Sally Beauty Holdings Inc (SBH) 2011 Q3 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 third 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. As a reminder, today's conference is being recorded for replay. I would like to turn the call over to Karen Fugate, Vice President of Investor Relations.

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contracts or business and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E by the Securities and Exchange Act of 1934. Many of these forward-looking statements can be identified by the use of words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, or 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 publically update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliations of its adjusting and non-GAAP financial measures in its earnings press release and on its Web site.

With me on the call today are Gary Winterhalter, President and Chief Executive Officer, and Mark Flaherty, Senior 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 Third 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 the fiscal 2011 third quarter in more detail.

As you may have seen from our press release this morning, we delivered another strong quarter of top- and bottom-line growth in both our businesses. On a consolidated basis, same store sales were up 5.9% and net sales grew 12.6%, marking our 6th quarter in a row for double-digit growth. Gross profit margin was 49.1%, up 50 basis points. Adjusted net earnings in the third quarter increased by 35.6% to $55.8 million, or $0.30 per share, after adjusting for an after-tax of $13.4 million from the litigation settlement net of non-recurring expenses. Including this $13.4 million credit, GAAP net earnings grew 68.2% to $69.1 million or $0.37 per diluted share. We ended the quarter with a total store count of 4262, an increase of 276 stores, or growth of 6.9% over last year, of which 4.8% was organic growth.

Turning to our segment performance, starting with Sally Beauty Supply. We continue to realize year over year growth in our international business. The initiatives we launched in the UK are coming together nicely and yielding positive returns. To date, 50% of our UK store base has been updated and rebranded. We believe our increased visibility and brand awareness to retail consumer drove higher traffic, sales growth, and gross margin expansion. Same store sales for Sally Beauty Supply grew 6.1% versus 3.6% in the prior year. Net sales were $517.3 million, growth of 10.6%. The primary contributor of this strong performance was growth in same store sales and new store openings. Gross profit margin for Sally Beauty ended the quarter at 54.4%, up 100 basis points over the prior year quarter. Gross margin expansion was primarily due to the continued shift in product and customer mix and low-cost sourcing. For the first time in a quarter, operating earnings for Sally Beauty Supply hit the $100 million mark, reaching $103.3 million, or growth of 21.3%. Operating margin also reached a quarter high of 20%, a 180 basis point improvement over last year's third quarter. We believe our CRM program continues to be a key contributor to the consistent growth in sales and gross margin.

During the third quarter, we reached out to over 5 million prospective new customers through our CRM initiative, which contributed to 21% growth in Beauty Club Card memberships.

Now turning to our BSG segment. BSG had same store growth of 5.3%, compared to 7.4% in last year's third quarter. Net sales were up 15.9%, to reach $319.4 million. This performance was primarily due to acquisitions, growth in same store sales, and new stores. BSG's gross profit was $129 million, growth of 15.9%. Gross profit margin was 40.4%, equal to the prior year quarter. Operating earnings for BSG were $56.7 million, growth of 88.4% with an operating margin of 17.8%, a 690 basis point increase. BSG's operating results reflect a net positive impact of $19 million from a litigation settlement and non-recurring charges.

To summarize, Sally Beauty Holdings performed very well in the third quarter. We achieved record earnings in both our segments and continued our efforts to strengthen the balance sheet, making a prepayment of $61 million on our long-term debt. With one quarter remaining in the fiscal year, we believe that 2011 will end on a strong note, and expect that the growth levers we have in place will continue into fiscal 2012. Now Mark will provide more financial detail for the third quarter. Mark?

Thanks, Gary. Consolidated net sales for the third quarter were $836.6 billion, an increase of 12.6%. This increase was driven by same store sales growth of 5.9%, growth from acquisitions of 3.6%, new store growth of 1.8% and favorable impact in foreign currency exchange rates of 1.7%. Consolidated gross profit was $410.5 million, or 49.1% of sales, a 50 basis point improvement from the fiscal 2010 third quarter.

Third quarter SG&A expenses were $259 million and include a $21.3 million credit from a litigation settlement net of non-recurring charges. This credit is reflected in the BSG segment and in the unallocated corporate expenses, in the amount of $19 million and $2.3 million respectively. Including the credit, consolidated SG&A as a percentage of sales was 31%, a 340 basis point improvement from the 2010 third quarter. Excluding the credit, SG&A as a percentage of sales would have also been favorable over the prior year. Unallocated corporate expenses including share-based compensation were $23.7 million or 3.8% of sales, versus the fiscal 2010 third quarter expenses of $22.6 million or 3% of sales. Consolidated operating earnings in the third quarter increased 47.1% to reach $136.3 million. Operating margin was up 380 basis points to 16.3%.

Third quarter performance was positively-impacted by SG&A leverage, higher gross margins and a credit of $21.3 million from a litigation settlement net of non-recurring charges. Interest expense from the third quarter was $27.8 million. Interest expense decreased $514,000 over the prior year quarter due to lower outstanding principal balances on our senior term loans. For the fiscal 2011 third quarter, our effective tax rate was 36.3% versus 36.1% for the fiscal 2010 third quarter. Given our year to date effective tax rate experience, we now estimate that our effective tax rate will be in the range of 36% to 37% versus our previous expectations of 37% to 38%.

GAAP earnings per share was $0.37 compared to $0.22 in the fiscal 2010 third quarter. Our GAAP net earnings performance reflects a credit net of tax of $13.4 million related to the litigation settlement net of non-recurring charges. Adjusted net earnings per share was $0.30 per share compared $0.22 per share in the year ago quarter.

And turning to the balance sheet of June 30, 2011, inventory increased by $78.4 million or 13.4% compared to ending inventory on June 30, 2010. This year over year increase is primarily due to sales growth in existing stores and additional inventory from new store openings as well as acquisitions.

Capital expenditures finished the first nine months of fiscal 2011 at $43.1 million. For the fiscal year, we continue to expect capital expenditures, excluding acquisitions, to be approximately $55 million.

During the quarter, we reduced our term loan B debt by approximately $61 million, bringing our total debt, excluding capital leases, under $1.5 billion. In May of 2011, our credit rating agency Standard & Poor's and Moody's upgraded Sally Beauty Holdings' credit ratings to Double B and B1 respectively. In the previous quarters we've stated that we are proactively considering our alternatives within the term debt and note portions of our debt structure. Although we've been in the enviable position of not needing to do anything with our debt at this time, we will continue to look for opportunities when the market becomes more attractive. Gary?

Thank you, Mark. In summary, our performance in the third quarter was strong. With three quarters of the year complete, we feel good about ending 2011 on a strong note, positioning us for another robust year in fiscal 2012. We will now turn the call over to the operator to take your questions.

(Operator Instructions) Simone Gutman, with Credit Suisse.

Good morning, it's Simeon Gutman, thanks. Can you talk on the BSG side -- the consultants are up, I think store growth is, and I recognize some of that is coming from the acquisitions. Can you talk about how your new BSG salespeople are ramping up and what the right balance of salespeople to stores is over time in that segment?

Simeon, it's Gary. I think that's just going to be reflective of where the business is shifting. As you've heard us say over the last several years, primarily due to the shift in the industry to booth renting, the BSG business has shifted more towards the stores, and as that continues, you're constantly rationalizing the sales force, so that the people that you do have out there are making a decent living and covering the salons that need that kind of attention. When a salon shifts to the booth running format, those stylists generally become store customers. It's mostly done through attrition, but I think we stay on top of it pretty well. I don't see any major shifts in that area. It will just kind of shift, as I said, as the business shifts, either way.

This is Gary, Gary. Just a follow-up question. Could you talk about on the international side? Obviously you had really good results, as you mentioned on the call. Could you talk about Europe versus Latin America, where your priority is and also, as you look at Europe's ramp, how comfortable are you, as you move further along, that it's going to kind of emulate what you're seeing in the US over time?

Well, Gary, I'm not sure that Europe will ever emulate the US. The US is a terrific market for us, particularly for Sally with the retail business it's a wonderful market from a margins standpoint. However, it took many, many years to grow the retail business in the US to the point that it is today, and we are where we were 25 years ago in Europe relative to the retail business. I do think we're ahead of where we were 25 years ago when it comes to the private control label business in Europe. In parts of Europe that we're primarily focused on and where we have our heaviest concentrations are Belgium, France, Germany, and the UK. So, we aren't feeling some of the extreme difficulties that the economies are having in countries such as Italy, Ireland -- although we have a presence in Ireland, it's not a large one. Spain -- we have a very small presence, and it's a very difficult market right now. But as far as our priorities go, we have a much larger presence in Europe. We've been there a lot longer, and I think that it will continue to afford us some great expansion opportunities, not only organically but via acquisition.

Central and South America, on the other hand, are more like the Sally model, in that the business is primarily retail. It's just that it's very difficult to get started in some of the key markets down there, particularly Brazil and Argentina. Unless you are in Brazil, as an example, and manufacturing in Brazil, you just don't go there and start opening stores and importing product. It's very, very difficult to do that. So I think, long-term, that the margins in Central and South America can be better for us, but I think the growth will be more sporadic, given that we -- once we get into a country we can grow rapidly within it, which I think we're proving in Chile, but getting into the country initially -- Chile was not a major problem, but I think Argentina and Brazil will be a bit more challenging.

Getting back to Europe, I mentioned our private and controlled label business is actually much stronger there than it was even 10 years ago here in the US. From a store count standpoint, we've been very successful in the last couple of years opening new stores in France, and we will continue to do that. We still are somewhere in the 35-40 store range in France, and we believe we can have 3 or 4 times that at a minimum.

Can I just sneak one last one in? The balance between traffic and ticket in the Sally stores in the first quarter and any inflation in any of the categories?

Not seeing much in the way of inflation yet. We are starting to see a little bit of price pressure, particularly on hair extensions -- not only price pressure, but some supply shortages. But we saw a nice growth in ticket and traffic as we have all year for Sally.

Thanks, good quarter.

Karru Martinson, representing Deutsche Bank.

In terms of the product mix at Sally, I was wondering if you could provide a little color on what was helping drive that margin expansion there?

It's the same thing that's been driving the expansion. Our brands are growing much faster than our overall sales rates, so the margins on our brands obviously are significantly higher, that's helping margin. And the customer mix -- we continue to see very nice growth, primarily driven by our Beauty Club Card and CRM programs on the retail side of our business. As you know, that's a higher margin sale for us, as well.

In terms of the private or controlled brands, what is that as a percentage of sales these days?

It's approaching 44.

Okay, so a little bit up, there. And then, just lastly, you guys reduced the term loan by $60 million. Was that a required payment, that you had to put the settlement proceeds there, or -- kind of wondering why wouldn't you have gone after the more expensive bond debt here.

Well, the bond debt is still trading well above par, and in some cases, it's trading well above its first call in November of this year.

Do you the market's trying to tell you something?

I hope so.

All right. Thank you very much, guys.

Emily Shanks with Barclays Capital.

Can you update us on where your restricted payments basket stands?

Yes, the restricted payments basket right now is well over $300 million. It's about $315 million. Our general basket is roughly $52 million, so in total availability it's about $367 million.

Great, thank you. Just as we think bigger-picture for your capital structure, do you have a target leverage in mind that you want to operate this business at?

Well, we've been comfortable all along with where our leverage is. Certainly, where the Company historically has been in terms of its ability to generate free cash flow, we've been very comfortable in good times and certainly in challenging times. As far as a targeted ratio, in terms of optimizing where we think our weighted average cost to capital is, certainly as we get into the 2.5 to 3 times, which is pretty near where we are today, we feel very comfortable with that. If you get beyond that and you start to try to strive for investment-grade type ratings, the law of diminishing returns starts to kick in, in terms of pricing and maximizing our capital structure in the market. So, we're getting very close to, I think, where -- ultimately, down the road, it's a question of -- based on our success, what are we going to be doing with some of the cash after we've satisfied our long-term strategies in terms of our organic growth, our acquisition trajectory and certainly the leveraging of the balance sheet. Those are good problems to have down the road, and certainly we're not agnostic to one decision or another.

Great, I really appreciate the color. Terrific quarter.

Meredith Adler, Barclay's Capital.

Thanks, guys. Congratulations. I thought it was a good quarter. I'd like to just go back, maybe, to the question that was asked before, about international. I understand that it's mostly a professional customer that's buying at the stores in Europe. Is there, given your name recognition in the market, which is probably still pretty limited, and the general development of the market, is there the potential to move it more towards the retail customer, or is that just never going to happen in France or Germany?

No, I think it will happen throughout Europe, Meredith, but as we found in the US, this isn't the kind of business that you can spend a lot of money in general consumer advertising and get a good return on, because our whole reason for being, as far as the retail consumer is concerned, is the availability of the professional products which, for the most part, are not well known to them until they start shopping via one of our stores or stumble across one of these brands in the salon environment. So, the ability to push that along rapidly is the inhibitor there. If we could put together a creative TV or billboard or magazine -- or whatever would be effective in Europe -- campaign, that would be easy. However, the fact that that hasn't worked is also one of the things that makes it very difficult to compete with us, not only in Europe, obviously, but here in the US. We've got such a head start on anyone that would want to compete with us, and obviously in the US when 44% of what we're selling are brands that we own, that's difficult to compete with. So, what I would say to you is -- 25 years from now, we may see the same type of percentages retail versus professional in Europe that we see here. But I don't think that it's going to grow much more rapidly than it did in the US. And I say it could grow a little more rapidly because of the things we've learned from the Beauty Club Card Program and the CRM Program. We fully expect to institute those programs in any of the markets once we get an established database of retail consumers that we can then profile, which is how the CRM Program works. And also, that we can start advertising to via email and other types of cost-effective advertising to the existing Beauty Club Card base that we do have in some of those countries.

Well, I guess I'll follow up on that a little bit. I know that there are information sources in the US that find people who fit your profile. Does that same data exist in Europe?

No. That's the other problem. Actually, the company that we use here in the US is just trying to put together and build a model for Canada. They also would love to expand internationally, but the information on consumers is just not as readily available in a lot of countries, if at all. So, that's another inhibitor to the CRM piece and to profiling and reaching out to prospective customers. However, once you have a Beauty Club Card customer, you can then market to them just as we do here in the US without the third piece of the CRM. The CRM Program is designed to bring us new Beauty Club Card customers by going after these prospects.

Got it. And then, my final question is about hair extensions. You said you're beginning to see some price pressure. Kind of more broadly, it seems that one of the drivers of that strong private label penetration has been hair extensions, which are popular. Is there any reason to believe that's going to lose popularity, and is there any way for us who don't -- I don't follow a lot of hair care companies -- to keep track of what those trends are that might be impacting that bit?

The best way to keep track of the trends is to stay close to us, because that's one thing that I think we're very good at. We attend all the major trade shows where these trends are usually launched all over the world. As far as monitoring when these trends are going to really accelerate and when they're going to really slow down, hair extensions have been very popular now for at least the last 4 or 5 years. I don't really see the trends slowing down, but I do see some issues with the supply. Now, keep in mind, when I say the supply, we're only talking about the human hair extensions. The synthetic hair extensions obviously are a manufactured product, and there is no supply issue with those, but there has been, in the last 4 or 5 months, a fairly tight squeeze on getting human hair out of Asia, and what we're hearing from the suppliers in Asia who actually buy most of this hair in India, is that there is a shortage. I guess at some point, hair takes a long time to grow. You whack off two feet of hair off of some woman's head, she's not going to be back around for a while to have it done again. But, you know, they're trends. The flat-irons were an enormous trend for close to 10 years. It's still a very strong business, but it isn't growing like it did. However, curls are coming back into fashion, so curling irons are taking off like a rocket, but it's from a smaller base than the current base of flat-irons. Another trend that seems to be hot right now are these feathers. I just came back from the CosmoProf show in Las Vegas last weekend, and it's all about feathers. Sooner or later there will be a shortage on turkeys, or wherever they get these feathers. It's just the beauty business. Fortunately, some of these trends are extremely difficult for [mass] to follow us on. Hair extensions, for example. You don't see many mass merchants getting into hair extensions because of the inventory it takes to have the proper selection in lengths and in colors. Feathers is another thing. It will be difficult for mass to get into feathers and soon enough to get the wave and to be able to get out of it soon enough not to get burned. Feathers is something I wouldn't expect to last for 4 or 5 years as hair extensions has.

Okay. And then, I have one more question for Mark. You said that you were looking -- you would consider making changes to the -- I guess refinance some of the debt when the markets were more favorable. What is it in particular that you're looking for out of the markets to say that you're ready to refinance the bonds that are going to be callable in November?

Yes, we look at both the leverage loan and the high-yield market, Meredith, and certainly, as you've seen with the equity market, particularly today and over the last month or so -- the credit markets have backed up a little bit, with some of the world events that have taken place. And also, it's that we're an opportunistic refinancer. A lot about it is economics, pricing, and these transactions can be MPV-positive to us. So we are of the mindset that when we start to see certain price points in our structure that make economic sense, certainly we will try to find an entry point, whether that is in the leverage loan market or in the high-yield market. And both, right now, as far as opportunistic deals, have been rather lackluster or non-existent.

And was that different before this recent backup? Obviously, you couldn't take advantage of it before, but were you seeing better sort of opportunities three or four months ago?

I think we were seeing a little bit better opportunities three or four months ago. In terms of where we want it to be, and where we were targeting, that certainly is the case. But, as far as just kind of a true, pull-the-trigger entry point -- I think that it was certainly attractive but not enough for us to pull the trigger.

Okay, thank you very much.

Linda Bolton-Weiser with Caris.

I just wanted -- just a little question on BSG. I guess you said the growth margin was flattish year over year and if I recall correctly, I think you had been having some nice improvement year over year in growth margin there. Is there anything in particular that's going on? Can you give us some more color on that? Well, actually, our operating margins have been what's been improving at BSG, more than the gross profit margin. Actually, we just went over 40% in gross margin for the first time, I believe, in Q3 -- or Q2. And once last year, I believe. For us to stay above 40 in gross margin for BSG is pretty good, keeping in mind that we don't have the private label business in BSG and we don't have the retail business in BSG. Our margin driver at BSG is the business shifting more towards the stores, because the gross profit margin in the store business is better than the sales consultant business for several reasons. So, when I say stay at 40, I don't mean that it will stay flat at 40, but the growth rate there will be slower than it is at Sally because the only driver you really have there is the ship to the store business -- and then, we have somewhat of a driver in some of the brands that we've been bringing on, our better margin brands, and also when you look at our acquisitions, when we bring in a large acquisition like we did a year ago with Schoeneman and this year with Ariel, we generally find that either from purchasing differences or just merchandising differences that their margins are generally lower than BSG's, and it takes us a year or so to get those equalized, so to speak. But then, as happened with Schoeneman, you get that equalized and then you turn around and you have an Ariel right on top of that, so it's like you take two steps forward and one step back. But I'm quite pleased with where our gross profit margins are at BSG. There is room for improvement and, as I just said, it will improve primarily for those two reasons, but I don't look at being flat to last year, especially with a significant acquisition like Ariel coming on board, as a negative at all.

Okay. And just on the sales of BSG -- I guess maybe the acquisition revenue was a little bit lighter than what I had projected. It looked a little bit less than in last quarter. Is the integration of Ariel going okay, or is there anything unexpected in that business, or --?

No, not at all. Actually, the Ariel acquisition -- we're ahead of our plan for the revenue dollars on the acquisition.

And there's no particular kind of seasonality that would make one quarter differ from another on sales there?

No, no. I mean, we had slight differences from quarter to quarter, but they're not really seasonal. They may be somewhat seasonal relative to our industry, but there's no significant seasonality in either side of our business.

Okay, that's all I had. Thanks a lot.

Erika Maschmeyer with Robert W. Baird.

Thanks, nice quarter. You said you touched 5 million customers this last quarter. Could you give us a sense of what decile you're in right now as you think of that population that you've targeted? How far have you moved down? And I think on the last call you said that so far you've reached out to 23 million customers. Do you have an updated number for that?

Well, the easiest way to update that is to add the 5 million to the 23 million. As I've been trying to explain the last few quarters, we don't really look at this as a decile or an inning, or anything else. The CRM Program and the Beauty Club Card Program will be doing exactly what it's doing today well after we're all gone. It isn't the kind of program where you've got x number of customers that you're going to approach, and when you get to that number, it's over. It builds on itself, which is critically important, and the customer mix and the prospective customers that we profile continue to change. So, you really can't look at that as what inning are we in or what decile are we down to. We're working in different ways with all the deciles now. In some cases, it's a decile 7 or 8 customer that we haven't seen for 7 or 8 months and prior to that was a every-3-or-4-month customer. So, we reach out to that customer in a different way. All these things have had very nice results for us, so I just don't look to be saying to you at some point in time -- well, we got to the end of the rope on this and we're going to have to dream up something else. It's a customer relationship program and getting them into the Beauty Card program is the number one objective, because then we have an ongoing communication with these customers. Because they have a card and because we track their purchases after they become a cardholder, we're able to really understand what it is they use and what it is, maybe more importantly, that they don't use, and we go after expanding the categories that they buy from us and their frequency of visit.

Gotcha. That makes a lot of sense and is helpful. So, the 5 million number that you put out, those are the new customers that you are talking to. Because I know that it takes multiple touchpoints -- I think you said before, maybe you have to send something to someone four times to get them to respond. So you're now reaching out to 5 million new people plus all of the other customers, like the 3 million that you started contacting last quarter. Is that the right way to think about it?

Yes, that's a good way to think about it. And I think when you look at the fact that our Club memberships for the quarter were up 21% over last year, and it was like -- I think at this time last year we were somewhere around $4.5 million -- we're now we're over $5 million. That's significant. That doesn't seem to be slowing down. I think that, as I said, it will continue to evolve, as does the process in which we select whose those prospect customers are.

Gotcha. Do you have any sense of how much potential there is for CosmoProf in the US, kind of given the size the market is now -- how many stores do you think you could have, and do you think it could ever match the number of Sally stores?

No, I doubt that it can match the number of Sally stores, simply because it's dealing with only stylists. As you know very well, the majority of Sally's business today is retail. So I don't believe it will ever be even close to the number of Sally stores. But I do believe that our 4% or so growth that we've kind of been looking at on not only CosmoProf but Sally as well can continue for several years into the future.

Great, and then just a couple of quick follow-ups. How many stores do you have in Chile right now? And do you have a sense of how many Beauty Club members or the proportion of that base is outside the US?

The Chile store count, I believe, right now is 25 and we'll end the year with 2 or 3 more. And could you repeat the second part of your question?

How many Beauty Club Card members do you have out of the US? We don't. Well, I take that back -- we do have some in Canada. But as I said earlier in the call, that's one of the opportunities that we're looking forward to get started. We are starting the program in the UK, so we probably have some there, but at this point it isn't significant. The other thing I've said in the past is, when you bring a customer onto the Beauty Club Card program, that's great information, but until you have at least a year, preferably two years or more, of data and history on that customer, it's difficult to really understand them as a customer and be able to utilize that to drive your business forward and your relationship with that customer forward.

Great, thanks so much.

Carla Casella, JP Morgan.

Hi, most of my questions have been answered, but when you talk about the Beauty Club Card holders, you've given some status in the past on how much greater their purchases are. Has that changed much as you expand the number of holders significantly?

No, it hasn't changed a lot, Carla. I think what we are starting to see an even more positive reaction to is when we sign up a new card member -- I think I've told you in the past or one of the numbers we quote is, in general the retail consumer who joins the club goes from being an average 4 time a year to an average 5 time a year customer. Some of things that our marketing club is down to the new Beauty Club Card member is stimulating those visits to be even more than one additional visit during the year. They're doing a marvelous job incenting that customer when they initially sign up for the Beauty Club Card program, to stimulate a quicker return visit.

Okay, great, thank you.

Joe Altobello, with Oppenheimer.

Most of my questions have been answered as well. Just one quick one -- I think, Gary, earlier you said that you continue to see some pretty good growth in terms of ticket and traffic at Sally, and I was curious -- either late in the quarter or into July, did you notice any slowdown on the ticket side at all, any tradedown, for example?

Well, this quarter was through June, Joe, and I didn't notice any of that through the end of June, no.

And how about for July, at least the early indication?

Well, I really don't want to comment on July, but all I'll say is, July didn't show us anything unexpected.

Okay, thank you very much.

Jason Gere, with RBC.

Thanks. Just one question -- just talking about Sally and the operating margin, that 20% that you hit this quarter. Obviously there's a nice acceleration, even from when you peaked in the second quarter -- peak's a bad word. What do you see as the long-term operating margin that you can have for this business, especially as you grow more on the international side and get more leverage there? Can you just maybe give us a 3 to 5 year kind of context on the operating margin side on Sally? Thanks.

I wish I could. Here's what I will tell you. The margin drivers that are driving Sally North America's business today are in place. I don't expect them to change because they're natural and they're just kind of a function of the business. Those are the product mix moving more to brands we own, the customer mix moving more toward to the consumer, and we're getting a slight pickup every quarter in low-cost sourcing activities. Now, we will get a margin improvement and leverage as the European business and any of the international businesses grow. However, in Europe, where most of our concentration is, because we do not have a significant retail business there those margins will be significantly less. So if that business starts growing very quickly and becomes an increasing percentage of the overall Sally business, that will put some downward pressure on Sally's operating margin percentage. So even though the Sally North American business, I believe, can continue to grow about a half a point a year as it's done for many, many years, the fact that the international business operates at a significantly lower gross and operating margin percentage -- the larger that becomes, the more of a drag it will be. However, I would much prefer having the opportunity to double the size of this business over the next 5, 6 years, or whatever, by having that international business available to us, even though our margins, at a percentage basis, may take a hit. Last time I checked, you don't pay shareholders or bank debt or anything else with percentages, it's got to be dollars.

Okay, great. Thanks, Gary.

Jill Caruthers, Johnson Rice.

Just a follow-up on your previous comment. Could you talk about, within the Sally Division International, it seems as though it's been growing positive for the past couple consecutive quarters, but you haven't really seen any degradation on the net Sally margin. Could you talk about -- are you seeing huge improvements in international margins as well?

We are seeing some of our international businesses' margins improve significantly. But also, keep in mind that International is still only about 18% of the business. So, if that grows -- which, on a percentage base, our international business is growing much faster than our domestic -- if that grows to be 25% or 30% of the total business and that margin is, just for the sake of conversation, say, 10% or 11% versus Sally's 22%, 23%, whatever it is -- it's going to have some pressure. But, again, I would much rather have an 18% operating margin on $5 billion in sales than a 22% operating margin on $3 billion in sales.

Understood, understood. Could you talk about the margin favorability between the customer mix. I know it's always been a driver as you increase the retail. Can you quantify that difference or any type of range of magnitude between the retail and the professional customer?

Are you talking about the international business or in general?

I'm sorry, in general at Sally, yes.

Yes, at Sally the retail consumer business is at least 10 gross profit points above the professional.

Okay, okay. And then, just a quick one on Easter shift. It seems that that holiday period shifted into this past quarter. Could you quantify any benefit, or was it pretty small?

You know, this year it was almost invisible. It was kind of a strange Easter. We actually expected it to be softer in March and, as you said, a little more of a shift into April, and it really didn't happen that way. When I look at March and April together -- which is really the right way to look, I believe, at Easter -- it was fine, but we didn't see the soft March and significant increase in April.

Okay, appreciate it. Thank you.

(Operator Instructions) Erika Maschmeyer, Robert W. Baird.

Great, thanks. One other follow-up here. Could you talk a little bit about which areas might be opportunities for you on the low-cost sourcing side and how much each point contributes to gross margin as you add categories there?

Well, the way to look at that, Erika, is -- about 30% of what we sell in North America originates in Asia, is manufactured in Asia. We have about 7%, or about 25% of that 30%, that we are importing on a direct basis today. We have said and believe that we, over the long haul, can probably double that 7% and get to the point where about half of the product that we sell that originates in Asia is being done on a direct import basis. So, how that impacts gross margin -- you'd have to put some numbers to that, but I would tell you that, again, from that 7% to the 14% or 15% is a long haul. That could be over the next 8 to 10 years. The other 15%, or the other half of the Asia-produced product, are branded goods that we carry and we have no intention of walking away from. There are many very valuable brands that we carry that are sourced in Asia -- the professional products from Con-Air or the professional products from Helen of Troy, those are two of our very valued and very large electrical suppliers, and even though we do import some electricals on our own, we have no intention of trying to replace them as suppliers, because their names are well-known in the industry and they're great partners.

Very helpful, thank you.

There are no further questions at this time. We'll turn the call back over to Gary Winterhalter. Please go ahead.

Thanks, operator. To summarize, we had a terrific quarter, positioning us well to end fiscal 2011 with another record year. As always, thank you again for your interest in Sally Beauty Holdings, and we look forward to seeing you all soon.

And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using the AT&T executive teleconferencing service. You may now disconnect.