Sally Beauty Holdings Inc (SBH) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Sally Beauty Holdings conference call to discuss the Company's fiscal 2011 second quarter results.

All participants have been placed in a listen-only mode. After management's prepared remarks, I will facilitate a question and answer session, and initially each caller will be limited to two questions. Additional instructions will be given at that time.

Now I would like to turn the call over to Karen Fugate, Vice President of Investor Relations for the Company.

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 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 materially 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 ended 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 and non-GAAP financial measures on 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 second quarter earnings call.

I'll begin today's discussion with a high level review of our financial results followed by a review of our business initiatives. Mark will then take you through fiscal 2011 second quarter in more detail.

Sally Beauty Holdings had another outstanding quarter, driven by strong execution from all of our businesses. Consolidated sales reached $802 million, surpassing the $800 million mark for the first time in a quarter. Same store sales grew 6% versus 4.8% in the year ago quarter.

Gross profit grew 13.8% over prior year and contributed to gross margin expansion of 110 basis points. Operating margin expanded 150 basis points over prior year to reach an all-time high of 13.2%. This increase was primarily due to gross profit improvement and expense leverage in both business segments, including Sally's international results.

Net earnings increased 42.6% to $49.3 million, with earnings per share of $0.26. Adjusted EBITDA in the fiscal 2011 second quarter reached $122.9 million, an increase of 23.9%.

We ended the quarter with a total store count of 4,207, an increase of 254 net new stores or growth of 6.4% over the fiscal 2010 second quarter. 4.4% of this growth was from organic store openings and 2.1% was due to stores acquired from Aerial.

Turning to segment performance starting with Sally Beauty Supply, the Sally International businesses performed very well in the second quarter and contributed, on a consolidated basis, to Sally's overall sales growth, gross margin expansion, and SG&A leverage. We expect ongoing financial improvement as we grow our international footprint and continue to leverage infrastructure costs.

Same store sales for Sally Beauty Supply grew 6.2% versus 4.3% in the prior year. Net sales were $491 million; growth of 8.2%. The primary contributor of this strong performance was growth in same store sales driven by increased customer transactions and higher average ticket in both North America and international.

Gross profit margin at Sally Beauty ended the quarter at 54.4%, up 130 basis points over the prior year quarter. Gross margin expansion is primarily due to the continued shift in product and customer mix and low cost sourcing.

Operating earnings for Sally were $93.9 million, up 18.1% over prior year. Operating margin was 19.1%, a 160 basis point improvement over the 17.5% in last year's second quarter.

During the quarter, we reached out to almost three million prospective customers through our CRM initiatives. These efforts contributed to a 15% increase in Beauty Club Card memberships, which now total over five million.

Before I move on, I would like to address a question that I have received from many of you about the lifecycle of our CRM campaign. We began our CRM campaign approximately two years ago and designed it to build upon itself. For example, when a potential customer is introduced to Sally through our CRM direct mailer and visits a store for the first time, our primary goal is to sign up the customer as a Beauty Club Card member.

In doing so, we can track buying behavior and establish an ongoing communication. We proactively reach out to that customer via direct mail or e-mail with information that may include product specials or coupons that relate to her specific buying behavior. The ultimate goal is to incentivize her to become a frequent and loyal shopper of Sally Beauty.

In short, I believe we have a lot of runway left in our CRM campaign. I fully expect, over the long term, that we will continue to attract and retain new customers while generating a positive return for the Company.

Now turning to our BSG segment, BSG had same store sales growth of 5.6% compared to 6.1% in last year's second quarter. Net sales were up 16.5% to reach $311 million. This performance was primarily due to acquisitions, growth in same store sales, and new stores.

BSG's profit margin was up 140 basis points to 40.1%. Gross profit margin performance was due to variable customer and product mix resulting, in part, from the addition of product lines and geographic expansion.

Operating margin at BSG was 10.8%, a 100 basis point increase over last year. This increase is primarily due to synergies realized from the Schoeneman acquisition and gross margin expansion, offset by nonrecurring integration expenses associated with the Aerial acquisition.

If you recall, we acquired Aerial Beauty Supply this past October. The integration of Aerial is going well, and we recently completed the conversion of their IT systems.

To summarize our second quarter, Sally Beauty Holdings financial performance is the result of strong execution across all of our businesses. We reached record sales and operation margins for the quarter, and reduced our total debt by $60 million, further deleveraging the balance sheet.

As we head into the second half of the year, we believe we will continue to build on the momentum realized in the first half of fiscal 2011.

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

Thanks, Gary.

Consolidated net sales for the 2011 second quarter were $801.8 million, an increase of 11.3%. This increase was driven by same store sales growth of 6%, growth from acquisitions of 3.9%, and new store growth of 1.6%.

Consolidated gross profit was $391.8 million, or 48.9% of sales, a 110 basis improvement from the fiscal 2010 second quarter.

Second quarter SG&A expenses, including unallocated corporate costs and share-based compensation, were $271.4 million. For the second quarter in a row, we leveraged our SG&A expenses and, as a percentage of sales, decreased 60 basis points over the year ago quarter to reach 33.8% of sales.

Unallocated corporate expenses, including share-based compensation, were $21.8 million, or 2.7% of sales, versus the fiscal 2010 second quarter expenses of $21.2 million, or 2.9% of sales.

Consolidated operating earnings in the second quarter increased 25.2% to reach $105.7 million. Operating margin was up 150 basis points to 13.2%. Second quarter performance was positively impacted by SG&A leverage and higher gross margins in both business segments.

Interest expense for the second quarter was $27.8 million. Interest expense decreased $600,000 over last year, primarily due to lower outstanding principal balances on our senior term loans.

For the fiscal 2011 second quarter, our effective tax rate was 36.7% versus 38.2% for the fiscal 2010 second quarter. This rate was lower than our prior year primarily due to tax benefits associated with discrete items during the quarter and income in foreign tax jurisdictions at favorable rates.

Given our effective rate experience during the first half of fiscal 2011, we now estimate our annual effective tax rate to be in the range of 37% to 38%.

Our net earnings for the fiscal 2011 second quarter were $49.3 million, a 42.6% increase from the net earnings in the year ago quarter. Earnings per share was $0.26 compared to the fiscal 2010 second quarter earnings per share of $0.19.

In looking at the components of our balance sheet, at March 31st, 2011, inventories increased $58 million, or 10%, compared to ending inventory on March 31st, 2010. 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 first six months of the fiscal year 2011 at $29.4 million. For fiscal year 2011, we expect capital expenditures, excluding acquisitions, to be in the range of $50 million to $55 million. However, we do anticipate ending the year at the higher end of the forecasted range due to additional store openings in the US at BSG and Sally Mexico.

At March 31st, 2011, our debt, excluding capital leases, totaled approximately $1.5 billion. The ABL facility began the second quarter with a $43.2 million balance. During the quarter, we reduced our total debt by $60.2 million, and included in that $60.2 million is a $17 million prepayment on our senior term loan and the payoff of our $43.2 million balance on our ABL facility.

We believe there is opportunity for us to capitalize in the favorable debt market in the near future, and continue to proactively consider our alternatives within the debt and the notes portion of our debt structure. There is nothing more specific that I can tell you right now, but we'll keep you informed as we conclude on a course of action in the months ahead.

Gary?

Thanks, Mark.

In summary, we had another great quarter. And when combined with our first quarter results, performance for the first half of fiscal 2011 is exceptional.

On a year-to-date basis, our net sales are up almost 12%, partially attributed to strong same store sales growth of 6.4%. Our consolidated margin year-to-date is 80 basis points above prior year, and operating profit margin is 150 basis points over 2010.

I am very proud of our global performance and the Sally Beauty Holdings team that made it come about.

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

Thank you. (Operator instructions.) Your first question comes from the line of Simon Gutman from Credit Suisse.

Hi, it's Gary and Simeon. Gary, I just wanted to congratulate you on another great quarter.

Thanks, Simeon.

And I'll turn it over to Simeon.

Hey, good morning. Just a quick question, Gary, on international. Can you just talk about the regional performance a bit more in detail? And bigger picture, it sounds like trends are strong. And you mentioned that the scale, the greater scale you're getting there, is helping leverage. So, at what point does it make sense to accelerate the international expansion?

Well, to answer your first question, the UK was unusually strong for the quarter. I think a little bit of that had to do with them anniversarying some very bad weather in the second quarter of last year. But, even having said that, the performance there was exceptional.

We're also starting to do better on a comp basis in Germany. We are expanding quite rapidly in France. And we will continue to expand, particularly in France. We're looking at some other opportunities in a couple of other countries over there that could be, from an acquisition standpoint, providing us some growth.

But, in spite of the very difficult continuing economic situation in the UK, our performance was very satisfying. And I think in Europe, again, the economy over there is not terrific. But, we just seem to be doing quite well over there right now.

Okay. So, from that, it sounds like the sort of rate of expansion may hasten more in European markets than Latin American markets.

Well, Simeon, I think a lot of that is going to depend on opportunity. We want to expand in Latin and South America quickly. Our concept works very, very well there. And as I think you know, it's primarily a retail business for us there, which are much better margins.

So, I would like to keep it somewhat balanced. But, both markets are doing well for us. And like I said, it'll be somewhat opportunistic as to the rate of expansion in either area.

Okay. And then, second question on the strength of the comps across both businesses. Wanted to get your view on what the comp growth is for this business, or what it should be. I think based on what you sell and based on the long-term rate, low single digit is what we used to think. And now, there seems to be some drivers that have elevated that, not that we should get used to them. But, I don't -- has the fundamental floor of what this business should grow, has that risen at all, in your mind?

Well, I think it has a little bit, in my mind. Historically, I think we've given numbers of 3% to 5% in comps. We have been performing a little above that. I would tell you that I think a new baseline might be closer to 4% to 5% as opposed to 3% to 5%.

And expectations are right now that will continue. I don't see any reason, with the things that we have going like the CRM program and the Beauty Club Card program on the Sally side and on the BSG side, we continue to pick up brands and we continue to expand geography. And I don't see anything taking away for that, at least in the short term for the foreseeable future.

And if international continues to perform even close to the way it did in the second quarter here, that will be kind of in addition to that where in the past it's been a bit of a drag to our overall comps.

And did weather hold you back in Q1 or Q2? I know you didn't mention it as an excuse, but curious what the impact may have been.

Well, we did have some weather impact, particularly in the South. I know here in the Dallas market we had ice for like a week. I've never seen that in the entire time I've lived here.

But, yes, we did. But, our business is pretty resilient. I don't think you have ever in the past heard us use weather as a major excuse. It happens. It happens. When you're national like we are, it kind of happens somewhere in the country every year. So, you deal with it and you move on.

Okay. Thanks.

You're welcome.

Your next question comes from the line of Meredith Adler from Barclays Capital.

Hey, guys. Congratulations on a good quarter.

Thanks, Meredith.

A couple of questions for you. The first is about you mentioned that you're still able to pick up brands and expand geography in BSG. Is there any reason to think that the Aerial acquisition and going through the process of integrating that hinders you from doing small acquisitions?

No, not at all. As a matter of fact, the new geography that it gave us gives us an opportunity to make smaller acquisitions within that geography now that we have a nice infrastructure.

Some of the states that Aerial operated in, they did not have a lot of brands. Their heaviest concentration was Wisconsin and Minnesota. So, the other four or five states that they operate in are pretty new for us. And we -- it gives us the opportunity, like I said, to go out and pick off some other smaller brands either through acquisition or just through negotiations with some of our supplier partners.

And it also -- I think one of the biggest things it does for us, Meredith, is gives us the opportunity to open a lot of stores, particularly in those states outside Minnesota and Wisconsin, many of those which we were not operating in at all such as Kansas, most of Missouri, Nebraska, some of those states.

Okay, great. That's very helpful. And you did just now mention negotiating to pick up some brands. Is that something that -- is that trend still in place, that some brands prefer working with you than maybe with a different distributor?

Well, of course. And when we move into a geography, oftentimes even if they -- even if we don't have the total business, they choose to use us as a store partner because oftentimes the small distributor who has been representing them for, in some cases, many years doesn't have stores. So, that works out well for us and it works out well for the supplier.

That's great. And then, just another question. I want to go back to you got a question about the CRM, or you said you've been getting questions about it. I guess my question would be, you had three million offers that you've sent out. Do you envision that you're going to continue to have that kind of magnitude of people to send offers to for a while?

Oh, absolutely. Yes, I definitely do. And that list changes with time when you rerun that. Just because of socioeconomics and demographics, that list will change. And as we go deeper and deeper into the deciles of our customer -- of our current Beauty Club Card customer list, that also provides us with some more fertile potential customers.

So, my point in bringing that up, Meredith, was I get questions a lot of times, and it's like what inning are we in as far as CRM. And we just don't look at it like that at all. And I don't think it's going to develop like that at all. It isn't a one time hit where, once you go through all the customers that you can approach, you get some and the rest are no longer customers and it's game over.

It's not that at all. What works for us is, once we get them in the Beauty Club Card program, then, as I mentioned in my remarks, we can approach them with samples based on their purchasing history and the products they use. We can provide them with offers, with new products that come out that might be within the brand that they're already using.

And it just really opens up an opportunity to, in a meaningful way, approach a customer with something that we believe, again based on who she is and what we know about her, would be important to her beauty regimen.

Great. Thank you very much.

You're welcome, Meredith.

Your next question comes from the line of Erika Maschmeyer from Robert W. Baird.

Thanks. Another great quarter.

Thank you.

Did you see any impact from the Easter shift?

Yes, we did. Easter, I think, is becoming less impactful to our Company than it was, say, 10 or 15 years ago. It's still -- you'd still have a bump around Easter. And obviously moving from -- for us, from a second quarter event to a third quarter event, we did see some impact, although we were very, very pleased with our March, even though Easter was not part of it this year.

Great. And then, could you give any other sense or information about the magnitude and contribution from Sally International maybe on the top and bottom line?

Well, I can't give you a whole lot more detail than what we've already given, other than I will reiterate that our international business, all of them, actually, Mexico, South America, and Europe to include the UK, had just a terrific quarter.

Great. And then, you mentioned that you converted Aerial's IT over to your system. What do you have left to integrate from here? And you said that you expect to see some synergies sort of building in the back half of the year. Any sense of the cadence of that, how that could go?

Well, we've done this so many times I think it will go well. What's left is a lot of the back office that actually is moving here to our corporate headquarters.

So, the IT conversion is -- it's a big deal. But, again, we've done it so many times that that's not really where the cost savings and the synergies come in. It's in consolidating things like accounts receivable, accounts payable, customer service and all that sort of thing where the real dollar savings come in. And we still have a fair amount of that that we will be gaining some benefit from throughout the rest of this fiscal year.

Great. And then, just to follow up on it, you mentioned some incremental openings, I think you said in the US and Mexico. What drove your decision there? Was it seeing better lease rates or better new store productivity than you had previously been modeling?

In Mexico, it really was a real estate opportunity. There are -- we just have had a lot of malls coming out of the ground there and new shopping centers, more than we expected. And we decided to take advantage of that.

One of the reasons is, in Mexico if you get in when a mall or a shopping center is new, you oftentimes don't have to pay key money to an existing tenant where you're taking secondhand space. So, wherever possible, when we can get in on the ground floor of a new project, we do it. And that's one of the reasons why.

In the US, it really is more of a function of our closings than our openings. Our openings are actually pretty close to being on our plan. But, we've found that we're closing less stores this year.

And typically, a closing for us is driven by a relocation as opposed to just poor performance. But, in a few cases where we had some stores that were marginal, maybe a dozen or so, not a large number, we have just found that we're seeing enough improvement in them that our closings are down a bit. So, that's really what's driving the higher than expected net new store increase in Sally US.

Great. Thanks so much.

You're welcome.

Your next question comes from the line of Carla Casella from JPMorgan.

Hi. I'm wondering if you could talk about sourcing, where you're getting your products mostly from and what kind of inflation you're seeing in your sourcing costs and the ability to pass through pricing.

Well, as I've mentioned in the past, on the Sally side of our business, approximately 30% of what we sell comes from Asia one way or another, either directly to us or through other suppliers. We are seeing a little bit of price pressure, particularly coming out of China, which is where a lot of our goods come from.

But, first of all, in our business, our price points are such that we can absorb a little of that and also our suppliers can absorb a little of that. We're not at the very low end of things where a 2% price increase has to force its way right through the supply chain immediately or everybody gets hurt. That really isn't the case with us.

But, to answer the second part of your question, we are able to pass those increases along. And again, it's primarily because we don't have somebody next door to us selling the same item. And our products are professional products that are not available in mass, and it gives us a little more ability to pass through increases when necessary.

And I'll also mention that on the BSG side, the 30% I mentioned for Sally is much less on the BSG side. It's actually under 10%. So, when you look at BSG, a little over 90% of their product is actually sourced right here in the US.

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

Hi. I was wondering if you could -- it's kind of a what inning are you in kind of question. But, the Sally stores operating margin is certainly impressive and it's been increasing, and we know the reasons for that. And it seems like those reasons can continue to drive that. But, I don't think there's many retailers out there with operating margin that's in the 20% area, and you're getting up there to 18%, 19%. Can you just talk about what you see as the possibility longer term for that and if those drivers that have been driving it will continue?

Well, I think I say on every call I don't see the drivers changing, because they're kind of built in to the nature of this business. And that's the shift to more retail business, the shift to more brands that we control, and the increase in low country cost sourcing.

But, the Sally operating margins were exceptional this quarter. And I said earlier a lot of that was driven by international. I don't know that I would use over 19%, which I think it was this quarter, ongoing. That was quite an increase from, I think, 17.5% last year for the same quarter.

But, I do see them gradually improving. Like we have said all along, we generally get about a 0.5 point improvement a year partly driven by the customer shift, partly driven by the product mix shift, and the sourcing mix.

And the same thing happens on the BSG side, again due to reasons that are kind if inherent with BSG's business model, the biggest one being the continued shift to more store business and less sales consultant business. And that's just a function of the booth renting phenomena in the US, which isn't going to change. It's been going on for well over 20 years. And if anything, it seems to be accelerating.

Great. And can I just also ask about -- your SG&A leverage is coming through nicely and you had kind of told us that would be happening this year. Looking forward into like next year, fiscal 2012, are there any additional investments or projects or new programs or anything in particular that would make it be that you won't have leverage, at least some leverage again, in FY '12?

Well, I think -- we do have a continuing international ERP project going on. But, I would also tell you that, if our comps stay in the range that we hope that they will, we should be able to more than offset the ERP expenses and should still get some leverage on our SG&A.

Great. Thanks very much.

Thank you.

Your next question comes from the line of Jason Gere from RBC Capital Markets.

Thanks. Good morning, guys.

Morning, Jason.

I was just wondering if, maybe on the quarter, if you could talk a little bit about the same store sales on the Sally side between maybe some of the newer stores that are in the comp base versus the older stores. Just, I guess, thinking about the older stores, is there any need for remodeling at this point? I was just wondering if you can give some color on that. And I just had a couple of follow ups.

We go through a remodeling process on a regular basis. When we do our five year lease renewals, we go in at that point on every store. And if it's a newer store, it's oftentimes just a fresh coat of paint, new window graphics. If it's an older store, oftentimes we will replace checkout counters. Occasionally, we will replace floor tile. But, those are some of the stores that might be 25 or 30 years old.

As far as the comps go, one of the things that I think is significantly underappreciated about this business is we've been around 50 years. Our average store is somewhere around 15 years old, and we're still comping in mid single digits. So, I think that's pretty incredible, and I'd challenge you to find any other retailer that can make that statement.

Great. And then, I guess the other question is really thinking about the performance in the quarter and maybe even thinking about, going ahead, rural versus urban locations. And then, considering that -- who your consumer is, thinking about the impact of fuel. I'm sure you get this question all the time, how you're thinking about that affecting traffic just as gas prices remain escalated. Thanks.

Well, as we commented on, I believe it was in the summer of '08 when gas was being used by a lot of people as an excuse, I think it's obviously going to have an impact on the consumer.

However, our stores deliberately are placed in shopping centers where we are anchored by grocery, oftentimes anchored by Wal-Mart. And we are anchored by tenants that the consumer really has to go to on a regular basis.

So, even though gas is getting higher and a lot of discretionary driving might be cut out, I didn't see it affect our business in 2008. I haven't seen it affect it so far this year.

And I don't really anticipate that, because if you look at the BSG side on the store business, the salon owner and the booth renter has to have supplies to do their business every week, every day. On the Sally side, as I mentioned, I believe that the consumer is going to go grocery shopping and they're going to make their periodic trips to the Wal-Marts and Targets of the world. And that's where we are.

Your next question comes from the line of Joe Altobello from Oppenheimer.

Thanks. Good morning, guys.

Morning.

First question. In terms of the same store sales growth, I apologize if you gave it, but could you just give us a flavor for what drove that? Was it more traffic or was it more tickets?

Joe, I didn't hear specifically what you're asking. What drove what?

The same store sales growth, was it more traffic or more tickets?

It's both. I think we mentioned that, and this included international. Across our businesses, BSG, Sally, and International, ticket and traffic increased for the quarter.

Okay. And then, in terms of your Beauty Club customers, or the incremental Beauty Club customer, who is -- where is she coming from? Is she coming from a mass retailer? Is she coming from a department store? Is she coming from both?

She's coming -- well, I've mentioned in the past that we, I think, have gotten pretty sophisticated in determining who those potential customer are. And it's a tremendous amount of research.

And it's simply a match of going out and finding consumers that are not customers or not Beauty Club Card holders that match the attributes of the best Beauty Club Card customers that we have. So, we narrow it down pretty well.

And because of that, we get a pretty good response rate when we approach those customers, because we know they look a lot like our best customers already. So, to tell you where they come out of, I'm not sure we can answer that. But, I would tell you to some degree it's dependent on the products they're using.

If they are attracted to us from the standpoint of hair color, let's say, my guess is that they are either feeling a little bit of cost pressure from salon prices on hair coloring and are trying to do that themselves, or also, probably given the numbers that I see in retail on hair color, I think many people are wanting to step up to a little more professional brand to do hair color with as opposed to buying their hair color in a box retail kit in mass.

Okay, that's helpful. And then, in terms of the salon business, or at least any insight you might have on salon traffic through BSG, have you seen that tick up at all? Or, has that slowed with the rising gas prices?

No, it hasn't. As you know, BSG is completely professional. So, it's all salon business and stylist business. And you see the comps we just reported and you see the overall growth. So, we haven't seen that.

But, again, BSG is more of a B2B business. And those salons and those booth renters have to have the supplies to operate their business. So, sure, are they upset with the price of gas? I'm sure they are. But, oftentimes we are a stop on their way to the salon. So, it isn't like they're driving 20 miles out of the way to get supplies. We're very conveniently located with almost 1,200 stores just in the US for BSG, and as you know, well over 2,500 in the US for Sally.

So, again, nobody likes the higher gas prices. But, I think that retailers who are at least situated in shopping centers that are anchored by destination stops that the consumer really has to go to on a regular basis, again being grocery or Wal-Mart or Target or those, if you're there, you're not an extra stop. So, it isn't a matter of using a lot of extra fuel to come and visit us.

Got it. Okay. Just one last one, if I could. Could you quantify the Aerial integration expenses that were in the quarter?

Oh, boy. Can you do that?

We really haven't given that kind of detail. But, if you took out some of the Aerial acquisition expenses as well as some of the professional fees that were kind of one-off in connection with the acquisition and just some work on some of their franchise-based business, that you'd be flat to what you saw in the first quarter of 2011.

I'm sorry, flat with what?

The first quarter of 2011.

Keep in mind we were going through this exact same process on the exact same schedule last year with Schoeneman, if that helps you.

Okay. Okay, that does. Excellent. Okay. Thank you.

Your next question comes from the line of Jill Caruthers from Johnson Rice.

Good morning.

Hi, Jill.

Hi. Just a little bit more clarification on the CRM program. It's done remarkable performance on your comps. And kind of how are you addressing the members as you send out direct marketing and whatnot? Are you going by store, by market? And kind of where are you at right now in trying to touch all your markets?

Well, we switched from that strategy actually about a year and a half ago where we were doing it by store and doing it geographically. What we do today is we go across all of our markets in the US, and we are just doing it by decile in the customers that we think are most likely to respond. And then, we move into another decile and do some of those customers.

So, it isn't -- and it gets back to the what inning are you in. If we were doing this by store and felt like once we've finished with a particular geography and moved on to another, there would be an endgame when you're finished. But, that's not the case at all.

What we're finding is a significant amount of our new business, which is driving our comps and our customer visits, are coming from our new Beauty Club cardholders that we then are communicating with on a regular basis and getting them to visit us again.

And the Sally management and the marketing people down there have done a marvelous job in figuring out ways to even get these customers to visit more frequently than what's typically been a five time a year visit from a Beauty Club Card customer. And that all has to do with promotions and offers and incentives that they're giving these customers.

And you touched on my next question. Could you just refresh us on the percentage of business that comes from the card members? And they typically spend more. I know you've given metrics before, if you could just refresh us on those numbers.

Yes. Right now, the Beauty Club Card sales in Sally represent about 40% of Sally's retail business. And the retail business is representing about 73% of Sally's total business, US.

Appreciate it. Thank you.

You're welcome.

Next we'll go to the line of Mimi Noel from Sidoti & Company.

Thanks. Good morning.

Hi, Mimi.

Nicely done on another quarter.

Thank you.

You're welcome. A couple questions. First, looking at the different categories within your business, skin, hair, nails, are you seeing any shifting in performance?

Not really. Hair color is still doing well for us. Hair extensions doing well for us. We've actually seen a nice pick up in our skincare business, which is a fairly small business for us. And I attribute that completely to our merchandising folks have really taken a whole new look at that category and done really well with it.

Nail, especially nail color right now on the BSG side behind this shellac phenomenon, is incredible. And on the Sally side of the business, something called crackle is doing numbers that I've never seen done in the nail color business.

And that's a function of your merchandising or product innovation from the manufacturers?

My comment on the skin care business was our merchandising. My comment on the nail business, they're just new products that have been brought to market in the nail polish category.

Okay. And then, some more questions about your CRM. I guess to maybe provide a framework, ask it a different way, that five million number, the five million member number, would you care to take a stab at what that could be in five years?

Well, that's a tough question. I --.

Or, you could change the time horizon, if you're more comfortable with that.

I don't see the rate of increase diminishing over the next couple of years. I think we have a large pool to feed from right now. I think that our merchandising folks and our advertising folks really have their arms around how this is working.

When you look at the total number of customers we serve in a year retail and you look at five million being our Beauty Club Card customers, that alone tells me that there is a significant amount of runway here. Could that be 10 million in five years? I don't know. I would feel more comfortable telling you that it probably could be seven or eight.

Okay. Thank you for indulging me on that one.

You're welcome.

And then, along the same lines, explain to me -- I don't know if my understanding is accurate. But, as you get deeper and deeper into the deciles, as you say it, do you start to lose efficiencies?

Yes, we probably do, because the -- as you get deeper and deeper into the deciles, those are customers who, over time, have been less and less valuable to you. But, at the same time, you're working with each decile to try and move them up a decile.

So, when I say this thing kind of builds on itself, we're not only going out trying to attract new customers via the prospecting process, but at the same time we're taking deciles -- let's say that decile one is your best customer. We're trying to move decile two up to one and three up to two and so forth.

Okay. That makes sense. And then, the last question I have, I think previously you have described that with this loyalty program, not every one of your stores has the technology compatible with it. And in the past, you've stated what percentage of your store base has this technology. Is my memory accurate there?

No, I don't think so. All of our US stores are compatible with this. And as a matter of fact, our Puerto Rico stores are. Even our Canadian stores would be.

Now, getting outside of North America, first of all, in Europe we're primarily a professional business, but we definitely will be getting into a program like this in the future. But, there -- and we would, I think, go to the UK first because a lot of the stores that we've remodeled over the last few years are retail type stores. And they're adding nicely to the comps there.

But, to answer your question directly, we have no stores in North America that, from a technology standpoint, could not handle this program.

Okay, great. Well, thank you for all the added color. And good luck in your latest quarter.

Thank you very much.

(Operator instructions.) And Mr. Winterhalter, there are no further questions. Please continue.

Okay. Thank you, operator.

To summarize, we had a terrific quarter, positioning us really well for the back half of fiscal 2011. Thanks again for your interest in our Company, and we look forward to seeing all of you soon. Thank you.

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