Sally Beauty Holdings Inc (SBH) 2008 Q4 法說會逐字稿

Good morning ladies and gentlemen. And welcome to the Sally Beauty Holdings' conference call to discuss the Company's fourth quarter and fiscal year 2008 financial results. All participants are 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 Karen Fugate VP of Investor Relations for the Company. Please go ahead, ma'am.

Thank you. Before we begin I'd 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 information within meaning of Section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by use of words such as May, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases.

These matter are subject to factors that could cause actual results to differ materially from expectations. Those factor are described in Sally's SEC filings including its most recent annual report on Form 10(K) being filed today. The Company does not under take any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliations of its adjusting items in nonGAAP 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, and Mark Flaherty, Senior VP and Chief Financial Officer. Now I would like to turn the call over to Gary.

Thank you, Karen, and good morning everyone. Thank you for joining us for our fiscal 2008 fourth quarter and full year earnings call. I'll begin today's discussion with a high level review of our full year financial results followed by a review of our business initiatives. Mark will then take you through the 2008 fiscal fourth quarter and full year in more detail. As you saw from our press release this morning we had a solid financial results for the year. Both segments executed well on their 2008 strategic initiatives leading to sales growth, gross margin expansion and strong earnings performance.

For the fiscal year we reported consolidated net sales of $2.65 billion, growth of 5.3%. Consolidated same store sales grew 2.6% in line with our historical trend. Gross profit margin improved 70 basis points to 46.6%, adjusted net earnings grew 35% to $81 million, resulting in adjusted EPS of $0.44. GAAP net earnings were $78 million, up 74.4% with earnings per share of $0.42.

Year end total store count was 3,773, an increase of 5.7% or 205 stores, of which organic growth represented 4.3% and acquisitions 1.4%. We drove unit growth in the Sally division by 150 stores to reach a total of 2,844 Sally stores worldwide. Our long-term growth initiative remains the same, to build our total store base organically 4 to 5% per year and to make strategic and synergistic acquisitions both domestic and international where appropriate.

We ended the year with $100 million of cash and cash equivalents which includes the $75 million drawdown under the ABL revolving credit facility from this September. If you recall, we drew down this money to increase our cash position in order to preserve our financial flexibility in light of the dislocation in the financial markets. In addition to cash we ended the fiscal year with $276 million available on our revolver. Had we not drawn down the $75 million in September, our revolver outstanding balance would have been zero at the end of the fiscal year. We believe that our historical earning performance and cash generation combined with access to the revolver provides us more than adequate long-term liquidity.

Turning to the segments full year performance, Sally Beauty Supply had year over year sales growth of 6.6%. Gross margin expansion of 40 basis points, and operating profit growth of 4.9%. Same store sales for the year grew 1.2%. Sally's growth was somewhat dampened by fourth quarter same store sales performance which was negatively impacted by the weakening economic environment in the UK and the disruption in operations from hurricane related weather in several key states.

We are two months into our roll-out of the CRM program and are encouraged by the results. The average sales for a Beauty Card Club customer is consistently several percentage points higher than a non-Beauty Club Card customers. Our objective is to increase the number of cardholders to drive incremental sales. Although it's too soon to no meaningful results we believe going forward both transactions and stores will realize incremental growth as this program gains traction.

Our customer acquisition program uses analytics to identify potential retail prospects by product category, region and demographics. In October we launched our direct mail flyer to 1.1 million prospective customers and to our top Beauty Club customers within a 400 store vicinity. The fliers is the first of its kinds for Sally Beauty featuring hair color and color maintenance products with a 20% off coupon. So far the coupon redemption is higher than we expected.

Our e-commerce site now includes more than 6,000 beauty products. The site was redesigned to expand features and functions, easier navigation and an enhanced online loyalty program. The shopping and search capabilities have been redefined allowing customers to easily locate products, finds expert advice and product recommendations. Please have a look at sallybeauty.com.

Our BSG segment performed well this year, sales grew 3.2% to reach $975.3 million. Keep in mind the first four months of the year include impact of lost sales from a large supplier. In fact, revenue growth in the second half of fiscal 2008 was 7%. BSG same store sales for the year were up 6.9% primarily due to the success of our vend diversification efforts through the introduction of new product lines in our stores and direct sales consultants.

BSG's gross profit improved by 100 basis points over last year. This expansion was driven by a positive shift in mix to store sales, the elimination of pressure from lower margin products in our franchise based business and successful cost reduction programs. Operating margin reached 8.3% for the year, over 160 basis point improvement from a year ago. Higher gross profit, lower advertising costs and a decline in sales consultant retention guarantees helped drive improvement.

During the fourth quarter BSG acquired professional beauty distribution company Glamour Sources and SS Keddy and Sons. located in the Canadian Maritime provinces, the combined companies have 11 stores and or direct sales consultants but most important many provide BSG a presence in Canadian territories where it previously did not operate. We intends to expand BSG's store base both organically and through acquisitions to increase our footprint in existing geographies and enter new territories.

In October Farouk Systems notified us they would terminate distribution agreement with BSG excluding BSG's franchise business, you will recall that changes in our relationships with our suppliers occur often and it is not the first time we have had a situation like this with Farouk. Outside of our franchise business product sales from Farouk in 2008 represented only 2% of BSG's sales. Over time our Farouk chief sales have struggled as these products are widely available in the retail marketplace and we believe we can easily replace these sales from other electrical appliance manufacturers. Our warehouse optimization project is complete.

We've consolidated five distribution centers, Venetia ,California, Salt Lake City, Utah, Chatsworth, California, Fargo, North Dakota and Austin, Texas, Our Fresno California warehouse is now fully operational. For the year expenses associated with this project totaled $4.7 million. We anticipate savings realized in fiscal '09 to be in the range of $8 million to $10 million expect annualized savings from this project of $10 million in fiscal year 2010 and beyond.

So to summarize, we executed well and posted solid financial results for the year. And although the economic outlook in the US and the UK

remain challenged in the near term we believe that cost consumers will continue to by beauty products even in a recessionary environment. Now mark will provide more financial details for the fourth quarter and full year. Mark?

Thanks, Gary. First, I'll start off with the fourth quarter consolidated results. Consolidated net sales for the fourth quarter increased 5.1% to $672.2 million. This increase was principally driven by same store sales growth of over 2.2% and revenue growth from new store openings. Consolidated gross margin in the fourth quarter improved 60 basis points to 46.8% over fiscal 2007 fourth quarter. Gross margin improvement was driven by both operating segments through favorable product and customer mix and low cost sourcing. Fourth quarter consolidated SG&A expenses were $230.8 million or 34.3 % of sales, an increase from 32.9% in the year ago quarter.

SG&A expenses increased by $20 million compared to the fiscal 2007 fourth quarter. Approximately $10 million or half this increase is due to rent and occupancy related expenses from new stores and to acquired businesses. The remaining increase is due in part to warehouse optimization costs, higher advertising expenses associated with Sally Beauty's launch and the CRM campaign, which are offset in gross profit through vendor rebates and concessions.

Unallocated corporate expenses increased $5 million principally due to higher professional fees and foreign exchange losses incurred from the settlement of intercompany loans each of which were associated with our foreign subsidiary reorganization project. This project is anticipated to do reduce local reporting requirements, improve our international holding company structure, and reduce corporate costs in the long-term. Consolidated operating earnings in the fourth quarter declined $2 million to $70.9 million with operating margins down 80 basis points, 10.6%.

Fourth quarter performance was dampened by higher professional fees and foreign exchange losses resulting in reorganization project as well as the economic slow down and disruptions due to hurricane related weather. Interest expense net of interest income from the fourth quarter -- for the fiscal 2008 fourth quarter was $35 million which included $2 million in noncash credit related to our interest rate swap transaction. Interest expense declined $12 million over last year's quarter primarily due to lower rates on our loan facility. Our adjusted net earnings were $20.2 million, a slight decline over the year ago quarter. Adjusted net earnings per share was $0.11 after adjusting for a non-cash interest credit of $1 million net of tax for the mark-to-market changes in fair value of our interest rate swaps.

On a GAAP basis net earnings for the fiscal 2008 fourth quarter were $21.5 million, an increase of 27.4% with diluted EPS of $0.12. Adjusted EBITDA for the fourth quarter was $85.6 million, a 2.7% decline compared to $87.9 million in the prior year quarter. This decrease is primarily due to higher SG&A expenses. As I've mentioned previously SG&A increased over the last year due to higher professional fees and foreign exchange losses incurred with the settlement of intercompany loans associated with our foreign subsidiary reorganization project, higher advertising costs and occupancy expenses from new stores.

For the fiscal 2008 year, consolidated net sales increased $134.4 million or 5.3% to reach $2.7 billion. This increase was principally driven by same store sales growth of 2.6% as well as additional sales from acquired and net new stores. For the fiscal year gross profit margins were 46.6%, up 70 basis points over a year ago. The gross margin improvement was driven by both operating segments through favorable product and customer mix as well as cost reductions. SG&A expenses for fiscal 2008 were $903.1 million or 34.1% of sales compared to SG&A expenses in fiscal 2007 of $857.3 million or 34.1%of sales. The $45.8 million increase is principally due to expenses associated with the increase in sales volume, cost related to opening of new stores and acquisitions, as well as higher advertising expenses in connection with the Company's CRM initiatives.

On are unallocated corporate overhead expenses were $83.2 million including share-based compensation expense of $10.2 million. For fiscal year 2009 we anticipate unallocated corporate expenses to be in the range of $80 million to $85 million including share-based compensation expense of approximately $10 million. For fiscal 2008 interest expense net of interest income was $159.1 million included a $4.6 million non-cash charge related to our interest rate swap transaction. As a reminder these mark-to-market adjustments are the proper GAAP accounting treatment for a swap that does not need hedge accounting requirement . For the fiscal year 2008 adjusted net earnings grew 35.3% to $80.5 million, or $0.44 per diluted share after adjusting for $2.9 million net of tax in noncash interest charges from the mark-to-market changes in the fair value of our Company's interest rate swap.

For the fiscal year 2007 adjusted net earnings was $59.5 million after adjusting for $1.6 million net of tax in noncash charges related to interest rate swaps and $13.4 million of adjustments related to the separation from Alberto Culver. A detailed explanation of these 2007 adjustments is included in our press release on Schedule C. On a GAAP basis net earnings for fiscal year 2008 were $77.6 million or $0.42 per diluted share. Fiscal 2008 adjusted EBITDA was $341.7 million an increase of 10.4% from $309.5 million in fiscal 2007. This increase is primarily due to the growth in operating earnings from both segments.

Turning to the business segment starting with Sally Beauty, Sally Beauty's fourth quarter results were negatively impacted by the week economic environment in the UK as well as disruption in operations from hurricane related weather events in several key states. Net sales in the fourth quarter were $429 million, an increase of 4.3% with same store sales up 90 basis points. We estimate the weather impact of our fourth quarter same store sales to be approximately 50 basis points. Net sales for the Sally Beauty segment for the fiscal year 2008 increased $104 million or 6.6%. Sales increased principally from same store sales growth of 1.2%, acquisition related revenue of 3.6% and sales growth from new stores of 1.7%. Although immaterial in 2008, but beginning in fiscal year 2009 we will be including our Sally Beauty e-commerce sale in our same store sales calculation.

Gross profit for the quarter for Sally increased $11 million or 5.3% over the year ago quarter which was a 50 basis point improvement. For the year gross profit increased 7.5% to reach $858 million with gross margin improvement of 40 basis points. This increase for the quarter and the full year was primarily the result of shift in product mix and improved international business margins partially offset by the increase in promotional initiatives in the US as well as higher freight costs. The Sally segment reported fourth quarter operating earnings of $73 million, operating margins were 17% of sales, and down from the year ago quarter of 17.6%. Segment operating earnings for fiscal 2008 increased 4.9% to $285.2 million. Operating margins were 17.1%, compared to 17.3% for the fiscal year 2007. The decrease in Sally Beauty supplies segment operating harms for the quarter and the full year was primarily a result of a higher mix of lower operating margins international business.

Turning to the BSG business fourth quarter net sales for BSG were $243 million, up $15 million or approximately 6.4% from the prior year, with same store sales up 6.1%. For the year net sales were $975 million, an increase of $30.6 million or 3.2%. This growth is attributed to the same store sales growth of 6.9% and net sales from new stores of approximately 1.9%. If you recall, the first four months as Gary alluded to of this year, the results for the year include the impact of lost sales from a large supplier. The same store sales growth in the fourth quarter for BSG in the full year is attributed to our vendor diversification through the introduction of new product lines. Gross profit for BSG in the fourth quarter increased approximately $8.5 million or 9.9% compared to the year ago quarter. Gross margin was 38.5%. An increase of 120 basis points.

For the year gross profit increased $21.1 million or 6% as compared to the fiscal year 2007. BSG's gross profit margin increased to 38.6% which was 100 basis points improvement. This increase in the fourth quarter and the full year margins was due to primarily to shift in the sales mix towards Company operated store sales volume as well as the introduction of new product lines during the year. Segment operating profit for BSG in the fourth quarter increased 17% year over year to $20.1 million. Operating margins strengthened to 8.3% and 80 basis points improvement from a year ago quarter. For the year, BSG's segment operating earnings increased $17.5 million, or 27.5% to $80.9 million. Operating margins were 8.3% for the year which was 160 basis point improvement.

Operating improvement through the year reflect BSG's efforts to improve the sales mix, broaden product mix, reduce expenses and consolidate back office functions. Expenses for the BSG warehouse optimization project were $1 million in the quarter and $4.7 million for the full year. As we have discussed, the project is nearly complete and on track to deliver anticipated savings in fiscal 2009 in the range of $8 million to $10 million. In looking at our consolidated balance sheet, cash and cash equivalents increased $61.5 million to $99.8 million at September 30, 2008, compared to September 30, 2007, primarily due to the $75 million that we borrowed under our ABL revolving credit facility in September of 2008 to increase our cash position in order to preserve our financial flexibility in the light of recent dislocation in the financial markets.

We explained earlier this year that working capital improvements would be constrained by the introduction of new brands in Sally and BSG as well as the seating of a new warehouse as we consolidated a number of our facilities this year. As a result working capital on September 30 was up $13 million over last year to reach $367.2 million. On a sequential basis fiscal 2008 fourth quarter versus fiscal 2008 third quarter inventory declined approximately $12 million. By the mid year fiscal 2009 we anticipate inventory levels to normalize as well as anticipate that working capital changes will gradually turn into a source rather than a use of cash.

We ended the year with approximately $276 million worth of borrowing capacity under our ABL facility. Had we not chosen to maintain at least $75 million in excess cash at the end of September 30, 2008, we would have had no outstanding borrowings on our ABL facility at the end of this year. In the fourth quarter, we paid down $4.2 million of our senior term loans. As of September 30, 2008, our debt excluding capital leases totaled approximately $1.8 billion. Capital expenditures totaled $9.9 million for the quarter and $45.6 million for fiscal 2008. Included in the fourth quarter and the full year results our capital expenditures associated with the warehouse optimization project of $1.3 million and $14 million respectively. We do not anticipate any further material capital expending or expenses to occur with respect to the warehouse optimization project. For fiscal 2009 we anticipate capital expenditures to be in the range of $40 million to $45 million. Now I'd like to turn the call back over to

Thank you, Mark. In summary we had a good year, ending with solid financial results and executing on several key initiatives. Positioning us well as we head into fiscal year 2009. Our 2009 strategic objectives remain the same as last year; to build our store base organically 4% to 5% and when appropriate make strategic and synergistic acquisitions. To improve margins and increase profitability; we believe there are several opportunities across the business to do both. And lastly we will take a balanced approach in our use of cash, investing in our growth and paying down debt. And although we are not recession proof our history of resiliency in a down economy combined with our strong management team gives me confidence that we will have another successful year in 2009. As always, thank you for your interest in Sally Beauty Holding and now we will turn it back to the operate to take your questions.

[Operator Instructions] Your first question comes from the line of Emily Shanks with Barclays Capital.

Good morning. I had a Follow up question just around SG&A. I want to make sure I was understanding this right. If I follow, it's up about $20 million year over year, $10 million is due to the incremental rent and in occupancy cost and the remaining was due to CRM and so forth, but then you talked about the unallocated corporate expense being up $5 million. I'm just trying to understand because unallocated corporate expense is in that SG&A number, is that correct?

Yes.

So, I mean, is the -- how does that, those don't add up?

Yes, $10 million that's related to new store growth and SG&A related to acquisitions that were done during the year. And then you have $10 million that additional costs primarily $5 million of that, of that is SG&A in our unallocated corporate expenses, that breaks down in which there's approximately $1 million worth of cost to professional fees and there's another $3 million worth of costs related to foreign currency translation adjustments for the settlement, cash settlement that's an intercompany note with respect to our foreign entity reorganization project.

Okay. Perfect. That helps explain it. Thank you. And just a follow up to that, as we think about rent and occupancy related expense costs increasing, can you just explain a little bit more about that? Are those leases that are [inaudible] and is that something a trend that we should expect to see continue?

No, the $10 million you're talking about?

Yes.

It's increased, we opened 205 new stores. And the other SG&A expenses associated with acquisitions that we've made.

Okay. So it has nothing to do with leases rolling off the 100% related to the new stores and acquired stores?

Yes.

Okay. Perfect. That was it. Thank you so much.

Your next question comes from the line of Todd Harkrider with Goldman Sachs.

Thank you, appreciate you taking my call.[inaudible] is an established company so I don't want to put a number on the mistake they might be making in buying their own distribution center or system. Can you talk about if you think they've lost market share in the salon channel from their move and how much share Goldwell might have picked up since they were doing a great job of growing that product and expanding it and how we should look at BSG sales for 2009,

I think their is no question doing the growth of Paul Mitchell, Goldwell, JOICO and ISO and the other brands we've replaced that business with that those brands have gained market share and obviously it had to be at the expense of some L'Oreal brands. But I haven't seen any market share numbers recently. They normally are only out once a year and probably won't be out until spring.

And then how should we look at the BSG sales for 2009?

I think BSG will continue what BSG's been doing. They had very, very strong growth this year particularly in the last half because as Mark stated the first five months we still had the comparisons to fiscal '07 which made the first half a difficult comparison. But we continue to make very small but very strategic acquisitions to gain new brands or get into some new geographies. We'll continue to do that and all of the things that we are doing in partnership with our manufacturers on the BSG side seem to be working. So we are seeing organic growth there as well. And I expect that to continue.

Appreciate it. And can you talk a little bit more about the new product introductions on the Sally store side like China Glaze, Femme Couture, if you have [inaudible], holiday products in your stores yet since WWD said you were going to carry them? I was hoping to get more color o or metrics what kind of sales or gross profit per linear per square foot.

I didn't get your comment about W. W. D. but our China Glaze in particular and Femme Couture introductions have been huge, huge successes for us. Mineral make up is a hot thing right now and our Femme Couture line is very reasonably price for a mineral make up. China glaze was a brand that existed in the professional industry for a long time and has a great deal of brand awareness and bringing it into Sally was just a huge home run. And I didn't, like I said I didn't catch the part about W. W. D.?

Well, [inaudible] for holiday products those are getting a lot of buzz, I don't know if you were all planning to carry those as well.

We typically wouldn't get into any brands that are in mass retail or even in limited retail. Femme Couture is a brand that we own and China Glaze is exclusively in the professional beauty industry.

Sounds good. Congratulations on a good quarter and a very tough environment and best of luck in 2009.

Thanks, glad to see somebody appreciates that.

Your next question comes from the line of, Karru Martinson, Deutsche Bank,

Good Morning, Well, I would say that you guys are very resilient retailers, but I guess October would have been a real test of that theory. What did you guys see in terms the of the consumer and the trade down as I think really testing your business model at that point?

Well, I guess the only comment that we'll make on October at this point since it's obviously in our first quarter of '09 is that our same store sales remain positive which I think is a testament to the strength of our model and the resiliency of our concept. We feel good about obviously on a guarded basis but feel good about the first quarter but it's tough out there. There's no question about that.

In terms of kind of the balanced approach for the use of cash growth in paying down debt are we looking beyond the $100 million of amortization payments here, the bonds trading off, kind of what's your minds set for repurchasing here on the open market?

Well, yeah, we certainly feel that our capital structure, certainly we still belief in the ability to generate free cash flow through our new store growth. And certainly through our long-term strategy in terms of continuing to grow organically and pursue acquisitions diligently where would that make sense. Certainly if you are referring to where our bonds are trading and things like that, it's certainly the argument could be made that possibly down the road or it may make a compelling argument to be repurchasing bonds. Certainly we are not prohibit from doing that. In the open market. However, there are certain quantitative limits that are our loan agreements put on us as well as that we would need approval through our Board of Directors and certainly preannounced to our stockholders. But we still believe strongly in our long-term strategy but if there wasn't a compelling acquisition opportunity out there certainly we will not be opposed to retiring debt either paying down debt or looking at other options.

Just lastly on the CRM program here, have we seen the bulk of the advertising or should we kind of expect that to continuity first quarter and beyond? And what beyond kind of the mailings that you are doing, I have to say you guys caught my house as well with one of those fliers so what beyond that are you guys doing?

Well, we have a long way to go with just that as I've mentioned. We've only done this in the vicinity around 400 of our stores and we also know from the tests that we did on this last spring that you'll be seeing more than just that one piece. Because it takes four, five, six pieces to get the maximum return out of this program that we want to see. So obviously your wife or a female in your household that lines up with our target customer. So, that's where we will be focusing most of it and it certainly isn't just an October thing much it's going to be the bulk of our advertising effort throughout fiscal 2009 on the retail side of our business and I'll remind you that we got tremendous cooperation from our supplier community last spring that is offsetting most of the cost of this year. So even though you see it as an increased advertising expense, it's to a large degree offset in our gross profit line which is where our advertising allowances are taken.

Thank you very much, guys.

Your next question comes from the line of Grant Jordan with Wachovia.

Good morning, thanks for taking the questions. I appreciate the comments on October. Not to get into specific guidance but maybe you can just give us an idea as clearly the consumer environment has softened, have you seen a change in the products your customers are purchasing and how do you respond to that particularly as we head into the holidays? I know your business isn't heavy with holiday product but there is some electric product.

Well, what we are seeing, I guess doesn't surprise us. I've said many times that to a large degree we are a destination stop for our customers. What we are seeing is actually more frequent visits from customers. They are spending a little less on each visit. So on the professional side which is half of our business if you look at Sally and BSG combined, I think it stands to reason that could say cosmetologists are buying what they need in a very short term, in other words, they are buying what they need for two or three days business and then they come back. So it's interesting but encouraging that we are actually seeing increased traffic but a smaller average sale which is not unexpected. Talking about this quarter, I think if there is any good news for us we had a soft quarter last year which I think we weren't on our game as much as we are today so I have hopes that that will help us get through this quarter. But I think that it's going to be a very difficult Christmas. Now, again, our average retail sale depending on whether it's a beauty club card customer or not is somewhere between $12 and $22. It's not somebody buying an expensive TV or clothing or something like that. So I think to a large degree that some of the trade now that we are seeing is from some of the more expensive brands not only in liquids but also on electrical appliances which I am hoping will help our business this holiday season.

That's very helpful. My last question, you talked about the coupons that were sent out in October and you actually had a higher than expected redemption rate. Will that have an impact on margins or is that an overall positive given the increased traffic?

It actually ends up being a positive because the mix that the retail customer or beauty card customer purchases and the increase in their purchase size really doesn't have much of an impact on our margin. They also, the thing that we are finding which again is not a surprise because we saw a lot of this on the BSG side last year is that the stores, the 400 stores that this is being mailed around are seeing a significantly higher increase in business than the coupon redemptions would dictate which simply tells me again as we saw in the BSG side of our business, a lot of people see this advertising and they are either just not coupon kind of people or they just, forget to bring the coupon with them or something, but you would expect, I would expect given the sales increase we are seeing in those 400 stores to see even a higher coupon redemption. But that's a good thing. We are getting the benefit of advertising without taking the margin hit if there is no coupon redeemed in the sale.

So far you've only coupon around 400 of your 2800 company operated Sally Beauty stores?

That's correct.

What are the plans to roll that coupon program out to the remaining?

Well, it will be rolled out. As I said to you those 400 stores will get somewhere between four and six mailings, what you saw at your home is just the first. The second is actually going out right now. And then we will add another group of stores that will start on their first of four or six and then another group. Once we feel confident that the test results we saw in the spring are the same results we are going to see in a roll-out we will probably speed that up. But we are being cautious right now. As I think is prudent given the situation that everybody is in.

Thank you very much.

Your next question come from the line of Carla Casella with JP Morgan.

Hi, most of my questions have been answered but I just wondered if you can give us any more color in terms of the salon traffic. I mean, we heard from some competitors that the salon business is off significantly this year and your consultants or professional business seems to be doing much stronger. Do you think it's trade down or is there any other way to explain why you are outperforming?

Keep in mind when you say competitors, we are not really a competitor to anyone in the salon industry; that operates beauty salons. We don't operate beauty salons. Also keep in mind that when a salon says that their visits are slowing down around over 90% of a salons revenue is labor and it's not related to product. So the salon industry can slow down significantly -- our pain of that is going to be much less because it's relative to the 6% to 10% that's actually product used in those services. But to answer your question, we are getting comments from our best customers that traffic is slow in salons. People are trying to stretch out the time between salon visits. That's a two edged sword. It kind of hurts the salon business but when people decide to try and do some of these services at home, our hopes are and it's proven in the past that they still want to use professional products so they will come into Sally to purchase those products and do some of this stuff at home still using professional products and on the BSG side, I think what happens is the booth renders who are a significant part of BSG's store business, actually can get more active because people are looking to either trade down in the cost and not going to a salon and going to a booth renter if they think that's an alternative from a price standpoint, but the salon, what you're hearing from as you call them our competitors, the salon operators is absolutely true.

Right. okay. That's actually very helpful. Thanks a lot.

You're welcome.

Your next question comes from the line of Linda Bolton-Weiser with Caris.

Thanks , a couple of number questions. I was wondering if you could tell me how much cash was spent on acquisitions in the fourth quarter of

It was minimal. The acquisitions were in Canada. What was it, Mark.

About $4 million, Linda.

And then that increase in the BSG's number of stores in the quarter, the 14, was 11 of the 14 from those acquisitions?

Eight was.

Eight. Thanks. And then do you have a number for an FX translation effect on sales growth for the Company overall and then the two segments in the quarter?

I can give it to you consolidated for the year, it was, we were positive where it was $18 million for the year on the topline. And then it was a fairly nominal impact, I mean both the topline and the bottomline were impacted less than 1%.

Okay. And then just in terms of, I know you've said many times that your overall company same store sales growth has never been negative. I think in the history of the Company. Is that true of the same store sales growth for just the Sally stores piece, too?

For a quarter, when we said that we were talking over quarters. We've had a month here and there that you have negative same store sales but we've never had negative same store sales for a quarter in the Sally business.

Okay. Great. And the inventory goal that you talked about in terms of normalizing the level by mid '09, is that, how dependent is reaching that goal on the general economy and the level of your same store sales growth.

How are we going to do that, is that the question?

Yeah, I'm trying to understand, if your business really slows down a lot more than you think can you still reach that goal for other systemic reasons or is it highly dependent on the general sales environment?

It's, if sales would slow dramatically we would obviously cut purchases. But what's happening here, Linda, is we went through this distribution consolidation project. And we basically had to seed a new warehouse which is a lot of inventory and then fold five into it and the other thing is on the BSG side a lot of the brands that we have brought into replace the business that we have lost in '07, when you bring a new brand in it takes awhile before you start to get turns out of it. You have to seed the stores, you have to have it in the warehouse and then you start selling. So all those fairly massive influx of inventory from companies like Goldwell and JOICO and all those we brought in to replace the brands are now starting to turn and that's going to help our inventory significantly. And then also this past year as the gentlemen mentioned before, we brought in China Glaze, Femme Couture and Paris Hilton hair which was unusual for us to bring in three introductions of that size in one year. But, again the Femme Couture and the China Glaze are turning like crazy already and the Paris Hilton is working well for us also. So we believe, we are pretty confident that, I mean unless the world would come to an end here and sales would really drop off that inventory will be a source or working capital will be a source for us this year instead of a use.

Thank you, that's very helpful. And then just finally should we still think about kind of like 4% overall square footage growth for fiscal year '09?

Yes, at this point we believe that the economics of our store model are such that we shouldn't slow that down and we also feel like come January there's probably going to be a few vacancies in shopping centers out there and we are hoping that we can start seeing some rent relief in new store openings.

Great. Thank you, I appreciate it.

You're welcome, Linda.

Your next question come from the line of Joe Altobello with Oppenheimer.

Thanks, good morning, guys, two quick questions for you, first in terms of the warehouse savings, the eight to 10 million for this year, is that going to occur rateably throughout the year or is that more back end waited toward the second half?

It's more back end waited, Joe. We still, we've got some nominal things that we are doing to kind of get it completely fully operational and it's kind of just more working out the efficiencies and things like that. So it's more back end waited towards the back half of the year.

Got it. Okay. And then second until terms of BS could you walk us through your covenants and where you guys stand right now.

We are continuing on the same trajectory as we did in the third quarter that you are seeing continued improvement in our covenants. As we demonstrated in the third quarter is that we certainly weren't close at all on any of our covenants and preliminarily right now there's a fixed cover charge we are at 1.4% which is where we were in the third quarter, the consolidated secured leverage ratio for the first time has gone below 3. It's at 2.9. And our consolidated leverage ratio in our agreement, some of these are very technical but if you're familiar with some of our covenant that one is at 4.9. That's the first time it's gone below five.

It sounds like you guys are not at risk at least in the near term I recollect no.

I would, again, since we pointed out that had we not drawn down on the $75 million, we would have had no borrowings outstanding on our ABL facility.

Okay. And then lastly if I could in terms of the low cost sourcing you guys referred to in the call could you give us some more details on that?

Sure. It's about finished in our brush category and our margins in our brush category went up significantly the last half of fiscal '08 and it's pretty much complete in our electrical appliance category, although the, our electricals, we didn't take it all to low cross country sourcing which we pretty much did in our brush category so we've seen a nice bump in margins in electricals as well.

So it's brush and electrical basically?

Yeah, those are the two categories that were the prime candidates to be sourced. Just to give you a flavor of that, our electrical category went up about ten percentage points, about 25% of it prior to this project was coming from direct source and went up to 35% and we believe that that will top out in the low 40s in '09 and then in our brush category we went from like 30% in '07 to 55% in '08. And as I said it was mostly in the back half. And we believe that in '09 that will go up to 75%.

Got it. Okay. Great. Thanks.

You're welcome.

Your next question comes from the line of Duncan Vise with AIG.

Good morning, just a couple of questions, guys. First, just on your operating margins for next year, given some of the comments that were made when you guys separated from Alberto Culver you talked about several initiatives you could do within the Company to improve operating margins. And just given the current economic environment that we are in today, if you were just to assume that your business was going to do flat comps for next year, would you be able to see operating margin improvement or how should we think about your operating margins?

We believe that we could. And again we have a few things going for us, we have which was just discussed that helps our gross profit margins which will offset some of the margin enhancement you'd get in same store sales if they were to go flat and that obviously is the extra margin we get from our low cost country sourcing as well as our continued improvement in the sale of our own brands. That was up over, to over 41% for fiscal '08 and continues to grow. As well as the customer mix shift which we've talked about oftentimes where on the Sally side the business gradually becomes more and more retail which is higher gross profit sale. And on the BSG side the stores tend to grow a little faster than the sales consultant business and that's a higher margin for us. So we believe we are in a pretty good position to at least maintain our operating income levels and percentages even if our same store sales were to be fairly flat.

And can you just say, what are your expectations today, is it more for a flat operating margin or down or up?

We don't give guidance, Duncan, but again I keep referring people to take a little look at our history and at this point we hope that will continue.

Okay. Just a second question, just on your Capex, you guys did I think around $45 million for the year this year. About $14 or $15 million of that included your warehouse optimization. You're guiding for flat Capex for next year. Where is that $14 million going towards? Is that going towards new store growth or are there other initiatives that you are going to be spending capital on?

Yeah, I mean, yeah, on a net basis we are only down about, we said that we are $40, $45 million. And if you say take the low end at $40 million we are only down $5 million we spent $14 million on our warehouse optimization. So at least that leaves you with roughly $8 or $9 million of additional projects. And there are a couple of projects there. None of them are called out to $9 million but certainly in aggregate they do. We've got some IT initiatives in terms of just some business intelligence software just from a support function standpoint that we are looking at. We have some normal IT upgrades. We also are kind of looking at some of the enhancements to some of our consolidation of our international operations specifically. In central Europe as well as enhancements to our UK operations that require some additional capital that are one time charges for facilities. And then there is a little bit higher store model activity both in on the international footprint because we are certainly rationallizing some of the Pro-Duo stores as well as some of our other international businesses as well as what we do here in the States.

Okay. And just lastly, I mean on the warehouse optimization you spent you said $4.7 million that actually ran through your income statement this year. Just looking into next year are these projects that you're outlining, are you going to be incurring expenses associated with those projects that would be flowing through the income statement that may be considered one time?

As far as the ones I just mentioned to you Duncan the only one that would have some impact in it would have no where near the impact that we went through with the warehouse optimization. It would be the business intelligence software, there would be some training charges and things like that but, again, very immaterial.

Okay. So one time expenses should be down year over year then, what you would consider non-recurring?

Yes.

Okay. Thank you.

Your next question comes from the line of Peter Grondun with OSS capital.

Hi, everybody. A quick question, you've answered a lot of my question, it's been a helpful call. Can you talk a little bit, Gary, about the same store sales for October and being positive; which was my original question. But I guess what I'd like to know, why do you think that's the case? Is it just a continuation of sort of the marketing, new marketing initiatives? Is it trade down, a combination thereof, so forth, so on?

When you say why is that the case --

Why do you think your same store sales are positive in October given that a lot of other retailers had such difficulty, businesses basically fell off the cliff in October for a lot of guys?

I think the easiest way to answer that, Peter, is we are really not alike a lot of these other retailers. As I said earlier, a large amount of our business is a destination stop for a customer. That they use the product that we sell and oftentimes it's a solution to a problem that they believe they have with their hair and nails and again it isn't a large purchase and I don't think a lot of these females view it as a discretionary purchase. I told you many times that I think most women will have hubby go hungry before they will quit taking care of themselves and that's the beauty of the business that we are in. I'm not surprised by that. as a matter of fact if our same store sales every fall off a cliff like a lot of them that you're talking about.

There are going to be a lot of hungry guys.

Yeah, I will be shocked because it's just not indicative of our industry. And I don't know how to answer it any better than that other than to say it wasn't a surprise. It was kind of much p in line with our expectations. As we mentioned, in the fourth quarter the UK is a lot more sensitive in our industry to the economy than the US seems to be. Or Mexico or even Canada. So. The good news in the UK for us is we've made a management change in the UK which has been plan for quiet sometime. But we are going for a process over thereof rolling out our assisted replenishment program which we've discussed this many times and you've seen it in our presentation. When we did that here at Sally back from 2000 to 2002, I believe, we had a nice bump in sales. We are seeing the same thing in the UK So I think that some of the softness in the UK economy could be masked for us in 2009 with the roll-out assisted replenishment and we are kind of excited about that and trying to get it done as quickly as we can. And we are also, we are still somewhat in the process of remodeling and doing some things to further accommodate the full product assortment in the acquisition starts we made from Salon Services almost two years ago.

Okay. All right. Well, considering everything it's not a bad quarter. So thanks.

Thank you. Good to talk to you.

Take care.

Your final question comes from the line of Laura Richardson with BB&T.

Thank goodness. If you can believe it, I still have a couple of questions. I was hoping you could just flesh out some of the expenses and also the benefits you expect to get from, you talked about that foreign subsidiary consolidation, and also for the Web site, have there been costs for that and has it been a drag to earnings? Did I hear you say those stores are going to go in comparable store sales?

Let me address that part and Mark can address the first part. Yes, you're correct, they will start going into courses full year a couple of reasons. We credit the stores for those sales because we want the store people promoting the Web site. It's so insignificant to the comparable store sales at this point that it's less than meaningful. So we are not, we are certainly not doing it just to try and bump our same store sales. And the question about, most of the money that was spent on the Web site was done prior to this past year. We did have some costs associated with the improvements that I mentioned to you in my prepared statements. But they were, they weren't huge relative to the initial startup costs which were two or three years ago.

Okay. And was it a drag on earnings, Gary, or neutral or?

In general.

The e-commerce.

It's so insignificant, Laura, that I guess it was a slight drag on earnings just because we've got bodes involved with that department and bodies, and quite frankly it isn't making any money for us yet but it's just, we just, this past quarter got in the full assortment of product up there. So we are looking for it to grow but I think as I've told all of you many times, that our business, our Web site has always been extremely active but I think people use it more for education and to learn about our products. But most women still prefer to come in and smell the shampoo and again we are a very problem solution oriented business. So if they don't always find an answer to a question on the Web they are still going to come in and talk to a Sally person as I've also said many times are mostly hair dressers that work in our stores to help them with these problems. So I've never expected the e-commerce business at Sally to be a huge, huge business and I'm not going to be disappointed if it isn't. I think it's an adjunct to our business and I think it's important that we be in that business but we are still in the business of solving problems for people with their hair, skin and nails and a lot of that takes a personal consultation and smelling the product and seeing how the dryer and the iron works and all that kind of stuff.

Okay. Thanks.

The first part of your question, Laura, was that the benefits derived from this reorganization project. We consolidated a lot of entities that we picked up through acquisitions along the way. What this does on a couple of front, one, is it stream lines our holding company entity structure from an international standpoint and reduces the number of statutory audits that we have to be required to perform over in various other foreign jurisdictions. And then the other piece of this that it allows us to do is it allows us to move cash freely throughout all of our entities in both internationally and domestically without bearing any significant tax consequence. So in light of where currency is and the ability to consolidate funds and provide a more effective cash management solution to the entire company, this has a lot of benefits to it. From a tax benefit standpoint that's, it's tough to speculate but based on some rough estimate that we've put together. We feel that there's probably a benefit of somewhere between 25 and 50 basis points off our effective tax rate.

Okay. And let's see. Is there any SG&A benefit?

There is as far as professional fees for audit services and legal services for compliance of those entities.

Okay. Would you want to try to quantify that and could you be a little more specific on what the costs was that you incurred in fiscal '08?

Yeah, we incurred approximately $1.2 million, $1.5 million of accounting and legal fees to reorganize the structure.

Mostly the conversion.

Well, yeah, as Gary has pointed out it's also the foreign currency loss that we took for settlement of some of the [inaudible] which is another $2.5 to $3 million.

And then on the savings side, how many basis points does that save you in the audit and legal going forward?

Yeah, I really don't break that kind of information out.

But it's something.

Yeah, it's, obviously enough to make it worth doing this project.

Okay. Thank a lot. Good luck.

At this time I would like to turn the call back to Gary Winterhalter to close.

Thank you very much everyone. We appreciate your continued interest in our company and have a happy Thanksgiving.

This concludes today's Sally Beauty Holdings' conference call to discuss the Company's fourth quarter and fiscal year 2008 financial results conference call. You may now disconnect