Sally Beauty Holdings Inc (SBH) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Sally Beauty Holdings fourth quarter and full-year financial results. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time.

(Operator Instructions)

And as a reminder, today's conference call is being recorded. I would now like to turn the call over to Karen Fugate. Please go ahead.

Thank you. Before we begin I would like to remind you that certain comments including matters such as forecasted financial information, contractor business, and trend information made during this call may contain forward-looking statements within the meeting of Section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of the words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty holdings SEC filings, including its most recent annual report on Form 10-K being filed today.

The Company does not undertake any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliation of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are Gary Winterhalter President and Chief Executive Officer, and Mark Flaherty Senior Vice President and Chief Financial Officer. Now, I would like to turn the call over to Gary.

Thank you, Karen, and good morning, everyone. Thank you for joining us for our fiscal 2010 fourth-quarter and full-year earnings call. I will 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 fourth quarter in more detail.

Fiscal 2010 was a year of outstanding performance. A year in which we continue to strengthen the Company's financial position, investing growth and delever the balance sheet. Throughout the year important milestones were set. We opened our 4,000th store and surpassed $400 million in adjusted EBITDA. Beauty Systems Group topped $1 billion in annual sales. And Sally Beauty Supply reached a record annual gross margin of 53%. We executed on our strategic objectives, including unit growth of 145 stores, gross margin expansion of 100 basis points, and a reduction in our long-term debt of $125 million. Fiscal 2010 ended with consolidated net sales of $2.9 billion, strong growth of 10.6%.

Same store sales growth was 4.6% compared to 1.8% in fiscal year 2009. Gross profit ended the year at $1.4 billion growth of 13%. Gross profit margin expanded 100 basis points to 48.2%. Operating margin in fiscal 2010 improved by 40 basis points to 11.7%. This increase was primarily driven by gross profit margin expansion in both business segments. GAAP net earnings were $143.8 million, up 45.1% over last year. With earnings per share of $0.78. Fiscal 2010 adjusted EBITDA topped $400 million, ending the year at $405 million, an increase of 14.9%. In July, we opened our 4,000 store. We ended the fiscal year with a total store count of 4,059. An increase of 3.7% or 145 net new stores. We expect a consolidated store growth rate of 4% to 5% in fiscal year 2011.

We generated over $217 million in net operating cash, which funded our investments in Company growth and reduction in long-term debt of $125 million. Turning to segment performance, starting with Sally Beauty Supply. Same store sales for Sally Beauty grew 4.1% versus 2.1% in the prior-year. Net sales were $1.8 billion, strong growth of 8.2%. Driven primarily by higher transactions and average ticket in Sally North America. As well as improvement in the international businesses. Gross profit margin at Sally Beauty expanded 140 basis points for the year. And reflects the continued shift in product and customer mix, as well as gross margin improvement in the international businesses. On the marketing side for Sally Beauty we continue to realize positive trends from our customer acquisition strategy. Our targeted marketing efforts this year reached just over 20 million perspective customers. As a result, beauty club memberships are up and now represent over 40% of our retail sales. Growth of 200 basis points from a year ago.

The average sale for a Beauty Club card customer is consistently higher than the average for a non-card customer. We believe our targeted marketing initiatives and BCC customer conversion efforts led to our growth in-store traffic and higher average ticket in fiscal 2010. In fiscal year 2011, and beyond, we plan to continue our marketing efforts to attract new customers and increase the penetration of Beauty Club card memberships. Our BSG segment had strong same-store sales growth of 6.2% compared to 1% in fiscal year 2009. Net sales were up 14.9% and surpassed the $1 billion mark. This strong performance was primarily driven by growth in same-store sales, acquisitions, and 36 net new stores. BSG's gross profit margin was up 90 basis points to 39.6%. Gross profit margin performance was due to favorable customer and product mix, resulting in part from targeted marketing initiatives. Operating margin at BSG improved by 70 basis points to reach 10.4% for the year.

In October, BSG acquired Aerial Beauty Supply in direct support of our strategy to extend our distribution reach in important geographic regions. Aerial is a leading distributor of professional beauty supplies, operating a network of 82 stores and approximately 70 direct sales consultants in the Midwest. Our strategy at BSG remains the same, to continue store expansion both organically and through acquisitions, to increase our footprint in existing geographies and new territories. In summary, Sally Beauty Holdings had an outstanding year. We executed on our strategic initiatives and delivered strong financial results. Looking ahead to fiscal 2011, we anticipate another year of growth and strong performance.

Now, Mark will provide more financial detail for the fourth quarter. Mark?

Thanks, Gary. Consolidated net sales for the fourth quarter increased 10.6% to $747.8 million. This increase was principally driven by same-store sales growth of 5.3%, acquisitions, and new store openings. The impact of unfavorable foreign exchange rates was $4 million or 60 basis points as an offset to our sales growth. Gross margins in the fourth quarter improved 160 basis points, to 48.9% over the fiscal 2009 fourth quarter. Gross margin improvement was driven by both operating segments through favorable product and customer mix, as well as low-cost sourcing. Fourth quarter SG&A expenses were $258.5 million or 34.6% of sales. A 40 basis point increase from the 34.2% in the year-ago-quarter. Unallocated corporate expenses including share-based compensation were $22.1 million. A $1.4 million increase over the prior-year primarily due to higher share based compensation expense.

For fiscal year 2011 we anticipate unallocated corporate expenses to increase due to higher share-based compensation and our continued investments in IT for domestic and international expansion. However, on a percent of sales basis we expect to remain flat to the prior-year. Unallocated corporate expenses in fiscal year 2011, including approximately $15 million in share-based compensation, are expected to be the range of $100 million to $105 million in 2011. Consolidated operating earnings in the fourth quarter increased 22.7% to reach $93.4 million. Operating margin was up 120 basis points to 12.5%. The fourth quarter performance was primarily driven by strong sales and higher gross margins. Interest expense, net of interest income for the fourth quarter was $27.8 million. Interest expense declined $1.5 million over last years quarter primarily due to lower debt and favorable rates on our loan facilities.

For the fiscal year 2010, our effective tax rate was 36.9%. This rate was lower than our expectations due to nonrecurring tax benefits recorded in the fourth quarter. For the fiscal year 2011 we estimate our annual effective tax rate to be approximately 38%. This expected increase over the fiscal 2010 annual effective tax rate, is related to the nonrecurring tax benefits recorded in the fiscal year 2010 and the expiration of certain US international tax law provisions. This increase is expected to be partially offset by a projected decrease in foreign losses subject to valuation allowances. Net earnings at fiscal -- in the fiscal 2010 fourth quarter were $42 million. A 55.8% increase from GAAP net earnings in the year-ago-quarter. Earnings per share was $0.23 compared to the fiscal 2009 fourth quarter GAAP and adjusted net earnings per share of $0.15 and $0.14 respectively.

In looking at our balance sheet for fiscal 2010, inventories increased by $44.7 million or 8% compared to September 30, 2009. This year-over-year increase is primarily due to sales growth in existing stores, additional inventory for new store openings, and acquisitions. Capital expenditures finished the year at $48.7 million, in line with expectations. For the fiscal year 2011 we expect capital expenditures, excluding acquisitions, to be in the range of $50 million to $55 million. This estimate is higher than the prior-year, primarily due to additional investments in IT for domestic and international growth.

As of September 30, 2010, our debt excluding capital leases totaled approximately $1.56 billion. During the fiscal year 2010 we payed down $125 million of long-term debt. Including a $20 million reduction in our term B loans during the fourth quarter. Our consolidated leverage ratio as of the end of the fiscal year was approximately 3.7 times. Four years ago we acquired $1.8 billion in debt during our spin-off. Since then we have lowered our leverage ratio by over two terms through paying down debt and EBITDA growth. Debt reduction will continue to be a strategic focus for us as we move forward.

In November we entered into a new agreement to replace our ABL facility with a $400 million five-year credit facility. This new facility contains similar restrictions and limitations to those contained in the prior ABL facility. And similarly, borrowings are secured by substantially all of our domestic assets. The terms of the new facility are favorable and include interest rates at prime plus 1.25% to 175%. Or LIBOR plus 2.25% to 2.75%. As well as commitment-fee of 50 basis points on the unused portion of the facility. We believe these favorable terms are a reflection of the stability and strong cash flow characteristics of our business.

Before I turn it over to Gary, I would like to comment on the universal shelf registration statement that we will be filing today with the SEC. Like many large companies, we put the shelf up for convenience. The SEC rules permit us to file this document to facilitate a cost effective access to the public markets, without the risk of potential delays caused by SEC review. We are including a number of different securities that we could sell off the shelf including equity, debt, and equity linked securities. We are doing so because we do not know what securities may be favorable to sell over the next several years and we do not want to find ourselves restricted in that regard. We currently have no plans to sell securities, nor has any shareholder advised us of a desire to sell through our shelf at this time. The shelf is set up for the use of Sally and any of the stockholders, and is typical for these types of shelf registrations.

Now, I will now turn the call back over to Gary.

Thank you, Mark. In summary, we had an outstanding year. We executed on our strategic objectives including unit growth of 145 stores, gross margin expansion of 100 basis points, and a reduction in our long-term debt of $125 million. We believe we are well-positioned for long-term growth and remain confident we will deliver another year of solid performance in fiscal 2011. Our 2011 strategic priorities remain the same, to grow our store base 4% to 5%, and when appropriate, make strategic and synergistic acquisitions. To continue to delever our balance sheet, and to continue to improve margins and increase profitability.

As always, thank you for your interest in Sally Beauty Holdings. And now, we will turn it back over to the operator to take your questions.

Thank you. (Operator Instructions) First we will go to the line of Simeon Gutman from Credit Suisse.

Thanks. First of all, congratulations, guys, on the quarter and the year. Can you talk about the margin opportunity here, especially on the gross margin side? I think this year at least you got more than probably we had expected. How should we think about that going forward? Should it accelerate from the rate at which it expanded this year? And then second on the SG&A side, it looks like in the years past you've gotten leverage on the margin. This year, not the case some investments. And should we think about -- the Company just going through a little bit of an investment period or should there be leverage on that going forward?

Good morning, Simeon, it's Gary. Let me address the margin question first. Margin this year was probably a little more than we have increased in previous years. We have said for a very long time and if you look at our performance over a long period of time, we have added somewhere in the neighborhood of a 0.5 a gross profit point a year, and that is driven by the drivers we have described many times, which are primarily the customer mix shift at Sally and the product mix shift at Sally. As well as the customer mix shift at BSG going more towards stores and a little less towards sale consultants. To give you advice going forward, I would tell you just to use a long average of what we have done in the past. And not necessarily expect the kind of pop we experienced this year to continue. But, if you take it over a several year average I think you could be comfortable with that.

Regarding the SG&A leverage, you are absolutely right as we stated earlier -- actually as we stated all year. This was a year where we invested in some international IT projects. The beginning of the rollout of the Sally US POS. We fully expect, which I think we've said a couple times during the fiscal 2010 year that w will be back to getting some leverage on our SG&A here going into fiscal 2011.

Okay. And then a follow-up on CRM. It is probably a process that could be ongoing even in markets that have already been touched. But, where are you -- at what stage of the game is that effort in, as far as getting to initial markets?

Well, what you just said is exactly what my answer to that question was going to be today. The CRM is not a -- an event that starts and it's over. You build on it. That is exactly what we are doing as we said in the script. We approached a little over 20 million potential customers this year.

That certainly isn't the entire list so we will continue to work that. But as well as -- like I said, it builds and just because you get a new customer the next goal is to get them in the Beauty Club card program. And then you have an ongoing communication with them. Either via e-mail if you have it or via direct mail if you don't. But, I don't see this thing being a third or fourth inning going towards the ninth and at some point the juice runs out of it. I believe, as I think most companies that are using this type of marketing, are seeing that understanding your customers needs and wants with this kind of detail, enables you to target those needs and just continue building on it. I do not look for this thing to -- like I say, go for two or three years until we get to some magical 100% of something and then stop. That is just not the way it works.

Okay. And then lastly, on the BSG consulting fees I think it was mentioned in the press release that there was some progress or just that it was a good quarter for that in general. Is their any big picture changes? I mean, from a spending standpoint have some accounts increased their spend? Is there a little bit more confidence in the channel? If there any slowing to the (inaudible) meaning being favorable for more discretionary spending starting to come back into the salon world?

Well, I'm not sure it's driven by that. We do see our average sale through our sales consultants going up year to year and quarter to quarter. However, you see the number of orders that we process going down slightly. Now, the cause of that is these smaller accounts that peel off of a salon and become a booth-renter.

They go to the store, which is driving the store business, and the effect of that is you get a smaller order count on the DSC side, but because they were by far the smaller half of your orders, the average order size increases. So from an efficiency standpoint, shipping a little fewer larger orders is good. And from a store customer mix shift it's also good because the booth-renter who becomes a store customer, generally takes advantage of more impulse type of things in the stores. And you get in the store it is like any other retail business. They spend more when they see everything that you carry.

Great. Thanks.

Next we will go to the line of Karru Martinson with Deutsche Bank. Your line is open.

Good morning, everyone. In terms of the Beauty Club customer what is the magnitude of the differential in ticket for them, versus a non-member?

Well, first all the Beauty Club card member gives us an additional visit each year. So that is part of it. We also get anywhere from a 25% to a 40% increase in our ticket size from that customer.

Changing gears here a little bit, across the board we have been hearing about commodity costs rising in many sectors. Are you seeing that on your private-label side? What is the outlook, and I guess that ties into your gross margin questions earlier

We are not seeing a lot of that, but as I commented on before we are not in the very low end of the market. So packaging and ingredients is a much smaller percentage of our cost, than it is for a lot of retailers that are out there selling $0.99 shampoo. So I don't think we typically do feel that as much, or if we get a cost increase, the percentage isn't as great to our total cost because of what I just said.

Okay. And in terms of acquisitions, Aerial was certainly a larger one for you guys. Is their any kind of integration update you can provide? What does the landscape look like in terms of the size of acquisitions that you guys are looking for?

Well, Aerial was very similar to Schoeneman, a little larger. As far as the integration plan, I believe it will look a lot like Schoeneman. It basically took us most of 2010 to integrate Schoeneman. And the real synergies and cost savings came out of that in the second half of the year, and I expect that to be the same with Aerial. Going forward there are not a lot of Aerials and Schoenemans left. So, as far as BSG acquisitions of that size, probably not likely. But, we continue to do a lot of smaller fill-in acquisitions, which are actually easier to do, more synergistic, and you get the cost savings pot much quicker. So there will be more of those to come. And as I have said in the past I think you can expect for a fair amount of our acquisition activity to be on the Sally side outside the US.

Okay. And just lastly, you guys paid down part of your term loan. You've refinanced the revolver. How do you view the remainder of your capital structure? And thoughts on refinancing there?

We are very comfortable with the capital structure to say the least. We now are at 3.7 times levered. And certainly with where we expect ourselves to be is that we have said publicly we would like to get close to 3. As we get to the point where we start to optimize our total cost of our capital structure we will certainly look at other opportunities in that regard. Certainly as we have things to share, we will share them. As far as refinancing right now, if we see a entry point in the market that is attractive to us, it makes sense -- the economics make sense in terms of our capital structure certainly we will be prepared to take advantage of it.

All right. Thank you very much guys.

Thank you. Our next question will come from the line of Emily Shanks from Barclays Capital. Your line is open.

Thank you for taking the questions. A lot of mine have been answered. My one question though is just around any geographical trends that you are seeing, particularly across the US as you look at your comp performance, which was quite strong?

Well, as we, I think have been kind of commenting on all year, during the depth of the crisis we did see more weakness in California, Florida, Arizona, and some of those states -- Nevada. During 2010 we saw that bounce back with good comps. But it was coming off of a softer year. So, I would tell you that if we saw any particular geographic strength it was in those areas. But again, it was driven by softer performance in the previous years.

Okay. Do you guys look at your store performance on an urban versus more rural basis at all?

We do. But other than the cost of doing business primarily rent, there is not a whole lot of difference for us.

Okay. Great. Good luck during the holidays.

Thank you. Same to you.

Thank you. Our next question comes from the line of Grant Jordan with Wells Fargo, your line is open.

Good morning. Most of mine have been asked.

Hi, Grant.

How are you doing? I guess if you could just help us drill down a little bit more on the gross margin performance in Q4. I know you gave a little bit of color, but maybe the magnitude of some of the factors you cited?

Well, I think a lot of it was driven by BCC and CRM on the Sally side. We saw some nice improvements, as Mark commented on, in both of those programs. Which are retail-oriented, so that is our higher-margin piece of the business. We saw some nice movement on the BSG side relative to customer shift and even margin improvement just as the brands kind of shift around. Which helped overall margin, and our international businesses improve significantly on the gross margin line.

What was the international improvement?

I'm sorry -- I coughed through that one.

That's okay. What was behind the international improvement?

Well, the international improvement is similar in that, the customer mix, our product mix referring to our own labels and control brands, are growing significantly internationally. Even at a faster rate right now than they are domestically. So, those were probably the key drivers in the international business.

Okay. Last question. If you can just you update us your thoughts on growing your store-base in like Canada and Mexico and kind of where that stands?

Sure. We finished the year in Mexico I believe at 102 stores. And we will be adding several there next year. We plan on expanding our store base I think we said in the prepared remarks between 4% and 5% in 2011.

I would love to see a lot of that come in Canada. We are doing extremely well in Canada. It's just the real estate availability in Canada is not quite as good as it has been in the US. Even in Mexico right now there continues to be a lot of new mall development in Mexico, which we are taking advantage of. And on a percentage basis we're going to be opening quite a few stores in Chile. And hopefully, some other areas in South America going into 2011.

Thank you for the information.

Thank you. Our next question comes from the line of Linda Bolton-Weiser with Caris. Your line is open.

Hi, how are you?

Good, Linda. How are you?

Good. So I was just wondering about if you are looking at any other semi-major cost reduction initiatives similar to the warehouse optimization program. Is their anything that you are seeing in either part of the business that you could do further?

I don't see anything at this point of that magnitude. Now, as we continue to fold in the acquisitions that BSG is making, or any acquisition that we make. We do get nice cost benefit from that, but as far as any one specific project that will get us that kind of cost savings, I do not see any of those in the near future.

Okay. Can you just update us on that program? Are the cost benefits all completed or do we still have a little carryover in FY '11 from that?

I think we've gotten -- probably at least 95% of what we're going to get out of there. If there's any left it is minor.

Okay. Great that is all I had, thanks.

Thank you.

Thank you. Our next question comes from the line of Carla Casella from JPMorgan, your line is open.

Hi. One question on assortments for this winter holiday season. I know appliances were strong earlier in the year. Do you think they could have stolen any sales from the holiday, or can you talk about that categories you see strong for the next quarter or two?

Well, our business is, you may know, is not very seasonal. We do get a little bit of a pop in the appliance category during the holidays obviously for gift-giving purposes. I don't see anything in the appliance category that is going to drive that to be any bigger pop than we historically get. But the business seems healthy, and I expect us to have a -- pretty much a normal electrical appliance Christmas season.

Okay. And then Latin America you talked about some opportunities opening more stores in Chile and South America. Are you -- do you have the platforms you need there or do you need to make any further acquisitions to get greater platforms in any of the specific Latin American countries?

We probably will make some other acquisitions in South America. As far as continuing the build out Chile we are fine there with the platform that we have today.

Okay. Thanks a lot.

You're welcome.

Thank you. Our next question will, comes with a line of Erika Maschmeyer with Baird. Your line is open.

Good morning and congratulations.

Thanks, Erica.

I just wanted to follow up on your warehouse optimization savings. Do you have the dollar amount realized this year and this quarter?

Yes, Erica. It was roughly $4.7 million for the year. And we record about half of that in the fourth quarter. The reason for that is just the timing of anniversarying some of the shutdowns in some of the other integration processes that took place during fiscal 2009. So you really saw the benefit in the back half as we had kind of have given guidance to at the beginning of the year.

That makes sense. And then another question on international. Any other comments on performance there? And then, in terms of South America expansion, can you give any sense of the magnitude that you could be thinking about next year and which countries that you're targeting next?

Well, we really can't talk about which countries we are targeting next. As you know our business in Chile is a very small business. We ended the year at 22 stores. If we put 10 more stores there it is a 50% increase. So on a percentage basis what I was saying before, those businesses are growing very rapidly. We continue to expand in Europe. We will continue to add stores in France. We are very comfortable with the way the German business is turning around and behaving. And in the UK we continue to improve that business. We have a lot of stores in the UK already. So I would not look for significant store count increases in the UK.

Do you have plans to rollout the CRM program to the UK?

We don't have specific plans to do that, right now. But obviously, as successful as it has been here, longer term we will do that.

Great. And then, any factors behind the slightly higher inventory levels year-over-year this quarter?

I think if you look at the percentage growth it was less than our sales growth. So obviously, some of it was due to the acquisition we made in the very early part of the year. So, it was primarily driven by that. But our inventory turns actually improved year-over-year.

Excellent. Thanks so much.

You're welcome.

Thank you. Our next question comes from the line of Jason Gere with RBC Capital Markets, your line is open.

Thanks, good morning.

Good morning, Jason.

Hey, I just have one bigger picture question, then a more general questions. So the bigger picture just trying to get your thoughts on the holiday season and the competitive environment. We have been hearing many mass retailers calling out as beauty as a source of strength. And I know that the product assortment is different. But I was just wondering kind of how you feel about the holiday season this year maybe versus last year, and put some context around that? And I'll have a follow-up question.

I think we are going to be fine in the holiday season. I am looking for our holiday season to be a little more robust than it was last year. But as you know, we are not a seasonal business. And we just do not see a tremendous amount of fluctuation in our customer count, our average sale, or any of that with the exception of the appliance category.

Okay. That's a fair answer. And then just kind of the more general question. I guess I'm just trying to think about the breakdown of sales for next year. So it's a little bit more square footage. Same store sales. I am not sure if you still said three to five. Is that still the range for -- that you laid out? I guess the question is, as we look at the impact to margins -- with more square footage seemingly it takes a little time for the stores to breakeven. I was just wondering if you could go through the pros and cons from a margin outlook. You did 40 basis points in 2010. Why that can't be the same for next year with more, I guess, new store openings. A little bit more investment that is out there. I was just wondering if you could provide a little bit more context there. Thanks.

I think the 40 basis points you are referring to is operating margin, not gross margin.

Yes.

Gross margin was up more than that. But as I said on our first question, the gross margin expansion in 2010 was on the high side of our norm. So what I have said in the past is if you count on us being somewhere in a 0.5 a gross profit point, and in normal years pulling most of that through to the operating line. Now, historically we have done that by getting leverage on SG&A. We didn't get that leverage in 2010 for specific reasons, which we have explained. But I expect to return to getting that in 2011.

Thank you. Next we will go to the line of [Henry Kaplan] with Oppenheimer. Your line is open.

Hi. Good morning. Thanks for taking my questions. I guess my first question is in terms of the filing of the mix shelf today. I am just wondering why in terms of the timing of that was there something that happened recently, or that you expect to happen in the future that stimulated that?

Actually, it was just purely opportunistic in terms of taking advantage of where our market-cap is and taking advantage of our [wixi] status. That is really the back story behind it. And we wanted to continue to provide ourselves with more flexibility in our capital structure as we move forward. And as we have demonstrated that we have been able to delever the Company and grow our earnings commensurately. And there is really nothing more to say. But that we were just being very opportunistic in terms of our status.

Okay. Great. And then, the other questions was, I don't know if you talked about this -- but in the past you've talked about the difference in the consumer traffic versus average ticket. During the quarter. Can you give a little more detail about how that trended in the quarter?

Both traffic and average ticket were up in both pieces of the business.

Okay. And we are seeing a bit perhaps of -- higher-end consumers perhaps starting to spend a little bit more. Are you seeing that in terms of -- at your stores?

First of all, I do not think the higher end consumer is our primary customer. So I would say I don't really see any evidence of that. What's driving our business is things that we are doing internally to drive it. Which is BCC and CRM and a lot of similar programs on the BSG side with the store business.

Okay. And then my last question is, in terms of -- you called out product mix as one of the favorable impacts of gross margin in the year. In the past you talked about electrical's and hair extensions. Was there anything else that drove the gross margin improvement in the quarter?

No, when I talk about product mix I am really referring more towards control and exclusive label brands, than specific categories.

Okay. And what percentage of your sales is the exclusive label brand of Sally Beauty at this point?

I believe we finished 2010 at 42% in Sally.

Okay. Thank you.

(Operator Instructions). We will go to the line of Jill Caruthers from Johnson Rice. Your line is open.

Good morning.

Hi Jill.

Hi. One of your big drivers of your very impressive gross margin is your customer mix. And I know the last number I think you publicly stated on the Sally side was retail made-up about 72% give or take. Where do you see that going? It seems as though that's getting a nice push-up with your CRM and the Beauty Club push.

Well, on a percentage basis I think that can grow significantly. What's interesting is our professional business is also growing nicely just not as fast a percentage. So theoretically, our professional business could continue to grow low single-digit. And our Beauty Club and retail business grow high single digit. And then years from now we could be 90/10 and still have a growing, robust and healthy professional business.

Okay. And just last question, on the -- I think it's been a year now you acquired a European wholesaler on the Sally side. And I think that was kind of a new kind of venue for you. If you could tell us what you've seen and learned through that acquisition, and kind of the future growth aspects on the wholesale versus retail side?

Sure, I think you are referring to Sonoco which we acquired in December of last year. We are very pleased with the business. It is -- we sell to other small distributors through that business. We sell virtually brands that we own all of. They have three major brands that they've had for quite some time. The business is good for us. We are just now in the process of putting out our first catalog under our ownership. Which we hope with a little bit of increased assortment, and some other things that we are doing in the catalog, that we think will add value to the other small distributors that the business will continue to grow.

Congrats. Thank you.

Thank you. We have a follow-up from Lisa Bolton-Weiser with Caris. Your line is open.

Hi, I know I could dig these numbers out, but do you have -- can you just tell us off the top what percentage -- what part of the growth in each of the two segments came from acquisitions in the quarter, the sales growth?

The sales growth in the quarter from acquisitions was about $33 million.

And how is that split between the two segments?

The majority of it is BSG. It's about $20 million.

Okay. Thank you very much.

Thank you. And with that, Mr. Winterhalter I will turn the call back over to you.

Thanks, Operator. In summary, we had a terrific year ending with strong financial results and executing on key initiatives. I think we're well positioned as we head into fiscal 2011. Thank you again for your interest in our Company, and we look forward to seeing you all in the new year.

Thank you. Ladies and gentlemen, today's conference call will be available for replay after 12.00 p.m. today until midnight November 27. You may access the AT&T teleconference replay system by dialing 1-800-475-6701 and entering the access code of 175393. International participants dial 320-365-3844. Those numbers, once again 1-800-475-6701 or 320-365-3844. And enter the access code of 175393.

That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.