Sally Beauty Holdings Inc (SBH) 2011 Q1 法說會逐字稿

Welcome to the Sally Beauty Holdings fiscal year 2011 first quarter results conference call. At this time all participates are in the listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). And as a reminder, today's conference call is being recorded. I would turn the conference 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 trends information, made during this call may contain forward-looking statements within the meaning of the section 21-E of the Securities Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ from expectations. Those factors are described in Sally Beauty Holdings SEC filings, including its most recent annual report on Form 10-K for the fiscal year end of September 30, 2010. 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 in 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 2011 first quarters earnings call. I'll begin today's discussion with a high level review of the financial results, followed by a review of our business initiatives. Mark will then take you through the fiscal 2011 quarter in more detail.

The year is off to a great start, with strong performance in the first quarter from each of our business segments. On a consolidated basis we delivered net sales of $794 million, strong growth of 12.6%. Same-store sales grew 6.8%, compared 3.8% in the prior year. Gross profit ended the quarter at $379.4 million, growth of 13.9%. Gross profit margin expanded 50 basis points to 47.8%. Operating margin in the first quarter improved 160 basis points to 11.6%. This increase was due to improvement in SG&A leverage and gross profit margin expansion in both business segments. Net earnings increased 56.7% to $40.9 million, with earnings per share of $0.22. Adjusted EBITDA reached $114.3 million, an increased 30.8%.

We ended the quarter with a store count of 4,178, and increase of 6.2% or 243 net new stores over our fiscal 2010 first quarter. This store count includes 82 stores from our acquisition of Aerial on October 1, 2010. For fiscal year 2011 we expect consolidated organic store growth of 4% to 5%.

Turning to the segment performance for the 2011 first quarter, starting with Sally Beauty. Same-store sales for Sally Beauty grew 6.4%, versus 3.7% in the prior year. Net sales were $481 million, growth of 9.7%. Primary contributers to this strong sales performance include higher transactions and average ticket in Sally North America driven by our CRM program, as well as general improvement in our international businesses. Gross profit margin at Sally Beauty ended the quarter at 53.2%, up 70 basis points over the prior year. Gross margin expansion is primarily do to our gross margin drivers, including the continued shift in product and customer mix and low-cost sourcing.

We continue to realize positive returns from our customer acquisition initiatives. Beauty Club Card memberships rose over the year-ago quarter, with renewal rates at an all-time high. Sales from our BCC customers represent over 40% of our retail sales and remain a key contributor to our sales growth. Operating earnings for Sally Beauty were $83.6 million, up 17.5% over prior year. Operating margin was 17.4%, a 120 basis point improvement over the 16.2% in last year's first quarter.

Our BSG segment also had strong same-store sales growth of 7.8%, compared to 4.3% in the last year's first quarter. Net sales were up 17.3% to reach $313 million. This robust performance was primarily due to growth in same-store sales, acquisitions, and new stores. BSG's gross profit margin was up 90 basis points to 39.5%. Gross margin improvement was due to favorable customer and product mix, resulting in part from geographic expansion and new product lines. Operating margin at BSG improved by 160 basis points to reach 11.2% for the quarter. This strong performance is primarily due to realized synergies from prior acquisitions and gross margin improvement.

On October 1 BSG acquired Aerial Beauty Supply in direct support of our strategy to extend our distribution reach in important geographic regions. Aerial operators a network of 82 stores and approximately 70 direct sales consultants in the upper Midwest. Aerial brings to BSG a strong team with a passion to win, and we are proud to have them on board.

To summarize our first quarter, Sally Beauty Holdings performed well, and I believe we are in a strong position to execute on our strategic objectives and deliver another year of strong financial performance. Now Mark will provide more financial detail for the first quarter. Mark?

Thanks, Gary.

Consolidated net sales for the 2011 first quarter was $793.6 million, a 12.6% increase. This increase was driven by same-store sales growth of 6.8%, growth from acquisitions of 2.9%, and new store growth of 1.4%. Gross -- consolidated gross profit margin was $379.4 million, or 47.8% of sales, a 50 basis point improvement from the fiscal year 2010 first quarter.

First quarter SG&A expenses, including unallocated corporate costs and share base compensation, were $272.9 million or 34.4% of sales, 120 basis point decrease from the 35.6% in the a year-ago quarter. Consolidated corporate expenses, including share base compensation, were $26.3 million or 3.3% of sales, versus the fiscal 2010 first quarter expenses of $26.1 million or 3.7% of sales. We did achieve some leverage this quarter; however, on a full year basis we expect unallocated corporate experiences on a percent-to-sales basis to remain flat to the prior year. For fiscal year 2011, unallocated corporate expenses, including approximately $15 million in share base compensation, are expected to be in the range of $100 million to $105 million in 2011.

Consolidated operating earnings in the first quarter increase 30.9% to reach $92.4 million. Operating margin was up 160 basis points to 11.6%. First quarter performance was positively impacted by SG&A leverage and higher gross margin in both business segments. Interest expense for the first quarter was $29.5 million. Interest expense increased by $1 million over last year, primarily due to non-cash income of the marked to market adjust of certain interest rate swaps, which occurred in the year-ago quarter, as well as the current quarter expensing of approximately $1.6 million in unamortized deferred financing costs.

For the fiscal 2011 first quarter our effective tax rate was 34.8%. This rate was lower than the prior year, primarily due to not occurring tax benefits recorded in the fiscal 2011 first quarter. For the fiscal year 2011 we estimate our annual effective tax rate to be approximately 38%.

Our net earnings for fiscal 2011 first quarter were $40.9 million, a 56.7% increase from GAAP measurings in the year-ago quarter. Earnings per share was $0.22, compared to the fiscal 2011 first quarter GAAP and adjusted earnings per share of $0.14 and $0.13 respectively.

In turning to the balance sheet, inventories increased by $53 million, or 9.1% compared to ending inventory on December 31, 2009. This year over year increase is primarily due to sales growth in existing stores and additional inventory from new store openings and acquisitions. Capital expenditures finished the quarter at $15.2 million. For fiscal year 2011 we expect capital expenditures, excluding acquisitions, to be in the range of $50 million to $55 million. That is a reminder, this estimate is higher than the prior year primarily due to additional investment in IT for domestic and international growth.

As of December 31, 2010, our debt, excluding capital leases, totaled $1.6 billion. If you recall, we announced in November that we entered into a new agreement to replace our ABL facility with a new $400 million five-year credit facility. Since new facility contains similar restrictions and limitations to those in the prior ABL facility,and similarly borrowings are secured by substantially all of our domestic assets. The favorable terms of the new facility are reflection of the stability and the strong cash flow characteristics of our business. The ABL facility ended the quarter with a $43.2 million balance. This outstanding balance is from the borrowings from the acquisition of Aerial Beauty Supply on October 1, 2010. We expect to end the fiscal 2011 second quarter with no outstanding borrowings on our ABL facility.

Before I turn it back over to Gary, I would like to further comment on our debt structure. Subsequent to the refinancing of our ABL facility, we are comfortable with our current debt structure, but it is prudent for us to continue to evaluate our options and the conditions of the debt market. Although we are in the enviable position of not needing to do anything immediately with our debt at this time, we continue to proactively consider our alternatives in the term debt and notes portion of our debt structure. There is nothing more I can specifically tell you right now, but we will let you know more about our thoughts as they crystallize in the months ahead.

Gary?

Thanks, Mark. In summary we had another very strong quarter and set the tone for fiscal 2011. We believe we have the levers in place to drive top and bottom line growth for the long term. As always, thank you for your interest in Sally Beauty Holdings. And now we'll turn it back to the operator to take your questions.

(Operator Instructions). The first question will come from the line of Simeon Gutman with Credit Suisse. Your line is open.

Hey guys. Congratulations again on another good quarter. Can you just maybe share some more detail? I know we talked about it in the prepared remarks on the top line. I guess our expectations for modest industry growth, and you growing above that maybe in the past, but maybe just more texture on what is driving the strength? Can you attribute more to the CRM versus other Company initiatives? Maybe macro-improving a little bit?

Good morning, Simeon. I think that it's pretty broad based. Our CRM program and our customer acquisition initiatives on the Sally side are working very well. They seem to gain strength with time on the BSG side. We continue to pick up small parts of geography in some of the brands that we have carried all along, and new brands to us in some other geographies, although there wasn't anything along those lines in this particular quarter that was significant. As we mentioned in our prepared remarks, our international business is doing well. We're expanding in Europe with new stores pretty rapidly. So there is a lot of top line help there, and they were nicely positive in comps this quarter. We're very pleased with our very small business in Chile, and we're looking to expand that.

So don't -- I hesitate to say that any one of those was the major driver, because I think it's a pretty broad-based effect that we're seeing right now from a lot of things that we've been working I think very hard and our teams have been working very hard on for the last two or three years.

Okay, just maybe one for Mark. On the expense line, I think the dollar growth maybe around 9%. Can you just separate what percentage of that growth or what portion of that growth was from variable cost items moving up? And I'm just trying to get a sense or separate out what the fixed pieces of the business should be growing, and whether they could moderate or increase from the run rate that you saw in this quarter. Thanks.

Yes, we don't usually break that out, but I would say it's because of the top line growth that we've had that we're--the expense side has been more variable than fixed. We haven't really added a lot of fixed expenditures beyond our run rate over the last year. So it is -- been predominantly a variable event.

Okay, thanks.

Thank you. Our next question comes from the line of Karru Martinson from Deutsche Bank. Your line is open.

Good morning.

Good morning, Karru

In terms of the gross profit margin, nice pick up. Is this a new normal? And I guess in that same vein, on that low cost sourcing initiative, how much room do we have to run with that program?

To answer your question, I would say the levels may be a new normal; however, the rate of increase is -- I wouldn't expect the rate of increase to continue at that rate every quarter.

Answering your question on low-cost sourcing, we are at about 6.5% of our Sally business. As I've said before, if you look at everything that we sell in our Sally stores and their country of origin, it's about 30%. We don't expect to ever get to 30% because there are a lot of branded goods that we carry that are valuable brands to Sally that originate in Asia. Our goal has always been to get to around 15%, which would be a little better than doubling what we're doing today, but I think that's going to be a steady increase to get there. I think the first couple of years we saw a rapid increase because we did some major categories, specifically appliances and hair brushes. Going forward we have, like I said, an opportunity to probably double that, but I think it will be bits and pieces.

The larger drivers of Sally's gross profit margin are and always have been the customer mix and the product mix shifts.

Okay. And on private label, where do we stand today as a percentage of sales?

I believe in this quarter we were -- Mark?

About 42%. We've typically given people a run rate on an annual basis, because it can fluctuate quarter to quarter, but we're right -- we're holding steady right at that 42%, 42.5%.

Okay, while you guys said you have nothing to report on the capital structure at this stage, what is your sponsor here? What are they looking at in terms of their hold period and their exit?

Yes, I really can't speak on behalf of our equity sponsor. They really have not given us any indication beyond what we have said publicly before, is that they're long-term investors. They're into now about to start year five of their investment. At some point they would look for an exit strategy that would be very orderly to the marketplace.

All right. Thank you very much, guys.

Thanks, Karru.

The next comes from Erika Maschmeyer with Robert W. Baird. Your line is open.

Thanks. Good morning and great quarter.

Thanks, Erica.

You talked a little bit about your lower cooperate expense, and you're still expecting $100 million to $105 million for the year. I guess can you talk about why that was lower in Q1, and why you would expect it to be up a bit for the rest of the year?

Sure, Erica. Part of it was timing. Certainly we had some IT initiatives that typically in the first quarter may or may not happen as quickly as we'd like. We typically don't want to disrupt store operations during the holiday season. So sometimes we put some of those initiatives on pause, and that created a little bit of a timing issue for us. As well as just we were anniversarying some increases of -- the merit increases of the prior year, which we knew that eventually that would stabilize as well. But we are still confident in the guidance of the year.

Great. And then competitively, are you seeing anything different in the competitive environment? And I know this is a little bit speculation, but who do you think you're taking share from? Is it the salon side or sales as customers do more themselves, or [mass] --

I think it's a bit of all of that. I think that some of the changes in consumer habits, particularly relating to beauty care, that happened over the last couple of years with the economy are holding, which I predicted that they would a couple of years ago, given our past experience in difficult economic times. And I think on the other side of our -- on the salon side of our business, I just think we're gaining market share. And as I said earlier, some of that has to do with picking up new geographies, picking up new brands, and just in general taking market share from some of our competitors there.

And then I think you said in the past you like to be by [Alta] stores. Could you talk a little bit about that. Do you see a traffic lift as women go to that welcome to fulfill beauty needs?

Yes, I've always felt we complimented each other. We both bring women to a shopping center. We don't carry much in the way of overlapped products with Alta, so I don't think we're directly competitive on a product-by-product basis. Obviously women shopping for beauty; we have beauty, they have beauty. But we're a little focused in a different area than they are, and I don't have a problem at all being in the same center with them, and I don't think they do with us.

Great. Then could you talk a little bit about, or just update us in where you're at in terms of the proportion of Sally sales in the US that are professionals versus regular consumers, and how that compares internationally?

Yes, we really report that on an you'll basis, but we -- ending last year, I believe we were at 72% retail and 38% professional. Which is about a 1.0 shift from the previous year.

Great. And then internationally, I guess are you still about the flip side of that internationally? It was more professional?

Yes, we are. We are. It's a little more difficult to measure, because our systems are not quite as sophisticated in some of those countries, but yes, we're much heavier weighted to the professional, particularly in Europe.

Thanks so much.

Thank you.

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

Hello? Carla?

Carla, please check your mute button.

Hello, this is [Mimi Sione] here for Carla. The beauty sales increased more than we expected. How much was it -- how much of that was acquisition versus product offerings versus sales practices?

Did you ask that question in total or for a specific segment?

For BSG in particular.

BSG.

Yes.

I think we have that detailed. Just a moment. Well, as we reported, a little over 7% of the growth was comps. The acquisition was about 10.5%, and that's BSG.

Thank you.

You're welcome.

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

Hi, how are you?

Hi, Linda, how are you?

Good, good. Is there any way -- I don't know if you talked about this before, but -- or if you disclosed operating margin difference between your Sally US stores and your international stores? Like in a very rough sense, can you give us a sense for that?

Yes, well, what I would tell you there, Linda, is the biggest difference is what I just answered on the previous question, or two questions ago. That our business in the US and Canada and actually in Mexico is very slanted toward our retail customer, which is a much higher gross profit margin than the professional business. And our margins from the international business, particularly Europe, which is more professional, look more like the professional margins within Sally. So it's just the weighting that causes a difference.

Okay. And then in terms of -- I think there is still a pending lawsuit. L'Oreal had a lawsuit against you. Can you give a general sense as to when we will resolve that issue?

I would love to, but as you probably know, the courts are a little difficult to put whens on any of that kind of stuff, but there is nothing new to report.

And then -- I mean, your margin progression in BSG has been really impressive, and I think you have always talked about BSG having the margin potential same as Sally Beauty. Is that still the case, that you could still have as high margins in BSG as Sally?

I don't think we ever said that, Linda. BSG is a distribution business. BSG has no retail component to it. Are you talking about gross profit or operating margins?

I'm talking about the operating margins.

Okay, well, it's driven primarily from the gross profit margins, which not having the retail component similar to the European business, the BSG business will never, at least probably as we know it today, have the kind of operating margins that Sally will. What I have said is that the BSG business has still operating margin potential, primarily as you've seen this quarter versus last year this quarter, the realization of a lot of synergies. This particular quarter it was from the realization from the Schoeneman acquisition synergies, and we expect to get similar synergies from the Aerial acquisition, which we should start seeing the back half of this year and into next year.

Great, thanks a lot.

You're welcome.

Thank you. Our next question comes from the line from [Henry Kaplan] were Oppenheimer. Your line is open.

Hi. Thanks for taking my questions. I just wanted to -- what stuck out to me was the improvement in the operating leverage, and I wanted to get back to this quarter's improvement, and figure out was there anything unusual that happened in the quarter in terms of cost savings besides the synergies? And in addition, what percentage of the operating leverage improvement was from the same-store sales improvement?

We really haven't broken that metric out. The one thing that -- from a standpoint of the overall operating leverage, there wasn't any one-off items in there that caused the increase to be diametrically move improved over previous quarters, other than it was a very strong top-line growth. And also this is, as we've kind of indicated in some of the prepared remarks as well as the release, is that we started to realize the synergies from some of the acquisitions on the Beauty Systems Group side of the business.

Henry, also keep in mind that in the store business our three largest expenses are rent, payroll, and advertising. I've made the comment for the last year that we were getting some very attractive renewal rates on a lot of our store leases for the last two years. I think that is helping us a little. And since these are for the most part five-year renewals, it should help us well into the future. And the other two, being advertising and payroll are greatly leveraged when you have the sales.

Got it. And then I guess the last two questions that I have is, one, is there a -- in terms of the operating leverage, is there a certain degree of same-store sales growth that you need to have in order to get this type of operating leverage? And then, I guess -- and then, if I could, you mentioned -- one of the things you mentioned was the driver for the BSG gross margin was new product lines. I wonder if you could give a little color on that too.

Yes, let me -- what was the --

Same-store sales. What --

We said in the past that we believe we can get slight operating leverage with same-store sales of almost zero because we have the margin drivers helping our gross profit line in both of our businesses at work all the time. So as long as that continues, and we don't really see any reason why it wouldn't, that is going to help us to get leverage with very low or possibly even zero same-store sales.

Talking about BSG, there is a couple of things that are helping BSG's margins -- their gross profit margins. One is what I said, the product mix as we try to bring in brands that have a higher gross profit to them, but also the mix on the BSG side of the business has a lot to do with the improving gross profit. Similar to the Sally side, where it's a retail professional mix, on the BSG side it's a store verse sales consultant mix. As long as that store mix is increasing as a percent, which it has for many years, and I expect it to continue, we should get a fair amount of gross profit margin improvement just due to that.

Yes, I did get that, but you mentioned there were some new product lines that you entered, which helped to drive the gross margin improvement in BSG, and I was just wondering if there was anything in particular you could highlight.

I think might comment was that that helped drive our top-line sales. But as we bring on new brands, and as we get larger with the brands that we represent, our margins tend to be a little more favorable.

Okay, thanks.

You're welcome.

Thank you. Our next question comes from the line of Jill Caruthers from Johnson Rice & Company. Your line is open.

Good morning.

Hey, Jill.

Hi. Could you talk about -- did you see any one-time expenses tied to the Aerial acquisition, since it did close in the first quarter?

It was very minor. It was the usual acquisition expenses. A lot of the expenses, because of the due diligence down on the aerial acquisition, had occurred in the fourth quarter, but we had roughly $150,000 to $200,000 of expenses. It was fairly minor for the fourth quarter.

Okay. Okay. And then could you comment on new store performance? Wondering if, as you get further into the CRM program and customers acquisition, is this helping you improve your site selection, or possibly the ramp you see [often in kind of] the first year of a new store openings?

Well, it's definitely doing both, because we use a lot of the same data determining who our potential customers can be for our customer acquisition program. We use that same data for real estate selection. And also being able to identify who our potential customers are in a much more scientific way is helping us with grand openings and launching new stores.

All right, thank you.

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

Hi, this is actually [Chase Vac] in for Jason. A couple questions. I know you guys have said you are not really a seasonable business benefiting from the holidays, but it does seem like that maybe salon traffic trends picked up a little bit during this holiday season. I was wondering if you could you comment a little bit on what you're seeing there? Was that a holiday bump, or just salon trends generally improving, and how do we think about that for the rest of the year?

Actually our -- when we look at our plan and our performance to LY, each month of the first quarter was fairly equal, so we didn't see anything in particular in December. Actually, if you look at the three months, because of weather issues in December, it probably, relative to our expectation and plan, was a little softer than some of the other months -- or the other two months. So I would still say that we are -- we have very little seasonality in our business. As I have said many times before, the electrical category, appliances, does have some seasonality to it, but there was nothing in particular in that category that was all that exciting this year, to be honest with you. So I still believe that we are not seasonal at all, and that the performance in the first quarter was due to all of the other things we've explained, as opposed to a particularly strong holiday season.

And are you guys seeing improvement in salon traffic trends as well?

It's a little difficult for us to measure that. We can do it from comments we hear from our customers, but I would tell you from listening to Regis's call, for example -- I believe it was last week -- where they're saying they are seeing some uptick in customer traffic. And also from some of the research companies that we try to pay attention to that specialize in our business, they're also saying there is an uptick in salon traffic, which obviously is good for our business.

Right. Okay, then just if I heard correctly, I thought you said -- unallocated, I know, came in a little bit lower, and I think you said some of the timing of IT, it sounds like, maybe was delayed. So does that get pushed into the next quarter, or is that later on in the year? How should we think about that timing?

I don't think one quarter versus another would necessarily change your modeling, but certainly from an overall annual perspective in which we looked at kind of the $100 million to $105 million range, we spread over that -- those remaining three-quarters.

Okay, thanks. And then just one final one, if you could help me understand, and maybe it's my misunderstanding. But you continue to say within the Sally Beauty segment, one of the factors that is helping you is customer mix, which I -- I'm trying to reconcile that with you guys saying there is continued shift from BSG into Sally Beauty. So I understand how that would help overall gross margins, but how does that help specifically Sally Beauty margins. Because isn't the retail gross margin higher than the professional?

First of all, we did not say we continue to see a shift from BSG to Sally. That's not the case at all. What we continue to see is Sally's business becoming more retail. As I said earlier, for the last year it was like 72% retail versus 71% the year before. And the retail customer pays a higher price. So our gross profit margins to the retail customer are significantly higher than the professional customer. That's the customer mix shift that we're referring to that helps our gross profit on the Sally side.

Okay. That makes total sense. Thank you.

You're welcome.

Our next question comes from the line of Grant Jordan with Wells Fargo. Your line is open.

Good morning. Thanks for taking the questions.

Hi, Grant.

My first question, it seems like you guys have been fairly successful in the acquisition front in terms of driving earnings. Do you feel like there are more opportunities similar to what you've done over the past couple of years?

Yes and no. The Aerials and the Schoenemans of world are gone. There are no acquisitions left of that size for BSG in North America. Having said that, we look forward to continuing with a lot of small acquisitions on the BSG side, which are actually more accretive for BSG than the large ones, but they don't have the big top-side implications. On the Sally side we are looking at -- there are acquisitions that we consider Sally International that are not as large as Schoeneman and Aerial, but if you put a couple of those together in any given year, plus the smaller BSG fold-ins, we still believe that we can add 4%, 5% to our top line, which we tried to do historically via acquisitions.

Okay, great. That's helpful. And then second question, more bigger picture. I mean, as you guys have been so successful, have you seen a step up in competitive response based on your success?

Seen what response?

Seen any change in your competitors, whether its mass or salons?

We're in such a niche with the Sally business that I can't really say that, no. I think when you look at other companies in our space -- Alta, for example. They're doing extremely well also. They approach the market a little differently than we do, and I think their customer is a slightly different customer than ours, but I don't think that Sally in particular necessarily competes with salons. So I don't think we're seeing anything there. On the BSG side of the business, as I said earlier, I think that we're taking market share, number one, from competitors, but also having more and more brands that prefer our distribution, being national, and I think we have a reputation of doing a good job and working well with our suppliers.

Internationally we're kind of doing what we did here 20 years ago. If you look at Europe, there is no distributor or Sally-type business that crosses country lines. We're the first one. And I think as we pick up critical mass in Europe and consolidate some of the back office and some of our distribution assets over time we will build out Europe in a similar way that we did the US. However, it took Sally 30, 40 years to get a 72% retail business in the US. So from a margin standpoint you can't expect, and we don't expect, Europe to provide the same kind of gross profit or operating margins that the Sally business does for many, many years.

Okay, great, thanks. That's helpful.

Thank you. (Operator Instructions). We will go to line of Chris Fetes with JPMorgan. Please go ahead.

Good morning. Just a couple of questions. I think on previous calls you articulated is target leverage ratio is three times. Is that still correct?

I guess if we have to have a target, which is more from you're side of the fence -- the analysts and so forth -- I think I've said in the past when we spun Alberto-Culver, we were over six. Now we're down slightly under four, and we were told to get to four. Now everyone says you need to be at three, so that's our target, yes.

Okay, and I would guess, depending on how the year plays out you'll likely be around that level. And so I guess my follow-on question really is maybe you can help us from a strategic perspective with respect to the capital structure, why -- given the accommodative high-yield market, why you would not go ahead and access the market now versus, let's say, waiting a year or two?

I don't think it's our intent to wait and look at our debt structure for a year or two. We -- these are very real-time dialogues that Gary and I have had with the Board, both on over all structure perspective, as well as the high-yield market. We have a very keen understanding and sensitivity to the robust nature of the high-yield market as it stands today, and that that window of opportunity is right now and in the very immediate future. So we're looking at that, as well as the bank debt market has also become competitive as well. Not anywhere near being robust as the high-yield market, so I don't think that there's any indication that we've given that we look to be waiting for a long period of time to potentially do something to address some of our maturities.

Okay. And then lastly, assuming -- let's just assume that three times is your optimal leverage debt structure, would you -- do you think that would allow you to take the free cash flow and then accelerate your organic growth internationally?

If we have the opportunities, and the opportunities are right for us. We're very, I guess, a bit conservative and very cautious when we enter new countries and make out-of-the-country acquisitions. We want to make sure we're doing it right, and we want to make sure that we're investing for a healthy future. So I've said in the past that I don't believe we can spend all of the free cash flow that we have intelligently on acquisitions. Primarily because there are no really large acquisitions, I don't think, that make sense for us. So I would look at us finding other ways to deploy that excess cash flow.

That's great. Thank you very much.

You're welcome.

Thank you. And I'm showing there are no further questions. So with that, I'll turn it back over to you, Gary.

Thanks, operator. To summarize again, we had a terrific quarter, positioning us well for the remainder of fiscal 2011. We appreciate your interest always in Sally Beauty Holdings, and we look forward to seeing you soon. Thank you.

Thank you. And, ladies and gentlemen, today's conference call will be available for replay after 12 PM today until midnight February 12. You may access the AT&T Teleconference replay system by dialing 800-475-6701 and entering the access code of 189419. International participants pay dial 320-365-3844. Those numbers once again, 800-475-6701 or 320-365-3844 and enter the access code of 189419. 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.