Sally Beauty Holdings Inc (SBH) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Sally Beauty conference call to discuss the Company's fourth quarter and fiscal year 2007 financial results. All participants have been placed in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. Now I would like to turn the call over to Sandy Martin, Vice President of Investor Relations for the Company.

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 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 2007 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 Web site.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer; David Rea, Senior Vice President and Chief Financial Officer; Greg Coffey, Vice President and Treasurer; and Mark Flaherty, our new Chief Accounting Officer and VP-Controller. Now I would like to turn the call over to Gary.

Thank you, Sandy, and good morning everyone. Thank you for joining us for our fourth quarter and fiscal year 2007 earnings call.

Today, we reported consolidated net sales for fiscal year 2007 of $2.5 billion, an increase of 5.9% from last year and comp store sales gains of 4.5%. Our net earnings for fiscal '07 were $44 million, or $0.24 per diluted share.

The last 12 months have been both exciting and challenging. A year ago, we successfully completed the transaction that separated our Company from Alberto-Culver, and we began operating as an independent public company. During this first-year our Sally Beauty Supply business continued its history of strong performance. We also added to our international business with an exciting acquisition.

Fiscal '07 was not, however, without its share of challenges. In addition to the efforts needed to transition to an independent public company, Beauty Systems Group faced significant challenges in its supplier base. I am happy to say that during our first year as a public company, I believe we demonstrated the ability to shift initiatives, right-size the business and retain key employees in BSG. I am extremely proud of the dedication and hard work of our employees, and despite the difficult year our team stepped up and delivered solid financial results in fiscal 2007.

For the fourth quarter ended September 30, consolidated revenues were $640 million, an increase of 5.5% from the year-ago period and comp store sales increased 4.3%. Turning to the segments, Sally Beauty Supply's fourth quarter sales were $411 million, an increase of 14.3% versus the year-ago period, and comp store sales increased 2.4%. Sally's strong top-line performance was primarily attributable to 9.6% of acquisition-related revenue, a continuation of new unit expansion and comp store sales increases of 2.4%.

Sally Beauty Supply achieved strong fourth quarter segment operating margins of 17.4% compared to 15.5% in the year-ago quarter. We continued to improve the Sally Beauty segment profitability through new store openings, successful growth of higher margin products, margin improvements on certain products and sales growth in certain merchandise categories and customer type.

For fiscal year 2007, sales grew to approximately $1.6 billion in the Sally segment, an increase of 10.4% over the prior year. Similar to the quarter, acquisition-related revenues contributed 5.2% and comp store sales for the year increased 2.7%. The Sally segment produced operating earnings of 17.4% of sales in fiscal year '07, an impressive increase over last year's operating earnings of 16.6%.

We are excited to announce the launch of our Sally e-commerce site, sallybeauty.com. In this initial phase, we are offering about 50 items on the site, such as professional grade electrical appliances, including hair dryers, electric rollers and specialty irons. We also continue to work on initiatives relating to advertising, our loyalty program and Sally's CRM program. We are testing various target marketing to customers based on proven demographic and psychographic profiles that match our best Sally customers. This year, we have increased our e-mail marketing reach to 1.6 million customers.

On the BSG side, fourth quarter revenues were $229 million, down $18 million from the prior year. Of the estimated $30 million of lost L'Oreal revenues in our DSC channel during the quarter, BSG recovered $12 million primarily from comp store sales increases of 10.1%.

We are very pleased with our sales and earnings performance this quarter, especially given the L'Oreal announcement less than one year ago. We believe BSG will continue to attract brands and expand distribution territories through the execution of our initiatives. BSG's operating margins for the fourth quarter were 7.2% of sales compared to 7.8% in the prior-year period. For fiscal 2007, BSG's operating earnings were $65 million or 6.8% of sales versus 9.3% in fiscal '06.

BSG's earnings in fiscal '07 declined $23.8 million. This decline was at the low end of the potential impact range that we discussed with you nine months ago and reflects the dedicated efforts of our BSG team to adapt to a changing competitive environment.

I want to quickly update you on BSG's recent supplier changes. During the fourth quarter, we acquired certain assets and distribution rights from two distributors of Goldwell products covering nine states. In addition, we acquired certain assets from C. B. Sullivan of Texas and were awarded distribution rights for Paul Mitchell products throughout North Texas. Due to L'Oreal's announcement of the acquisition of Maly's West, BSG began distributing Henkel's Schwarzkopf brand in BSG stores and the DSC channel in four western states, including California. This follows the Paul Mitchell change from Maly's announced last quarter.

Also during the fourth quarter, BSG began the distribution of P&G's Wella, Sebastian and Graham Webb brands in BSG stores in one additional state, Shiseido's JOICO ISO brands in stores and the DSC channel in four states and the TIGI brand in BSG stores in five states.

Now David will provide additional financial details related to the fourth quarter and year-end results for 2007, then I will discuss our fiscal '08 business outlook. David?

Thanks Gary. Before I begin, I want to welcome Mark Flaherty, our newest member of the finance team. Mark is our Vice President, Chief Accounting Officer and Controller. He brings over 20 years of experience to the Company where his prior responsibilities included senior management positions with two public companies. Welcome, Mark.

Total net sales for the fourth quarter were $639.7 million, an increase of $33.6 million or 5.5% over the year-ago period. FY '07 consolidated sales were $2.5 billion, an increase of 5.9% over fiscal year '06 and comparable store sales increased 4.5%. As Gary mentioned, our top-line growth for the year was primarily the result of the positive impact of our acquisitions, comp store sales gains and continued unit expansion with a net total of 183 Sally stores, which includes acquired stores, as well as 46 net stores added for BSG. Fourth-quarter's consolidated gross profit was $295 million, or 46.2% of sales, an improvement of 110 basis points from last year's 45.1% of sales.

For the fiscal year, gross profit totaled approximately $1.2 billion and gross margins as a percent of sales were 45.9%, up slightly from 45.8% in fiscal 2006. Gross margins in the Sally segment were positively impacted by a continuation of higher sales in exclusive label products which expanded to 40% in U.S. sales in FY '07. Also for Sally, we experienced margin increases on certain products, as well as a continuation of the favorable trend in sales mix.

For the fourth quarter, selling, general and administrative expenses were 32.9% of sales, an improvement from 33.5% of sales in the year-ago period. Last year's fourth quarter SG&A included a direct allocated overhead charge of $2.8 million, representing expenses from Alberto-Culver that ceased after the separation transaction. SG&A expenses for this year's fourth quarter included $3 million of share-based compensation compared to $1.1 million in last year's fourth quarter.

In October, the Company issued new equity awards to employees, and going forward we expect annual equity awards to occur during the first fiscal quarter of each year. Fourth-quarter SG&A expenses also included $1.9 million related to BSG's retention incentive costs.

For fiscal 2007, SG&A costs were 34.1% of sales compared to 33.6% of sales in fiscal 2006. FY '07 included $13.1 million of share-based compensation expenses, of which $5.3 million related to early vesting of equity awards from the separation from Alberto-Culver and $2.6 million was die an accelerated expense related to certain retirement eligible employees. For the year, SG&A expenses also included a total of $8.6 million of BSG retention incentives for our distributor sales consultants as well as right-sizing costs that were necessary following last year's contractual changes with L'Oreal.

In addition, we recorded $1 million of consulting fees for BSG during the first quarter of FY '07. Finally, fiscal '07 included $1 million of direct overhead charges from Alberto-Culver for the period prior to separation.

Unallocated corporate overhead costs are included as a component of SG&A expenses and were $84 million for the fiscal year. Unallocated corporate expenses for fiscal year 2007 include a shared services and other overhead costs, share-based compensation expenses and direct allocation expenses for Alberto-Culver, up to the time of separation. For the year, unallocated corporate overhead expenses came in less than previously expected due to lower than forecasted costs in certain overhead areas as well as the reclassification of certain corporate expenses to the operating segments. As part of our year-end review process, we reclassified certain expenses that we can now more properly identify as belonging to the business units and prior-year results were conformed to current-year presentations in both the corporate overhead area as well as the operating segments. These changes are reflected in the segment data we've provided in Schedule B of the press release.

For fiscal year 2008, we currently expect unallocated corporate expenses to be approximately 80 to $85 million, which includes approximately $8 million of share-based compensation expenses for the year.

Turning to the segments, fourth quarter earnings for Sally Beauty Supply stores were $71.5 million, an increase of 28.3% over the year-ago quarter and operating earnings as a percent of sales were 17.4% compared to 15.5% in the year-ago quarter. Operating earnings for Sally North America stores continued to improve due to the growth of number of stores, enhanced gross profit margins from selling a mix of higher margin products, margin improvements on certain products and sales growth in certain merchandise categories and customer type. Our Sally International business also had a strong quarter with nice increases to revenues and margins. Part of this increase was due to approximately $8 million of additional sales in Q4 over Q3 sales levels within our newly acquired Salon Services business. This business unit provides cosmetology school kits once per year to students enrolling in a professional cosmetology school.

Notwithstanding the increases in our international business, gross margin and operating segment margin improvements at our Sally North America business are somewhat obscured by the growth of our Sally international business. Gross profit margins and operating segment margins for our international business are lower than for Sally North America which brings our reported average margin for the entire segment down. After completing a significant UK acquisition during fiscal '07, we expect our Sally International business to consolidate infrastructure between Sally UK and Salon Services. We see opportunities to improve gross margins, take out costs and grow our store base with a strong brand name, Sally Salon Services.

For fiscal 2007, Sally USA and Canada represented about 84% of segment revenues and Sally International, which was primarily the UK, represented 16%. Our plan is to improve gross profit and operating margins for our international business over time.

For BSG, revenues if $229.1 million were down $17.7 million for the quarter versus last year. BSG segment operating earnings were $16.5 million, down 14% from the year-ago quarter. However, BSG segment operating margins sequentially improved from Q3 and were 7.2% of sales for the quarter versus 7.8% in the prior year's fourth quarter.

For fiscal 2007, BSG sales of $946.4 million were down only $7.4 million dollars from FY '06, a significant accomplishment given the lost L'Oreal sales through the DSC channel for eight months of the fiscal year. Operating earnings for fiscal year 2007 were $64.7 million or 6.8% of sales compared to $88.4 million or 9.3% of segment sales in the year-ago period. We expect BSG to continue to experience margin pressures from the loss of exclusivity of L'Oreal revenues. Retention incentives paid to DSCs for subsidies and guarantees in fiscal '07 that continue into fiscal '08 are expected to terminate completely by February '08.

Fourth-quarter interest expense net of interest income was $47 million versus $37 million recognized in Q3. For the three months ended September 2007, the Company recognized $6.3 million of non-cash interest expense based upon the change in fair value of our interest rate swaps. As a reminder, this is the proper GAAP accounting treatment for a swap that does not meet the hedge accounting requirements and the swaps take $500 million of our floating-rate debt and fix the cash interest expense for the life of the swaps. For the year, interest expense net of interest income was $146 million which includes $3 million of non-cash interest expense due to mark-to-market changes in fair value for the swaps.

Our pre-tax earnings for the fourth quarter were $25.8 million and the provision for income tax for Q4 was approximately $9 million. Excluding the impact of the nondeductibility transaction costs related for our separation from Alberto-Culver, the Company had a 39.2% effective tax rate for fiscal 2007.

Net earnings for the quarter were $16.9 million or $0.09 per diluted share and net earnings for the 12 months ended September 30, 2007 were $44.5 million or $0.24 per diluted share.

In an effort to provide you with other metrics that we believe are useful in understanding our results, we have included in the press release a supplemental schedule that provides certain non-GAAP measures and reconciles these numbers back to their equivalent GAAP financial measures. Each quarter, we provide an adjusted EBITDA number which begins with net earnings based upon GAAP, add back depreciation and amortization, share-based compensation expenses, Alberto-Culver transaction fees or expenses, net interest expense and the provision for income taxes discussed above. Adjusted EBITDA for the fourth quarter was $88 million, a $16.2 million increase compared to the prior-year quarter. Fiscal year 2007 adjusted EBITDA totaled $309.5 million compared to $293.7 million for fiscal 2006.

As Gary mentioned, we're extremely proud of the Company's progress this year and the expansion in adjusted EBITDA of over 5% during a difficult year. Our reconciliation of GAAP net earnings to adjusted EBITDA is included in the schedules as part of today's press release.

Turning to our balance sheet, we paid down $32.5 million of debt during the fourth quarter. Net cash used by investing activities for fiscal 2007 was $121.4 million and includes $76.4 million for acquisitions net of cash acquired. Net capital expenditures for the year totaled $45 million and we currently project fiscal year 2008 CapEx to be approximately $60 million excluding potential acquisitions. The $60 million CapEx budget includes about $14 million for our BSG warehouse consolidation project this year with significant savings expected next fiscal year.

We also expect to incur approximately $4 million of restructuring expenses related to a warehouse consolidation project in fiscal '08 that will be detailed each quarter. As discussed during our quarterly calls in fiscal '07, we work to tighten working capital. Inventory was a $40 million source of cash in fiscal 2007 after excluding inventory from acquisitions. Our intentions for cash continue to be to grow the business, invest in new stores, make strategic acquisitions and pay down debt.

During the fourth quarter, we increased Sally Beauty Supply's store base by 18 net new stores and added 14 net new BSG stores.

Lastly, I want to briefly walk you through our liquidity and current financial position. Last quarter, we ended with borrowings under the revolving AVL facility of about $40 million. By the end of Q4, we paid down the AVL facility to $11 million with approximately $335 million of available borrowing capacity on the revolver. In addition, we paid down approximately $2 million of the senior Term A loan and senior Term B loan during the fourth quarter. We ended the fourth quarter with long-term debt including capital leases of about $1.77 billion. Debt maturities for FY '08 are $16.7 million and fiscal years '09 and '10 are $24.2 million each year, respectively, excluding any potential repayments related to our excess cash flow test under the term loan. Schedule E from our Q4 press release has the table of debt maturities excluding capital leases.

Looking at the cash flow statement, during fiscal year 2007 the business generated approximately $192 million of net cash provided by operating activities with about $40 million of that coming from better inventory management. We spent approximately $45 million of that cash on capital expenditures net of proceeds from the sale of property and equipment and excluding acquisitions. In addition, we spent about $76 million on acquisitions primarily related to our Sally International business.

Now, Gary will take you through our fiscal 2008 business outlook. Gary?

As we look into fiscal 2008, I am optimistic and excited about the overall momentum in our business. On the BSG side as we mentioned earlier we will be working on our distribution project. We expect to incur some cost associated with this facility's restructuring this year but believe this project could save us $10 million beginning next fiscal year. We will provide you with updates on our progress during the coming quarters.

On the working capital front, I was pleased with the progress we made with our inventory management in 2007. I recognize however that this same type of working capital improvement will be much harder to achieve in 2008 in light of the number of product introductions at BSG as well as the anticipated seating of new or expanded distribution centers.

Having said that, once we are through this process, I would expect to see further improvements in this area as we bring more efficiencies to the BSG distribution network. Overall our focus at BSG remains on improving operating margins. Although we expect BSG's comp store sales gains to moderate as we anniversary strong comps, we also expect segment operating margins for BSG to return toward historical levels during the second half fiscal '08, setting aside the costs from the BSG warehouse project.

In addition, we plan to continue growing BSG revenues through unit expansion, both stores and DSCs, brand additions and through potential acquisitions that can provide a revenue stream through added distribution while adding little associated infrastructure costs.

On the Sally side of our business, we're excited about our international expansion opportunities. As a specialty retailer and distributor of professional beauty products, we see tremendous growth opportunities throughout Western Europe. Longer-term we also plan to investigate expansion into several countries throughout South America. While we look for these opportunities, we intend to remain focused on improving the profitability of our Sally International business. During fiscal year '08 we will continue integrating our acquisition and seeking to achieve the benefits of combining these businesses. Our goal is to have this business unit perform at approximately a 10% operating margin for 2008. Here in the U.S. where we make the majority of our profits, we believe the Sally Beauty retail concept currently has potential for 3000 stores. Additionally, we continue to roll out stores in Canada and Mexico where we believe there is potential for 250 stores in each of those countries. In fiscal '08, our store growth plans for Sally Beauty Holdings are an increase of 4 to 5% which would equate to approximately 140 to 180 net new stores excluding acquisitions.

We ended 2007 with solid performance and are committed to creating shareholder value through increased sales and profitability each year. With that, I would like to open the call for questions.

(OPERATOR INSTRUCTIONS). Karru Martinson, Deutsche Bank.

In terms of the retail space everyone has talked about and consumer pressure, higher energy costs, I was wondering what you are seeing there for the impact on your target consumers and the outlook going forward?

Historically, we have not followed retail patterns very closely. We have said that many times. Having said that, we -- in our first quarter which is the holiday season, we do see a little bit of seasonality in a particular category, the electrical category, which is hair dryers and curling irons and things like that that are used for gifts. So we expect that if overall retail gets very soft this holiday season, we can see a little pressure on that particular category. But our experience, and as you see here in our fourth quarter, our comps were pretty good even in a quarter where general retail was starting a down trend. We did see some choppiness in the quarter and we see that often times. And we have to keep in mind too that we're not on a retail calendar. And when we have for example five Sundays in a month it affects us in a negative way in comps that's a little confusing because we generally bounce back the next month just because the calendar works in our favor. So we have not yet seen any significant impact. As I said, our first quarter as we've said many times in the past, the holiday selling season is a little -- is the only part of our year that you can say is a little bit seasonal and it's primarily driven by that one category.

In terms of gross margins, very strong numbers this quarter. Is that kind of the run rate that we should be thinking of, or was there something else that contributed to that upside?

As we mentioned here in the script that we did see a continued slight shift in our customer mix. We saw some nice increase in particular categories, which in this particular quarter were hair extensions which are a very strong category for us right now with very strong margins. We also saw an increase in our Control labeled brands which David mentioned which also helps our margins. So it's kind of across the board and I think that's what we've been saying all along is that we kind of have three or four things going for us that have a national enhancement to our margins just because of the nature of the growth of our business.

Maybe just add to that, if you look over the entire fiscal year, there's really a couple of different things going on here. One is the rebound at BSG from Q2 to Q3 to Q4 and some of the improvements that have occurred there and recovering from the L'Oreal announcement, adding in new brands, additional revenue. So that obviously has a nice impact and that process is going along on the overall segment operating earning margins. The other is as Gary mentioned the continuation of the general trends that have been in place at Sally for the shift towards the retail customer, the additional sales within the Control label area, that type of thing. And then as Gary mentioned is our efforts to integrate on the Sally International side the business there. Within the fourth quarter as I mentioned, there were some additional sales within that particular business segment which helped for the overall margin, about $8 million of revenues there, which is really once a year type of event. But overall, those are the types of things that we would anticipate going into '08 to see those similar types of trends continuing, improvements at BSG, improvements in the Sally International as we integrate that, and then the Sally North America side in unit expansion and leveraging our business there.

Lastly, if we could quantify some of the brands that you have picked up from Maly's and the Goldwell KMS. Are we talking about $10 million type brands or are we looking above and beyond that on an annualized basis?

Some of them are above that. A lot of them are below that, but the important thing on a lot of these brands that we're picking up is, we don't really have an acquisition cost to them and when you're just pumping more volume through an existing infrastructure a lot of that falls through.

Grant Jordan, Wachovia.

You talked about the BSG margin improved as we anniversaried the lost L'Oreal contract. Should we see that happen in the June quarter when we start to see that margin come back?

As we said, what we expect to see is the BSG segment margin work towards the historical levels we've had in the past. If you look at '06, the segment margin for BSG was about a 9% number. Obviously we were not at that level for this year but we improved quarter to quarter to quarter during the year. So we would hope to see that trend continue and during the second half of fiscal '08 we would hope to see that -- we would be at those types of levels. So that is what we seem to be aiming towards.

And then your answered some of the question about why we saw a nice improvement in margins, part of it was due to mix and products and n a little bit due to the acquired international. I guess I'm still just -- we've heard all that all year, but it seems like it all hit in one quarter. Was there something about this specific quarter that made that all come together for you?

As I said, the international thing was a once a year, so that helped on the international side, notwithstanding the fact that when you look year-over-year having the additional international business in general this year particularly in Q3 as an example tended to bring the Sally overall margins down. The reverse of that was true in Q4 with the additional revenues, gross margin, etc., that helped. We also did some things during the year which had nice impacts in Q4 at Sally. Some of the initiatives we had on improving margins on various products had a nice impact in the quarter and we would hope to see that carry through into fiscal '08 as well. And then as I said on the BSG side, it has really just been a steady march towards reselling the revenues that we lost through L'Oreal with some acquisitions and then adding new brands in.

Linda Weiser, Oppenheimer.

Can you break down the 2.4% Sally same-store sales growth for us? Maybe you could give us North America and then international and also the currency translation benefit that is in the number.

We don't break down the international versus U.S. We have not provided that. The way we do comp store sales is without the currency impact, so that -- there is none in there.

So the 2.4 does not include any currency benefit?

Yes. It's on basically -- for all intents and purposes, on a local currency basis.

Can you give us some idea as to whether international growth was higher than the domestic or lower or --?

It was generally the same types of trends with respect to -- compared to domestic. They tend to be sometimes higher or lower, but generally the same basic trends in U.S. and international were in place.

Justin Hott, Bear Stearns.

First question I guess is on BSG, can you give us maybe some idea on the new products that you have added in the last year or so, what is working and what is not working? Are there any you're more particularly excited about maybe? We've seen some positive things on Goldwell, for example.

We are very excited about Goldwell. I think that has been a sleeper brand in the U.S. because it has not historically had real good distribution and it has not had distribution with stores for the most part. But also, Paul Mitchell is just exploding for us and with them really getting a handle on diversion and driving that down, I think it's helping the professional industry and obviously that helps us. We are excited about some of TIGI's new initiatives. The P&G brands are actually coming back stronger than we experienced with them two or 2.5 years ago before they left, so that is working well for us. Farouk continues to be hot, particularly in the appliance category. The Chi irons are continuing to do well. So we have been pretty selective, Justin, on the brands that we are getting involved with on a go-forward basis to replace the L'Oreal business. So the ones that we are teaming up with we feel are good brands and -- that we have a good future with.

Gary, there are a couple of interesting things about what you said on these brands. First, when you mentioned adding Schwarzkopf, big European brand as you expand into Europe. I would assume you would have somewhat of an opportunity there. Secondly, you mentioned diversion going down and I've seen some recent diversion data, especially with Matrix, which looks even worse than we've seen before. Can you comment, I guess maybe flesh out those two things?

We already do a lot of business with Schwarzkopf in the UK and we expect as we go -- continue to expand throughout Europe that they will be a major partner for us there. And I think that we will be doing more and more business with Schwarzkopf here in the US. Justin, I may have -- maybe you misunderstood me on diversion. I said that Paul Mitchell's diversion numbers were coming down significantly over the last six months. I did not say that about diversion in general. However, I will add to that, that the P&G people are doing a nice job bringing down Sebastian diversion, not as dramatically as Paul Mitchell yet but it is going in the right direction. And the other brands that we're involved with if you look at these diversion numbers, there virtually is not any with Goldwell. There isn't any with Aquage. There's almost none with JOICO and ISO. And as I said, the Paul Mitchell numbers are coming down dramatically. So we are encouraged that, even though diversion in general is getting worse, we are real disappointed that the L'Oreal brands are getting much worse, but the brands that our sales consultants are out there promoting today seem to have a very good handle on it and we are comfortable with them going forward.

Laura Richardson, BB&T.

I'm really trying to get one main thing which is to help build my model for 2008 and I'm trying to piece together what you said about related gross margin related to SG&A expense. Should gross margin expand more next year than BSG decreases? Because it sounds like you still have some SG&A pressure from the warehouse consolidation and L'Oreal in the beginning of the year, anyway.

Right. [One dimension] as part of our year-end review, we did do some reallocations of corporate overhead to the segment. So as we said, we think we expect corporate overhead for fiscal '08 to be between 80 and $85 million, including stock option expense. That is what we think for modeling purposes is our expectation for corporate overhead. With respect to the segment operating margins by area, as we stated within BSG in '06 the BSG operating margin for the year was roughly 9%, and what we would hope to do is to move BSG's operating margins towards that 9% during the second half of '08. And obviously, we have a tougher comparison in Q1 '08 because we haven't yet anniversaried against the loss of the L'Oreal revenues. On the Sally side, Sally operating margins were over 17% for the year and as it is happened in prior years with the improvements in sales of our Control label area, our efforts to integrate and improve margins on the international business we would hope to see margins on the Sally segment also continue to improve in '08.

Within those segments, David, it still sounds to me like probably if you look at gross margin SG&A, you're getting more benefit in gross margin. It looks like you got more of it in 2007 and it sounds like you should get more in 2008 compared to SG&A. Is that fair?

Year-over-year if you compare -- it that would end up being the right range of 80 to $85 million for corporate overhead for fiscal '08, corporate overhead would effectively be relatively flat for '07 to '08, whereas we would hope to see continued improvement of BSG earnings and margins and then same for Sally.

Reade Kem, Merrill Lynch.

I was curious within the BSG business if you could help us look at the complements per the bond memo last year. I just wanted to update that in terms of looking at what each piece was contributing on the top line.

When you say each piece, you mean stores versus sales consultants?

Exactly.

It's up to about two-thirds stores and one-third sales consultants.

Okay. And I guess related to that and then I will ask my second question at the same time. In terms of productivity of your sales force, did that increase sequentially? And how much do you think that can increase next year with the new products? I guess the last question is just on the acquisition front. If you were to acquire any brands to bring in-house on a dollar or EBITDA multiple basis, how large would we see you go? Thanks.

On the sales consultants question, they continue to get more productive every quarter. Part of it goes back to the right-sizing we did earlier in the year, but also as you add more brands and they have more to sell, the productivity obviously goes up. And I assume with the brand question, you're referring to BSG, and at this point we don't have any plans to purchase any brands. We are kind of -- we are aligned right now with some very large multinational companies that have great R&D, have great new product flow on the BSG side and we will continue to represent the name brands in our industry.

We will, however, continue to look within the BSG segment for acquisitions related to distribution. So if we can pick up a territory of a brand or brands, the distribution rights and not take any little or any associated overhead with that, then that is a nice transaction for us to do to fill in areas within the BSG distribution network and add additional revenues for those DSCs to sell.

As we have said before, you can look for us to do a lot of those smaller acquisitions, and as David said, it helps to fill out the DSC bag, but it also brings tremendous productivity to the stores. You're basically adding more sales without any overhead.

(OPERATOR INSTRUCTIONS). Emily Shanks, Lehman Brothers.

Good morning, terrific quarter. Just a couple of questions. Number one, can you speak any trends that you're seeing on a geographical basis?

I can't really, but it seems that the Florida market is a bit softer than we have experienced in the past, and I recently saw an article where I think this is the first -- or '06 was the first year since 1920 that Florida actually lost population from the previous year. But it isn't significant. Florida and California continue to be great growth states for us. And again, like our business, it's not really seasonal. There's not a whole lot of geographic differences that we notice.

Great, that's helpful, and then just the final question. When we think about the minimum cash balance that you need to run the business, what is that right amount?

We're typically around -- you see at the end of the quarter, we're typically around a 25 or $30 million level when you incorporate the cash and transit and cash that's overseas. That is about our typical level.

Justin Hott.

When we think about same-store sales at Sally's BSG, can you give us, especially in this economic environment, maybe some indication about [traffic is] versus ticket?

Sure. Before I do, congratulations on your baby.

Irene is right here, she's beautiful.

BSG I think primarily because of the new brands that are available continues to see strong increases in average ticket and customer count. Sally as we have said many times in the past, our challenge with Sally for the last several years has been a customer count and that is the primary reason Mike Spinozzi was brought in and it's the primary reason we're focusing so much attention on CRM programs and loyalty programs and the matching up of the demographic and psychographic targets that I mentioned earlier. So, I don't -- I look for Sally's business to continue seeing average ticket increases and I expect Sally's customer count challenges like every other retailer out there to continue to be challenging, but that is our focus. And like I said, I think Mike Spinozzi is doing a lot of things that are going to help increase that.

Gary, two real quick ones. One, how much Control label do you see maybe optimizing out at Sally? And second, are you seeing any margin pressure on appliances maybe due to China?

Actually, margins, since we're moving so much of our electrical business to China or the Far East -- a lot of it is Korea as well -- we're actually seeing an enhancement to our margins, which we've discussed in the past as we move a lot of that business there and don't deal with some of the importers that we have been dealing with. So I'm not really seeing the margin pressure on electricals there. What was other part of the question Justin?

How much Control label do you sell?

Right now, as David mentioned in his comments, we were at 40% on the Sally segment for fiscal '07. That has been growing about a point a year for a long, long time, and I think it will continue to grow for the foreseeable future, a point or so a year. I don't know what the top is. I think it could easily get to 50, but I think it could take seven to 10 years to get there.

If you look within the various categories, and we have categories that are well above the 40% and we have others that are well below that, and so obviously we're looking to see where we can take those other categories that are below the 40% and increase them. And we're seeing some of that through our Ion product.

Laura Richardson.

I saw a 10% off Sally coupon around Thanksgiving. Is that something you do every year? And if not, why would it be done this year?

No. What it was, well, we do a lot of different promotions, but in particular over the Thanksgiving holiday, we did a 10% return coupon for a customer to come back in December. We do that a lot. We also do a lot of e-mails to existing Beauty Club card holders to come in at certain times of the year or different specials. So, yes, it's a common practice for us to either use it to try to and get repeat visit in the short-term like we did over the Thanksgiving holiday to come back in December or to use for our e-mail communications with our customers.

Okay, thanks on that. I also wanted to ask on the cost for the BSG warehouse consolidation, did I hear you say $4 million for the year of expense?

Yes. The entire capital project cost is $19 million, and so we have about $14 million of that $19 million capital left for fiscal '08. And then what we said was that we expect to have about $4 million of operating expenses (MULTIPLE SPEAKERS) restructuring charges associated with that project during '08, and we'll be talking about those as and if they occur during '08.

And those are going to be in the segment operating profit for BSG?

Yes. Just like in this year when we had the DSC restructuring and some of charges there, those fall within the BSG earnings segment, so these would also fall within the segment and we'll be highlighting those for you.

And do you have any idea now how that is going to flow, like $1 million a quarter?

I believe, yes, kind of throughout, really throughout the year, but probably more in the Q2 and Q3 time frame.

Linda Weiser.

Can you just remind what you said about how much of the $10 million in cost savings from the DC consolidation will occur in FY '08?

Not much of it. Really, it's mostly in the following year as we said in our remarks. It's mostly in FY '09 when we expect to achieve that. We may get some of that, but it's really a project that won't be fully implemented and working through some of the benefits of that until we get towards the end of the year.

There are no further questions at this time.

Thank you for your interest in our Company and have a safe and happy holiday this year.

Thank you. This concludes today's conference call and you may now disconnect.