Sally Beauty Holdings Inc (SBH) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fiscal 2009 first quarter earnings call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. (Operator Instructions). And at your host's request, we do ask you to limit yourself to two questions. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Karen Fugate. Please go ahead.

Thank you. Before we begin, I would like to remind you that certain comments on matters such as forecasted financial information, contractor business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of the Securities and Exchange Act of 1934.

Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Such factors are described in the Sally Beauty Holdings SEC filing, including its 2008 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 reconciliations of its adjusting items and nonGAAP financial measures in an earnings press release and on its website.

Joining me today are Gary Winterhalter, President and Chief Executive Officer, and Mark Flaherty, Senior Vice President and Chief Financial Officer.

Now, I would like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2009 first quarter call. I will begin today's discussion with a high-level review of our financial results and business initiatives. Mark will then take you through the results in more detail.

In the fiscal 2009 first quarter, Sally Beauty Holdings performed well in one of the most challenging economic environments in the Company's history. Although the impact from unfavorable foreign currency exchange added pressure to year over year results, in particular to net sales and segment operating profit, we improved gross profit margin in both segments and held operating margin above 10%. Same-store sales, as always reported on a constant currency basis, ended the quarter slightly positive.

When I compare our same-store sales results to other retailers' declines of several hundred basis points, I am pleased with our performance. On December 12, Standard and Poor's raised its issue level rating one notch and changed our outlook to stable. In light of the global credit crisis, we view this upgrade as a terrific affirmation of the stability of our business.

Now, turning to the financial results, for the first quarter we reported consolidated net sales of $646 million, a decline of 1.6%, unfavorable foreign currency exchange of $24.8 million, or 3.8% of sales, and underperformance in the Sally UK and BSG's franchise business, were significant drivers of this decline. Helping to offset revenue pressure was the addition of new stores of 1.3%, and acquisitions of 1.8%. Same-store sales growth, as reported on a constant currency basis, was slightly positive at 0.04%.

Net store count was 3,769, an increase of 3.8%, or 138 stores over fiscal 2008 first quarter. Our long-term growth initiative remains the same, to build our organic store base 4% to 5% per year. However, in the near term, we will remain flexible to capitalize on potential real estate values. And if we can't find them, we will be prudent with our cash. In light of that, we are widening our 2009 store growth range to 3% to 5%.

We are responding to the challenging environment by reducing and controlling costs across the Company. During the first quarter, we implemented the following measures, a temporary hiring freeze, deferred merit increases for upper management, variable expense reductions related to benefits and payroll related costs, were among the many reductions. We anticipate that these measures will help to maintain operating margins during the back half of fiscal 2009, should the economy continue to be challenging.

Now turning to segment performance, Sally Beauty Supply had slightly positive sales growth of 0.2%. Same-store sales, as reported on a constant currency basis, were down slightly by 0.21%. Although year over year sales growth was favorable in Sally North America, unfavorable foreign currency exchange and weakness in the UK business negatively impacted revenue growth.

The weak economy in the UK is having a negative impact on our business, however there are opportunities to improve our performance. We recently made leadership changes in our UK business. This new team has identified several areas of improvements such as optimizing our merchandising strategy in our existing stores to better serve both our retail and professional customers.

A detailed review of our store portfolio is underway to determine the need to rationalize any redundancy that may still exist from our major acquisition two years ago. Further emphasis on integrating our warehouse and administrative functions, also from the acquisition, to improve operating margins.

Most recently we rolled out our assisted replenishment program to approximately 20% of the UK store base. The results to date are extremely positive. In fact, these preliminary results are very similar to the sales trends we experienced when we rolled out assisted replenishment to Sally US in early 2000, with same-store sales growth as high as 6%. We are optimistic that the measures we are putting in place in the UK will improve our performance in the Sally business over the long term.

On the marketing side for Sally Beauty, we continue to realize positive trends from our CRM campaign. The average sale for a Beauty Club card customer is consistently higher than the average for a non-card customer. Our objective is to increase the number of card holders, which drives incremental traffic and sales.

In February, we will launch another direct mail campaign as part of our customer acquisition initiative. We intend to reach prospective customers and our top Beauty Club members within a 400 store vicinity. In March, we plan to expand our reach to 800 stores.

Also in the next few weeks, we will target a direct mailer to our Pro Club members to help boost sales from our professional customers.

During the first quarter, our BSG segment grew same-store sales by 0.76%. Net sales in BSG were $235 million, a decline of 4.5% over the prior year's quarter. This decline is largely due to the impact of unfavorable foreign currency exchange and lower sales in the franchise business. Keep in mind, sales comps include the effect of the anniversary of several key brand and territory acquisitions we made in the fiscal 2008 first quarter.

The underperformance in the franchise business is being addressed and we are taking steps to help the franchisees improve sales and operations. For example, best practices from our BSG store operations are being integrated into the franchise business, as well as combining their back office operation. We believe the franchise business is fundamentally sound and will show improvement soon.

BSG's gross profit margin improved by 20 basis points over last year, due to better sales mix and the introduction of new product lines in 2008. Operating margin for BSG was 8.6% in the quarter, a 10 basis point improvement from a year ago. Lower-costs and a decline in sales consultant retention guarantees helped drive improvement.

As we commented in our fourth quarter call, our warehouse optimization project is complete, and we are realizing the benefits in inventory reductions. However, we now anticipate the savings in 2009 to be in the range of $5 million to $7 million versus our previous range of $8 million to $10 million. This change is due to further refinements in the distribution software to insure against disruption in our customer service levels. We continue to believe savings will be $10 million annually.

During the first quarter, BSG gained additional distribution of Henkel Schwarzkopf brand in stores across four states. The BSG segment ended the first quarter with 920 stores, including 162 franchise locations, for a year over year increase of 1.7%, or 15 stores.

To summarize the quarter, we executed well, and posted solid financial results in a very difficult environment. Even though the outlook remains challenging for the near term, we intend to respond to the ongoing economic conditions by focusing on cost containment and prudent capital investments.

Now Mark will provide more financial details for the first quarter. Mark?

Thanks, Gary. Consolidated net sales for the 2009 first quarter, were $646 million, a decline of 1.6% over the 2008 first quarter. Consolidated gross profit was $303.5 million, or 41% of sales, a year over year improvement of 30 basis points.

First quarter consolidated SG&A expenses were $225 million, or 34.9% of sales, a 70 basis point increase from the 34.2% in the year-ago quarter. SG&A expenses increased $1 million, principally due to rent and occupancy related costs from incremental stores and higher advertising costs. Partially offsetting this increase was a decline in non-allocated corporate expense of $1.7 million and a decline in share based compensation expense of $2 million.

Consolidated operating earnings for the first quarter declined $3.6 million to $66.3 million, with operating margin down 40 basis points to 10.3%. The first quarter results were dampened by softer performance at our Armstrong McCall franchise and Sally UK business, as well as higher advertising expenses.

Interest expense, net of interest income for the 2009 first quarter, was $39.7 million, and included a $3 million non-cash charge related to our interest rate swap transactions. Interest expense declined approximately $7 million over last year's quarter, primarily due to lower rates on our ABL facility and our senior term loans.

Adjusted EBITDA for the first quarter was $81.6 million, a 6.4% decline compared to $87.2 million in the prior year quarter. Adjusted net earnings grew approximately 40 basis points to $18 million, resulting in adjusted net earnings per share of $0.10. GAAP net earnings were $16 million, up 12%, resulting in earnings per share of $0.09.

And turning to the segments, starting with Sally Beauty, net sales for the 2009 first quarter were $410 million, an increase of 20 basis points over the year-ago quarter. We estimate the impact of unfavorable foreign currency exchange to be approximately $17.2 million, or 4.2% of sales.

Gross profit for the quarter increased $1.4 million, or 70 basis points over the year-ago quarter, with gross margin improvement at 30 basis points. The margin improvement was primarily the result of a shift in product and customer mix, recent marketing efforts and low cost sourcing initiatives.

The Sally segment reported first quarter operating earnings of $65.3 million, down $6.4 million over the 2008 first quarter. Segment operating margins were 15.9% of sales, versus 17.5% of sales in the year-ago quarter. The Sally segment operating earnings were impacted by the underperformance of the UK and professional business, and higher advertising and incremental costs related to store openings.

Turning to the BSG business, BSG's net sales were $235 million, a decrease of 4.5% over the 2008 first quarter. This sales decline is largely attributed to the unbearable foreign currency exchange of $7.6 million, or 3.2% of sales, and lower sales in our franchise business. BSG's gross margins were 38.6% of sales, up 20 basis points from the year-ago quarter. Gross margin improvement was primarily due to sales mix and the expansion of new product lines.

Segment operating earnings were $20.2 million in the quarter, down 3.8% year over year. This decline is primarily due to the underperformance of the franchise business and unfavorable foreign currency exchange. Segment operating margins however, improved 10 basis points to 8.6% of sales.

Turning to the consolidated balance sheet, cash and cash equivalents increased $12.8 million to $112.6 million at December 31, 2008, compared to September 30, 2008. Included in the $112.6 million is $75 million that we borrowed on our ABL facility in September of 2008.

Inventory as of December was approximately $572 million, a decrease of $26.5 million from the September 30, 2008, year end.

We ended the quarter with approximately $267 million of borrowing capacity on our ABL facility. For the second quarter in a row, the outstanding balance on the revolver was $75 million, and would have been zero had we not drawn $75 million in September.

Capital expenditures for the 2009 first quarter was $8.4 million. In light of the cost containment efforts, our current expectation for capital expenditures is now anticipated to be in the range of $35 million to $40 million versus the previous projection of $40 million to $45 million.

Now, I will turn it back over to Gary.

Thank you, Mark. In summary, we delivered solid results given the current economic environment. We ended the quarter with slightly positive same-store sales, gross margin expansion and net earnings growth.

In the near term, we intend to respond to the ongoing economic challenges by focusing on cost containment and prudent capital investments. We plan to maintain a solid financial position and a capital structure that provides the ability to delever the balance sheet while investing in long-term growth.

We will now turn it back to the operator to take your questions.

Thank you. (Operator Instructions). We will first go to Grant Jordan from Wachovia. Please go ahead.

Good morning, thanks for taking the questions. My first question, I believe in the last call you said that in October, you had experienced positive same store sales. I was just trying to get a feel for how that progressed throughout the quarter, particularly as we saw other retailers significantly underperform your numbers.

Grant, we don't really get into detail on the monthly numbers. They did deteriorate a little bit in November. I think you saw it, as most retailers, it seemed to have a tougher November than December. But there wasn't a significant movement in the negative direction in any one of those months. As we told you before, October did remain positive.

That is helpful. As we move into this year, have you seen any significant change in your customers' behavior as it relates to your business?

What we actually said last time, and we're still seeing, which I view long term as very positive, our customer count is actually up and gaining strength in both of our businesses.

What we are seeing on the professional side of the business is, people are kind of buying hand to mouth, they're buying what they need and coming in more often. On the retail side of our business, we are seeing the customer count up nicely, which I think is a trade down from some people that may not be visiting the salons as frequently but are still wanting to do some of these services themselves.

And the average ticket is soft on the retail piece. However, a lot of the increase in the traffic that we are seeing is specifically being driven by these customer acquisition initiatives and the CRM program. We have very good visibility to that and we know who those people are, and the frequency and the redemption we are getting.

I am looking at this thing very positively because I think when the economy does start to recover, we have a lot of new customers here, as well as a lot of customers who found us during tough economic times, that will stay with us.

Along the CRM line, if I understood you right, I think you said you would have it rolled out in 800 stores by March?

Yes.

Obviously if you are seeing great results, you are still on a limited number of the Sally stores, do you have plans to ramp that up at some point this year?

Absolutely, but there is a cost to it. We are getting a great ROI on it. It is very tempting to just bite the bullet, and blow and go with it. But we are a bit conservative when it comes to that.

I think if we see the same kind of results that we saw in the first 400, and keep in mind that this is like a three to six month program, where we are contacting these people on a monthly basis. We want to make sure the results we saw from the first round are the same in the second round. If we do, we will figure out a way to find the dollars to do it because it is very exciting.

Great, that is very helpful, thank you.

You're welcome.

Thank you, next we'll go to the line of Emily Shanks from Barclay's Capital. Please go ahead.

Hi, good morning, thanks for taking the questions. I just wanted to ask, as you look at potential target acquisitions for the remainder of this fiscal year, do you have any in mind, regardless of size? Or are you really dialing that back?

We are still looking at making, given our size, what would be very, very small acquisitions that are bolt on type of acquisitions that would be highly accretive and very synergistic to our existing businesses. But there is nothing in the queue right now there that would have any significant impact on our operations or our cash position or anything. They are very, very small.

Okay, and just the second question would be, as you look at potentially utilizing that cash flow to pay down debt or to go towards debt reduction, have you looked at buying back your bonds, and would you? What are your latest thoughts on that?

Mark?

As we said in previous calls, as well as in some of the analyst conferences, we believe that the capital structure is appropriate to generate free cash flow for new store growth as well as the acquisitions Gary's talked about that meet our investment criteria. And then also to execute our (inaudible), we'll follow the line with executing our long term strategy to retire debt.

One of the things that we looked at recently, that is certainly a viable alternative. We constantly talk about it internally. In general we are not prohibited from repurchasing our notes on the open market. However, as you are probably well aware, we do have a credit agreement that has a restricted basket to it. So it does set some quantitative limits on the amount that we can buy back.

And needless to say, our Board would have to approve such a transaction. And currently, right now there is no transaction that has been approved or in the pipeline.

Okay, and can you give us a sense of what that size is, that the credit agreement limits it to?

Right now, the restricted basket, it is a pretty simple calculation that you can do yourself, is that it's the cumulative net income from July 1, of 2006, forward, and take that number and divide it in half. And that is your restricted basket. Right now, it sits at approximately $115 million.

Great, thank you very much, good luck.

You're welcome.

Thank you, next we will go to the line of Todd Harkrider from Goldman Sachs. Please go ahead.

Thanks for taking my questions. I know you don't give guidance, but you continue to do a great job of increasing gross margins. Do you think that's going to continue in 2009?

Yes I do, for the same reasons that it has continued for the last 20 years. As we talk about often, our sales of our exclusive or controlled label brands continues to increase each year, which is a bit better margin, our customer mix in both of our businesses, on the Sally side tends to shift more to the retail consumer, which is a higher gross profit. And even on the BSG side, our store growth is more than our street sales consultant growth, which is also a higher gross margin. And we are getting some nice benefit from the low country cost sourcing on our electrical appliances and brushes that we started a little over a year ago.

That is what I was hoping you would say. And then, with all the new stores, it's causing a drag on your earnings, when do you think that will start rolling off some?

Well, I don't think it is new stores that are causing a drag on our earnings. The drag on our earnings at the present time is the UK, is a major drag, which I believe will be improving significantly due to the things I mentioned in my scripted remarks.

And the Armstrong McCall franchise business has been a difficult spot for us for the last year or so. But as I also commented on, I believe we are on the right track to doing the right things to fix that business.

That business is in a great part of the country, it's the sun belt, it's growing population, we have good brands. The business is almost 50% in Texas alone. And Texas' economy, as you probably know, is doing quite well still. So, I am very confident that both of those situations, which is the real drag on our earnings, not new stores.

One more, if I may, in regards to Armstrong McCall. On the store closers, do you expect that to continue or was that more one time in nature?

No, it was a one time situation. We had a situation with a franchise in Mexico that actually had about six stores that we had some issues with. And we just had to terminate.

Okay, I appreciate it. Good luck in 2009.

Thank you very much.

Thank you, we'll go to the line of Karru Martinson from Deutsche Bank. Please go ahead.

Good morning. Just to follow up on that private label and gross margin question, where does private label penetration stand right now?

It's around 41% on a 12 month rolling basis.

Did you see that pick up during this past quarter? In evidence of your trade down theory?

Yes, significantly but it is highly influenced by December. So, I don't want to start quoting those numbers. When I quote those numbers, I am usually always talking about a rolling 12 months, so you get a better idea of what the real growth is.

I appreciate that. In terms of the cost-saving measures that you talked about here, hiring freezes, deferring pays and so forth, what is the scope or the magnitude that we are looking at for the year, in terms of savings?

We haven't provided that guidance because, for the simple reason is, if the economy starts to turn positive, we may actually go in a different direction. And some of those initiatives may be removed. So, we haven't provided guidance for that very same reason. We have just been very cautious about our approach, we tried to pull the appropriate levers to be defensive in these market conditions, and we are taking it very cautious look and outlook towards the remainder of the year, but very optimistic.

Without trying to back you into a corner for guidance, if we're looking at gross margin being up, and these measures, assuming the economy stays the way they are, these measures are designed to maintain SG&A as a percentage of sales, correct. Would that be the right way of looking at it?

That is certainly the spirit behind it.

Lastly, really quickly, in terms of the competitive landscape, some of your competitors have talked about rather dismal professional markets, consumers pulling back, others on the higher end like Ulta and so forth, having less than stellar. What do you feel that is differentiating yourself from them, or are you seeing some of the same things in your markets?

Well, first of all, we have a very different business model. If you are referring to Regis commenting on salon traffic being down, they are absolutely right, but we benefit actually in a couple of ways there.

One way is what I mentioned earlier. If a consumer is putting a little more time between their salon visits, they typically are looking for professional product or similar product to maintain their hairstyle between the visits, that's a plus for Sally.

On the BSG side, what is happening is a lot of small and midsize salons are going out of business. The employees from those salons are finding it much easier to go to a salon as a booth renter, and take their clientele with them, then try and find an actual employment situation at a salon. That is great for the BSG store business because they then are buying their own supplies on a very frequent basis.

So, we are not completely dependent on salon visitations and salon retail. Again, the BSG business, only about 20% of our business is involved with selling products to salons that are then resold. So, our impact there is not as great.

When you are talking about Ulta, I think we have a completely different business model than Ulta. Ulta is into a lot of product categories and higher price points than we deal with. They have a beautiful salon in the Ulta stores, so I think they are probably feeling a little the same thing that all salons are feeling from a visitation standpoint.

And I also think that some of the higher end brands that they carry are feeling a little pressure with consumer trade down.

Thank you very much, guys, appreciate it. You're welcome.

Thank you, we'll go to the line of Carla Casella with JP Morgan. Please go ahead.

Hi, most of my questions have been asked and answered. Just one follow on. Your traffic being up, it sounds like you are outperforming anything we have heard in terms of mall traffic. Would you say your traffic is up from the malls, better than the rest of the mall that you are in? The strip malls?

The only way to compare that is with other retailers that are in the strip malls. I don't know that there is any data available on strip mall traffic versus the stores that are in the strip mall. But as I mentioned, I believe that our traffic is up for several reasons. The primary reason, I believe, in the Sally division, that our traffic is up, is our CRM initiatives and our new customer acquisition program. Our marketing folks are doing a fabulous job with that.

And on the BSG side, it's as I mentioned, the professional customers are coming in more often. And we can track that specifically by customer. They are just buying a little bit less obviously because of the economic conditions. They are not carrying any depth of inventory.

Right, and then, do you intend to, if this environment continues, would you intend to change your mix to more exclusives or private label than where you are even today? I know you have been increasing private label and that will probably continue but would you accelerate that?

I believe that we let that be the customer's choice. We represent a lot of great brands in both Sally and BSG, and really the exclusive brands is only on the Sally side. But we are not doing anything to drive those brands against the name brands, other than putting the product on the shelf at whatever price is appropriate for the market. And I think though that because control label for the most part is a little more price competitive, that we may be getting some of the benefit of that.

Okay, great, thanks a lot.

You're welcome.

We'll go to the line of Peter Grondin with OSS Capital. Please go ahead.

Good morning, everybody. Mark, a couple questions on margins. Gary, I think in the past, can you give us some idea of the margin differential between what the mature stores are at Sally versus what the new stores are, because you came in at a blended rate of a little less than 16%, but trying to understand what the breakout might be there, even directionally.

Pete, we don't break that out but I will tell you that the entire margin decline in the Sally business was relative to the International Business.

Okay, so it sounds like, I mean just being candid, it sounds like you took a pretty hard hit in the UK.

We did.

Even qualitatively, can you sort of break out how much of that was due to operational things that you are addressing now, it sounds like pretty aggressively? Versus just, I mean everybody reads the papers, how tough things are in the UK right now.

Well, as I said, the 20%, or at this point, roughly 60 or 70 stores in the UK that we have on our replenishment program, if that is any indication, the issues we are having there are more operational than economic. I am hoping that even though the economy there is extremely difficult, that the rollout of assisted replenishment at this particular time will help us get through this environment.

Like I said, in the 60 or 70 stores that we have put it in, we are seeing the kind of results we saw in Sally US back in 2000. Where, you have seen our charts many times, where our same-store sales took a blip for two or three years, up in the 4% to 6% to 6.5% range.

That is helpful. Secondly, you talked about maintaining operating margins in your commentary. Can you give us a little more color on that, what that means? Maintaining operations from operating margin from where you are now, where you were historically, just trying to get into that all little bit more.

Well, I think we would like to see our operating margins continue to grow, obviously. The goal here is not, and maybe we said it not in the right way, it wasn't really to maintain the operating margins. We would like to see our operating margins continue to grow as they did slightly in the first quarter, we would hope for even better performance than that going forward.

I guess if we're talking about maintaining something, we are trying to maintain our cost structure. But at the same time invest in these programs that I have talked about, because I really believe for our Company, in all of the recessionary times in the past that we have been through, we have invested in the business during those times and came out of it with a better market share, which is what I hope to do here.

I am not sure if that answers your question but if we have some extra margin above and beyond what we think a reasonable growth rate is, we are going to try to invest it in programs like, instead of 800, going to 12, 16, 2000, whatever, stores we can.

Okay, thanks.

You are welcome, Pete.

Next we'll go to the line of Linda Bolton Weiser from Caris. Please go ahead.

Hi, thanks. I was curious, Unilever recently purchased TG professional haircare brand, do you distribute that brand and do you think that Unilever has plans to bring that brand into the regular consumer retail channel to follow what [Alberto Culver] did with Nexis?

Linda, we do distribute the brand. We talked with TG's management, as you may know they are right down the street from us here in Dallas. They have told us that the same people who have been running it will continue to run it, and they intend on keeping it a professional brand.

Okay, great. Just to follow on that, I could ask Unilever, but do you think Unilever has intentions to get bigger in professional haircare and do you, I guess that could be a positive, actually. Would you view that as a positive if they were to get bigger?

I think it is positive. You would have to ask them what their intentions are. I would think that buying the business, they are going to want to grow the business. And I view that as a positive, it is another major international company coming into the professional industry with a lot of resources.

Right. And then, can you just clarify, I am sorry if I didn't catch this, but when you are talking about the issues in the UK, is that implementing a system in the new stores you sort of fairly recently acquired, or is the problem having to do with all the stores, even the ones you have had for a while? Can you just clarify that a little further?

It is all the stores. I would not characterize it as a problem, but we rolled out replenishment as you know, in Sally US in the early 2000s. We would have done the UK sooner but quite frankly, we just finished the BSG rollout a little over a year ago, and then we had some significant programming to do on the UK before we could begin that rollout. And we just started it last fall. We expect it to be done by June. But it is all the stores.

Okay, so these are just temporary costs to implement the system?

There really isn't much cost at all, Linda. It has to do with remerchandising the store, setting plan it guides, and getting the store on a replenishment system where most of the ordering work that is done manually now, is automated. It is really quite that simple.

So, at whatever cost we had in it, was two years ago or a year ago in the programming for it. And of course, there is a little bit of labor when you reset a store over two or three days, but that is not significant.

Okay, and then just on the CapEx, is the reduction in the CapEx guidance range, is that related to the reduction in your expansion plans for square footage?

It is not a reduction for just an overall spend. It doesn't necessarily translate into a complete reduction in the number of stores or anything like that. It is really, we took a little harder look at the average spend per store, and took a more critical eye towards that category because obviously the new store growth is the lion's share of our CapEx.

We also took a look at our some of our internal IT initiatives, and looked at if there were more efficiencies there in terms of what we were intending to do from a CAPEX standpoint, and what we really could get done during this year.

Okay, thank you very much.

Thank you, we'll go to the line of Jill Caruthers with Johnson Rice. Please go ahead.

Good morning. Trying to get a little bit more information on the BSG comp during the month, it dropped off significantly than what's it has been churning over the past few years. It's been strong, up in the high single digits. I know one factor of that is, you were recouping the loss of L'Oreal products.

But could you just explain a little bit more of that, is there a lack of opportunity out there to expand in new product lines or regions and we should expect these lower comps going forward, or is it just purely a reflection of salon traffic down?

Well, as I said before, we are anniversaring some major territory gains and some major brands that we brought in, a lot of which happened in Q1 of '08. Having said that, there is still opportunity like I mentioned the one with Schwartzkopf in bringing in other brands and expanding the distribution for our current brands into other geographies. I would certainly hope that the 0.76 same-store sales is not indicative of where we expect it to be going forward. My expectations would be more than that. But to say that, and I think we have said in the past that we could maintain high single digit same store sales growth, particularly in this environment, it's probably a bit of a stretch.

Okay, and if you could talk about, last year, Easter shifting later this year, it looks like it will fall from your second quarter to the third quarter. Is that a big seasonal peak for you guys, and should we look at how that might influence timing of comps between second and third quarter.

I would look at two things between second and third quarter. One is Easter, you're absolutely right, a later Easter, our Easter sales will be an April event this year as opposed to a March event. Secondly, keep in mind that we are on calendar months and we are short a day this year versus LY in February. There is going to be some same-store sales impact, probably for both of those events, obviously the day lost in February won't be made up for in Q3, but the Easter sales will.

Okay, thank you.

You are welcome.

Thank you, we'll go to Erica Maschmeyer with Robert W Baird. Please go ahead.

Yes, hi, could you talk a little bit about performance by category at Sally, areas that were weaker and stronger, I know you have called out equipment as more of a holiday type item in the past. Was that a tough category, and anything else in that bucket?

Let me clarify one thing, I want to make sure you're not confusing the equipment with electrical appliances. Our salon equipment business, which is when a salon is buying new chairs and dryers and things like that, it is very soft right now, which you would expect with the economy.

We really don't get into a lot of detail on guidance with categories or results with categories, but I will tell you there was nothing in the first quarter that was out of the ordinary. Some of the categories, which you would expect from people doing more services at home, showed some very nice improvements.

Okay, very interesting, thank you. And then, could you talk a little bit about the impact from the BSG consolidation in Q1, were you seeing any additional expenses there, or had you started to realize any of the savings yet or is that more of a back end year weighted thing?

Most of it is back half of '09. Obviously, we have had some expense reduction going into the year. The biggest benefit we have had in that program right now has been the inventory reduction.

Okay. Do you have expectations for a tax rate over the rest of the year?

I am anticipating our effective tax rate to be somewhere around 36.5%.

Great, thank you.

You are welcome.

Next we'll go to the line of Justin Holt from Chilton Investment. Please go ahead.

Hi, Gary. I guess the first question is, TG, can you give us some idea about what percentage of your sales that is? A very small amount, I'd assume?

It is a very small, it's a key brand to us, and in some geographies, Justin, it is a very good brand for us. We don't distribute it everywhere. It has pockets as a brand where it is stronger than other pockets, but it is a very nice brand. We have always had a good relationship with them, we do a nice business with them, we are looking forward to the resources that Unilever can bring to bear here, and we're looking forward to continuing to work with the same management group.

Gary, maybe I missed it but, is there any way at all to quantify how much CRM and customer acquisitions is helping same store sales, and maybe some idea of how long does the tail run on that, how long can it drive growth.

I can't answer that. Because I think until you go through at least a year and then start measuring those same customers in their second year, we would have to wait and see that.

I will tell you that a nice percentage of the new customers that we're bringing in with the customer acquisition program are buying Beauty Club cards, joining the club. So, that is a great indicator for us because we then stay in touch with them via e-mail and other mailings on an ongoing basis.

And as I said in my earlier remarks, and told you many times, that the Beauty Club card customer is a very, very valuable customer in average spend and transaction frequency.

When you talk about that one year, I guess time period, how far are we in that?

For the first group, we are five months into that.

You previously said that if same-store sales go negative, there would still be some operating leverage, I think you have, I don't want to put words in your mouth, do you think that holds still?

I think we've said if same-store sales were flat, we believe we could get some operating leverage. And yes, I still believe that.

And auto replenishment in the UK, can you give us some sort of guide of how that 20% gets to 100%, some sort of time table, how long it will take.

It will be finished by June.

Okay, and just one more question. I am wondering about if you manage FX at all and you took your, I guess the store guidance from four to five to three to five. (inaudible) international stealing a lot of growth, and the dollar is getting strengthened, why not just pull back for a little while on those numbers? Can you explain the thought process on that?

Yes, we're seeing some very, very attractive real estate deals, where some of these shopping centers Justin, are having a very difficult time with losing major tenants. Now that is a two-edged sword. We don't want to go into a dead shopping center, but the other side of that is, if you can cut some very good leases during this downturn, as you know, rent and payroll are our two largest expenses in the store.

So, I am not saying that we will do that. As I said in my remarks, if we can find really good values, we will continue to be in that 4% to 5% range.

I am just saying that we could drop down to 3% because if we don't find the values, keep in mind also that a lot of the 3% or 4% or whatever it turns out to be, is gong to be in Mexico and Canada, which are performing extremely well for us and we have a lot of virgin geography in both those countries.

Thank you.

You are welcome.

Thank you, we'll go to the line of Shawn Tesoro with BlackRock. Please go ahead.

Hi, you guys have highlighted the FX headwinds, excluding that and then the weakness in the UK, what would the Sally comp have been, or what is the North American Sally comp?

We don't break that out, sorry.

Okay, I was hoping you would. That's it then, thank you.

You're welcome.

Thank you, we'll go to Mimi Noel from Sidoti and Company. Please go ahead.

Hi, Gary, just one quick question. And I apologize, I didn't hear your early prepared remarks. But would you update me on your current thinking on the market potential in South America, and how you've adapted your approach there at all in the last few months.

I can't say we have adapted our approach because we really haven't done anything down there yet, Mimi. We have made several trips down there, we are having active conversations with some potential partners down there. Obviously, the economy in most of the countries that you would think of first there is in somewhat of turmoil as well.

However, as I just mentioned to Justin, we are doing extremely well in Mexico, which is having its own issues with currency and their economy. So, we still very much want to do business in South America, and hopefully one of the partners that we are talking with, we will end up doing a deal with.

If you can rank from number one to number 10, one being a top priority, how would you prioritize South America at this point?

Countries within South America or just overall priority of getting there?

Overall priority of getting there.

Probably three or four. As I have said before, we have a nice business going in western Europe. The UK, as I have said here many times in this call, is difficult, our business in Belgium and northwestern France is going quite well. We see a lot of opportunity there. That is pretty high on our radar right now. And expanding more in Canada, especially, and Mexico would probably be our second priority, and Central and South America would probably be third.

That is helpful, thank you.

You're welcome.

Thank you, and now we'll go to the line of [Maurice Deian] with Genelle Management. Please go ahead.

Thanks, I note your comment about the exclusive brands performing the best, and I presume that is related to the lower price points on them and people trading down, but does that relationship hold as you go up the price point ladder where the most expensive products are doing the worst or is it more of a barbell that you are seeing in the trends where they are holding up well also?

Keep in mind, and I know I said a few minutes ago, that the price value is an issue with our control label, but I have also said many times that, don't view these as private label alternatives that, like you would in a grocery store, where it is simply a price issue. These are brands that have their own place in the industry, they are brands that we have purchased from within the industry, and in many cases, they are as pricey or less pricey as the name brands.

The other thing that I would keep in mind, I read, actually I think it was some analysis that Alberto Culver did recently on Nexis, that the reason Nexis, which is an upper end brand that's in retail now, is doing so well, is that customers coming out of the salon environment, for them to be trading down from an Aveda or a Purology or a Bumble and Bumble, to a Nexis, it's like half the price, but nexus is considered a pricey brand.

So, we are seeing a lot of the same thing, some of the brands within our control label portfolio that we would consider the pricier brands, are still a significant value to the customer that is looking to trade down from an even pricier brand in a salon.

If I understand you, there is really no correlation necessarily between price point and sales trend.

We have not seen that. Now obviously, when you get down to the very low end of the market, where you are talking about shampoo that comes in gallons and things that lower income families use, sure, you see some bump in that in these economic times, but that is not a big piece of our business.

Thank you very much.

You are welcome.

Thank you, and now I would like to turn the conference back to Gary Winterhalter for any closing comments.

Thank you, operator. In closing, I would like to say again, we performed well in a challenging economic environment, improving gross margins in both segments, with slightly positive same-store sales. We remain optimistic about the remainder of the year, and as always, thank you for your interest in Sally Beauty Holdings.

Thank you. Ladies and gentlemen, this conference will be made available for replay after 12:00 pm today until February 10, 2009, at midnight. You may access the AT&T executive playback service at any time by dialing 1(800)475-6701 and entering the access code 983818. International participants may dial 1-320-365-3844, again with the access code 983818. That does conclude our conference for today, thank you for your participation and for using AT&T executive teleconference. You may now disconnect.