-store sales and new store opening. The negative impact of foreign currency exchange offset sales growth by 132 basis points.

Adjusted net earnings in the third quarter increased by 28.3% to $71.6 million or $0.38 per share, after adjusting for $2.1 million net of tax in unamortized deferred financing costs. Fiscal 2011 third quarter net earnings are adjusted for an after-tax credit of $13.4 million from a litigation settlement net of non-recurring expenses.

In the third quarter, GAAP net earnings were $69.5 million, a 0.5% increase when compared to 2011 third quarter earnings. GAAP earnings per share were $0.37, flat when compared to prior year GAAP earnings per share.

And finally, adjusted EBITDA in the third quarter was $155.7 million, strong growth of 17.3% over the prior year. We ended the quarter with a store count of 4,434, an increase of 172 stores or growth of 4% over last year.

Turning to our segment performance, starting with Sally Beauty Supply. Same-store sales growth for Sally Beauty was 5.2%. If you recall, in the second quarter Sally comps reached a record high of 9.3% due in part to extraordinary circumstances such as an extra gain in February, favorable weather comparisons and Easter promotions following in March versus April last year.

Net sales reached $553.4 million or strong growth of 7%. 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 increased 100 basis points to 55.4%. Favorable customer and product mix was primary drivers of this year-over-year performance.

Operating earnings reached $117.6 million or growth of 13.9%. Operating margin was 21.3%, an improvement of 130 basis points over last year's third quarter. Operating margin improvement was primarily due to strong gross margin expansion and SG&A leverage in our Sally North American businesses.

During the third quarter, our Beauty Club card memberships grew 20%. Sales from our club members were up 23% and were a key contributor to transaction growth and higher average ticket.

Now, turning to BSG. Our BSG segment had same-store sales of 5.3% growth. Net sales were $333.6 million, growth of 4.4%. This 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 100 basis points to 41.4%. The strong performance was due to favorable customer and product mix. Operating earnings for BSG were $46.7 million versus $56.7 million in the prior-year quarter. BSG's operating results in the fiscal 2011 third quarter reflect a net positive impact of $19 million from a litigation settlement and non-recurring charges.

In summary, Sally Beauty Holdings had an excellent third quarter with strong sales, EBITDA and EPS growth. We refinanced our Term Loan B and repurchased over 7 million shares of our stock. Our business performance continues to be consistent in the countries in which we operate, despite an unpredictable global economy.

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