Sally Beauty Holdings Inc (SBH) 2012 Q1 法說會逐字稿

Welcome to the Sally Beauty Holdings fiscal 2012 first quarter earnings results. At this time all lines are in a listen-only mode.(Operator Instructions).

I would now like to turn the conference over to your host, Ms 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, contracts or business, and trend information made during this call may contain forward-looking statements within the meaning of section 21-E of the Securities Exchange ACT of 1934.

Many of these forward-looking statements can be identified by use of the words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe and similar words or phrases. These mattersare subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Holdings SEC filings including its most recent annual form report, the annual report on form 10-K for the fiscal year ended September 30th of 2011. The Company does not undertake any obligation to publicly update or revise its forward-looking statements. The Company has provided a detailed explanation and reconciliations of its adjusting items and 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 2012 first quarter earnings call.

I will begin today's discussion with a high level review of our financial results followed by a review of our business initiatives. Mark will take you through the fiscal 2012 first quarter in more detail.

As you may have seen from our press release this morning, fiscal 2012 is off to a terrific start with strong performance from each of our business segments. We delivered consolidated sales growth of 9% and record same-store sales growth of 7.1%. Gross profit margin expanded 100 basis points to reach 48.8%.

We achieved SG&A leverage in the quarter which contributed to our 20% EBITDA growth. Adjusted net earnings in the first quarter increased by 36% to $55.7 million or $0.29 per share after adjusting for an after-tax charge of $25.6 million. This charge is due to the issuance of our new senior notes and the redemption of 2014 senior and 2016 senior subnotes.

Including this $25.6 million charge, gap net earnings were down 26.4% to $30.1 million or $0.16 per diluted share. We ended the quarter with a store count of 4,363, an increase of 185, or growth of 4.4% over last year, of which 4% was organic growth.

Turning to our segment performance starting with Sally Beauty supply. Same-store sales growth for Sally Beauty hit a record high of 8% versus 6.4% in the prior year. Net sales reached $536.4 million for strong growth of 11.5%. The primary contributors of this strong sales performance include higher transactions and higher ticket in Sally North America driven by CRM program, as well as improvement in our international businesses.

Gross profit margin at Sally Beauty ended the quarter at 53.9% up 70 basis points. Gross margin expansion was primarily due to the continued shift in product and customer mix. Operating earnings reached $101.1 million for growth of 21%.

Operating margin was 18.8%, an improvement of 100-- 140 basis points over last year's first quarter. Operating margin improvement was fueled by gross margin and SG&A leverage in our domestic and international businesses. During the first quarter, we reached over six million beauty card club memberships. We believe our targeted marketing initiative and BCC customer conversion efforts will continue to lead to transaction growth and higher average ticket in fiscal 2012 and beyond.

Now turning to our BSG segment. BSG had same store sales growth of 5% with net sales growth of 5.1%. As a reminder we anniversaried the acquisition of Aerial this quarter, which about brings tougher comparisons to our fiscal 2011 first quarter. BSG's gross profit margin was up 90 basis points, marking the fourth consecutive quarter to reach over 40%.

Gross margin performance was due to favorable customer and product mix. Operating margin at BSG improved by 200 basis points to reach 13.2% for the quarter. This strong performance was due to gross margin expansion and SG&A leverage.

To summarize, Sally Beauty Holdings performed very well in the first quarter. We achieved record results across the business and continued our efforts to lower our cost of capital. Now Mark will provide more financial detail for the first quarter. Mark?

Thanks, Gary. Consolidated net sales for the first quarter were $864.8 million, an increase of 9%. This increase was primarily driven by 7.1% growth in same-store sales and 2.1% in new store growth.

Consolidated gross profit was $421.9 million or 48.8% of sales, a 100 basis point improvement from the fiscal 2011first quarter.

First quarter SG&A expenses were $293 million and represented 33.9% of sales, a 50 basis point improvement from the 2011 first quarter. Unallocated corporate expenses including share-based compensation, were $31.1 million or 3.6% of sales versus the fiscal 2011 first quarter expenses of $26.3 million and 3.3% of sales.

For the fiscal year of 2012 unallocated corporate expenses including approximately $18 million in share-based compensation are expected to be in the range of $105 million to $110 million. Consolidated operating earnings in the first quarter increased 22.6% to reach $113.3 million.

Operating margin was up 150 basis points to 13.1%. The first quarter's strong performance was positively impacted by SG&A leverage and higher gross margins in both of our businesses. Interest expense during the quarter totaled $64 million a year-over-year increase of $34.4 million.

During the quarter we closed on our offering of $750 million related to new senior notes priced at 6 7/8%. We used the proceeds to redeem our high-interest rate senior and senior subnotes as well a pay the redemption premiums and unpaid interest. As a result of these transactions we incurred a pre-tax charges of $39.9 million which is the primary increase included in our interest expense for the first quarter.

For the fiscal 2012 first quarter, our effective tax rate was 38.9%versus 34.8% in the fiscal 2011 first quarter. The tax rate was higher in the fiscal 2012 first quarter due to non-recurring tax benefits recorded in the fiscal 2011 first quarter. We estimate our annual effective tax rate for fiscal 2012 to be in the range of 37% to 38%.

GAAP earnings per share were $0.16 compared to $0.22 in fiscal 2011 first quarter. Our GAAP net earnings performance reflects a $25.6 million net-of-taxcharge related to the issuance of new senior notes and the redemption of the old senior and senior subnotes.

Excluding this charge, adjusted net earnings per share was $0.29 compared to $0.22 in the prior year ago quarter. Adjusted EBITDA for the first quarter was $136.9 million, a growth of 19.7% compared to $114.3 million in the prior years quarter. The strong performance is primarily due to sales growth, SG&A leverage and higher gross margins.

In looking at the balance sheet , inventories increased $52.3 million or 8.3% compared to ending inventory on December 31 2010. This year-over-year increase is primarily due to sales growth in existing stores, additional inventory from new store openings and acquisitions.

As of December 31 2011 our debt excluding capital leases totaled approximately $1.5 billion. Capital expenditures for the first three months of fiscal year 2012 were $13.9 million. For the fiscal year 2012 we continue to expect capital expenditures, excluding acquisitions, to be in the range of $65 million to $75 million.

As you know, our company generates a significant amount of cash, and over the last five years we have had the luxury of growing our business through acquisitions and organic growth while using the remaining cash to pay down $450 million of long-term debt as well as taking advantage of the strengthening credit markets to refinance portions of our capital. We continued to take advantage of the improved mark-- we hope to continue to take advantage of improved credit market conditions during the upcoming quarters to refinance our term B note as well.

Growing the business organically and through acquisitions will continue to be a priority as our leverage ratio improves. Our board may also consider other uses for our excess cash that include dividends and/or stock repurchases. We have no mandate yet but are actively considering our options.

Thanks, Mark. In summary, we had another very strong quarter and set the tone for fiscal 2012. We believe we have the leverage in place to drive top and bottom line growth for the longer term. 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.

(Operator Instructions). And we'll go to the first question, to the line of Michelle Tan from Goldman Sachs. Please go ahead.

Great, thanks. Apologies in advance for any background noise since I am on a train. A couple questions. First, the upside that you are seeing to gross margin from mix shift, etc. really seem to be outpacing the benefit that you expect to see in a typical year. Can you talk about what is driving that upside? Is itfaster mix shifts than you expected to the P&L, or so to private label and to retail or are there other incremental drivers in there that we should be thinking about?

Michelle I would say on the Sally side it is a little more aggressive retail growth than we normally expect. It is also significant growth in our Beauty Club Card membership and sales to that customer. On the BSG side the margin growth in this particular quarter, some of it had to do with not repeating some of the Aerial promotions that they did and were already in place last year's first quarter which has a little bit of effect on top line but it helps the margin a lot when you don't repeat promotions that we really didn't think were necessary, and also on the BSG side there is the continued shift to booth renting. Not to play down the additional margin and the growth in March and that we are seeing in our international business.

That is helpful. On the promotional compare, is that a future opportunity in the coming quarters as well or is that really unique to this quarter?

Most of it is unique to this quarter. I don't want to overplay that. It wasn't huge but it did help BSG's margins in this quarter.

Okay, perfect. And then, just thinking longer term about these mix-shifts, I know you guys have talked about it before, anything that is making you think differently about the long-term opportunity? Do you think it is a perpetual dynamic given the quality that you are offering with the private label and this kind of ongoing trend within the salon base or do you think it is something where there is a target level where you reach stasis on these dynamics?

We don't really have target levels for it. The customer determines that when it comes to own brands versus name brands. It also is somewhat determined by us acquiring brands from within the industry that then get changed to the side of the ledger they fall on. But also as far as the booth renting movement, I think that continues to accelerate partly because of the economy and we are seeing it really accelerate in Europe right now.

Similarly my last one on comp. It is great to see the acceleration this quarter. Can you give any more color on what things sequentially got stronger in the two businesses for this last quarter?

Well as I mentioned on the Sally side we had a great holiday season. The weather has helped us this year, December versus last year particularly in Europe but also here in the U.S.

And on the BSG side we continue to have more brands coming in the BSG distribution and I just think we are hitting on all cylinders right now and also the shift in the holiday season this year helps us relative to where Thanksgiving falls and Christmas. I think for any retail business in particular when Christmas falls on a Sunday it is a very good thing, calendar wise.

Great. Thanks so muchGood luck.

Thank you.

Next we'll go to the line of Meredith Adler, Barclay's Capital. Please go ahead.

Thank you and congratulations on a great quarter. I think my little first impressions were not positive enough. (Multiple speakers)I wanted to start-- you talked about better margins in international. Can we talk a little bit about about what is driving that and maybe related to that is you're an increase in booth renting in Europe but maybe talk about whether that helps margins or whether that's something separate?

Yes, it does help margins because that business becomes a store business whether it's coming from a manufacturer's direct sales force or even from our own sales force in Europe. When the customer visits the store it is a more profitable sale for us wherever that happens. The other thing that I believe is helping margins -- there are a lot of little things, Meredith -- but also over there our control label brands are growing very nicely.

We also with some of the acquisitions that we have made, particularly the one in the Netherlands, Floral, that we just made during the first quarter, they help us going forward because we have more buying power with the suppliers now. Typically in Europe, as I mentioned before, there really aren't any suppliers such as ourselves that cross country lines, and we find that when we make these acquisitions their costs are significantly higher than what ours are just based on our size versus their size so obviously when we make an acquisition we go to the suppliers and say, look it is all part of the same company now, and we expect the same pricing in this country we were getting all along in the other countries. That helps the acquired businesses very nicely in margin, and when that all rolls up to the total, it is a benefit to the overall margin through purchasing power.

Would you say that benefited this most recent quarter or something that is still to come?

In the case of Floral it will still [become]. But you can't look at it as a comp because we did not have them last year. For that particular business. Now where it helps us is if we get a better price overall because of our increased size by the acquisition of Floral then that does help the margin comps.

Okay. I guess I still would like to go back to the thing about booth renting in Europe maybe because I don't understand it fully but I think you have said that your store business has historically been more professionals than individuals.

That's correct.

It sounds like what you are saying is you are taking share. You don't have a direct distribution professional business in Europe, right? So you are taking share from others who are now moving into your stores, is that it?

We do have some sales consultants in Europe but nowhere near the degree we have them at BSG in the U.S. We are primarily a store-based business in Europe. Because of the cost of putting a sales force on the road for the major suppliers that we deal with over there, they are backing off of that and finding that they can't economically call on smaller salons themselves and in many cases they are partnering with us now to try to transition that business to our stores. They want to keep it in their brands but they are finding it is not economical to call on small salons. So we are working very hard, actually doing some experimenting with some of the larger brands over there on how we can transition that business into the stores and not lose it for them or for us.

That is really very exciting. My final question would be about the UK and you had done pretty comprehensive remodeling of those locations. Are you still seeing a benefit? Are you happy with what that is giving you?

We are very happy with it. We are approximately two-thirds done with that project now. We hope to be I would say 90% done with it by the end of this fiscal year so our CapEx over there should come down nicely starting next year and we hope to continue to see the benefits of these remodels well into the future.

One more question about acquisitions. In Europe or Latin America, anything? Is the environment there at all?

I think we are finding the acquisitions much easier and more plentiful in Europe right now than in South America. In South America we are finding it a little bit difficult but to actually get the acquisitions done. We identified targets but it is very difficult in some of those countries to get a seller to give you the proper indemnifications going back after you buy the business, for lots of tax reasons these private companies are sometimes difficult to tie down on who is going to be responsible for what after the acquisition.

Thank you very much.

You are welcome. Thank you.

Next to the line of Gary Balter from Credit Suisse.

Hi Gary, hi Mark, hi Karen.

Hi Gary, how are you?

First of all, congratulations on another great quarter.

Thank you.

Question, I have a question or two and then I'll let Simeon ask a question. He's on as well. Just first thing is -- not to criticize the quarter it is absolutely a great quarter -- a few clients we talked to this morning were saying they didn't get as much expense leverage which is hard to complain in the quarter you had. Where is that expense going? It looks like you are building, you are making investments for the future. Could you talk about some of the investments and where it is going?

Well, we continue to have some expenses regarding our international IT our ERP program that we are in the process of putting in there. That is not a great deal of expense, but it is, I guess, more than a little, what we would have normally if we weren't doing that.

Gary, I think from a core business standpoint we saw expense leverage. If you look at the overall expense structure, 80% of the expense structure is three categories. It's rents, advertising, and payroll and benefits. In each of those categories we definitely saw a very positive leverage in all of those categories. Now in terms of when you take it on an individual segment basis and you look at some of the startup costs related to the international business or the assimilation of acquisitions during the quarter, particularly with the Floral acquisition you will have a little bit of a drag, but overall we have been encouraged with the leverage lift we have got.

We did get 50 basis points.

No complaints that seem to come up as a follow-up. Second thing is, there has been talk in the industry about PG starting to build its own sales force. I don't know that you want to comment on a specific brand. Is that a trend that you are seeing? Can you comment on what is going on in the sector?

Sure. We don't see a lot of that because I think most of the brands have looked at others that have tried that and have not been successful. I don't want to comment on PG's move in particular, however, those moves tend to be good for us because again, a sales force of less than 200 people is what they'll have covering the United States is a lot less effective than when they were in our sales force of 1100 sales consultants plus some of SalonCentric's sales force. So what happens is, just as we areseeing in Europe they will tend to focus on the larger salons with those 190 people or whatever they are hiring and the smaller salon business and the booth renter business ends up coming into the stores.

When P&G did this many years ago we saw and continued to see with their brands a very nice growth in our store business while I am not so sure they are seeing the same growth with their direct sales force. Very, very similar to what is happening in Europe right now.

And it's Simeon with one follow up. Could we talk a little bit more on Q4. In the past we have described it as not being such a seasonal quarter. If you look at some of the retailers we follow that have pretty steady businesses, in Q4 you don't see an acceleration. I was curious about the category if there was more seasonal product being targeted in the stores. You obviouslyhave more retail shoppers than you did. That percentage keeps ticking up, that helps. Anything to attribute by the nature of the industry that's helping drive that pickup?

You are referring to our first quarter being (Multiple speakers.)

Yes, this quarter. (Multiple speakers)

Okay. As I mentioned, we did get a nice boost from weather in December in particular this year. I think particularly, again, on the Sally side our merchants are doing a great job of trying to get a little more seasonal business around the holidays. We had some terrific promotions on electrical appliances and some other bag promotions where the customer purchased X amount of dollars worth of product and they got a very nice handbag to go with it.

We are trying to develop a little more and I guess a milk little more, if you would, of the traffic that comes by our door during those holidays. It just, for us to do things that are very detrimental to our margin through those holidays doesn't make a lot of sense and we haven't in the past and I doubt that we will going forward do that. We are trying to take whatever advantage we can of the traffic being generated by some of the other retailers that are dropping their margins significantly and generating a lot of traffic.

You mentioned the ticket was up. Was it up dramatically or a steady balance again?

It's been a pretty steady balance. It was up slightly more in the quarter and I think that is primarily driven by we did see improvement in the electrical category which is a nice ring for us.

Okay great. Thanks

Thank you.

Next to the line of Erica Maschmeyer, from Robert W. Baird.

Thanks and let me add my congratulations on another great quarter.

Thanks, Erica.

On the BSG side could you give more detail on where you were able to obtain the greatest synergies through integrating your acquisitions like Aerial and give us a sense what is remaining on that front?

On the Aerial front I doubt -- there's a little bit of distribution synergy left. We still operate both the distribution centers that we had when we acquired Aerial, but the synergies from Aerial or most of the other BSG acquisitions come in back office, they come in advertising synergies they come in combining sales forces where there is overlap, they come in product-wise they come in being able to be a little bit more cohesive in those geographies with the brands that we represent. The biggest ones typically are distribution and as far as the Aerial acquisition goes, that is still ahead of us, but I don't know that we will see it this fiscal year. We are trying to determine what the best answer to those two distribution centers is at this point.

That makes sense. I know you have benefited from the mix shift to retail sales from professional sales and that is something you have been seeing internationally. It seems like there may be some competing forces happening out there with both the remodels bringing in more retail consumers and you mentioned earlier in response to a question that you were experimenting with some of the larger brands over there to transition some of those sales into your stores. Should we expect to continue to see that mix shift to retail and international? Some of the work on the professional work slow that down at all?

I don't want to overplay the increase in the retail business internationally. My comment on that really referred to our U.S. or North American business. We are seeing increases in our retail business in the UK where we have done all of the remodeling.

We have not done remodeling in western Europe where we operate at least to any large degree, and yes, you are right as we do things to increase the professional business and as the booth renting trend accelerates, I think you will see our mixed customer shift in Europe be a bit diluted by the increases we're seeing in the professional business. We will see increases in the retail business. But as you are suggesting some of that will be offset by the professional business growth.

However, the growth in the professional business because we-- by getting those customers into our stores it does stimulate our control label business. The margins on our professional business are improving nicely in Europe.

On the professional side do you see a greater proportion of control label sales to those customers.

Absolutely.

Okay that is interesting. Do you have the rough proportion of professional retail and the UK versus western Europe.

Overall in all of that part of the world Europe and the UK we are approximately 80% professional. Now, when you look at it on the store-by-store basis there are certain stores in the UK located on high streets that could be the complete opposite of that. Even more retail than Sally. When you roll it up and throw in Europe, it is still about 80%/20% professional.

Any sense of the timing around your loyalty program rollout there?

Out where?

I'm sorry, in Europe. UK.

UK will come first because we have a partner identified that is in that business there as we have here in the U.S. so I hope to have that at least started yet this fiscal year. Now, you have to keep in mind that it takes a long time to build the database before it becomes useful in driving sales so I would not be looking for any significant increases in our business due to a loyalty program in the UK this year or probably even next year.

Then just one last quick one. Are you seeing any trade down or women trying to dye their hair themselves in Europe given the economy?

We have always seen that. It is a big part of our retail business over there. Hair color is a larger percentage there than it even is in the U.S. The answer to that is yes, but obviously with only roughly 20% of our business being retail it doesn't have the same dynamics that it does in the U.S.

That makes sense. Thanks so much.

You are welcome, Erica.

Next we'll go to the line of Karru Martinson of Deutsche Bank. Please go ahead.

Good morning. When we look at the European remodels, could you give us a little more color on exactly what are you doing there?I know that part of the selling point here in the U.S. has always been the bare boneslook, that you are getting the exclusive deal. Is that what you still have or are you changing that model?

I would say where we call it bare bones in the U.S. over there it was disintegrated bones. Keep in mind the original acquisition we made in the UK was a company that was 150-years-old when we bought it. The second acquisition that we made, the second large one that we made over there in the Spring of 2007 was also a very old company so we have some stores there that are are-- were very, very rough.

We are bringing them up for the most part to probably a notch above our average store here in the U.S. but when you look at some of the newer stores in the U.S., they are along those lines.

When we look at the store growth, the organically [X] acquisitions, you guys are still looking for 4% to 5% store growth, correct?

I would say organic growth, we are looking at 4% or 4.5% store growth, yes.

Is that a concentration in terms of where in the U.S. or internationally where you want to see the growth coming from?

I believe on a percentage basis it will be disproportionately favoring Europe right now.

When you look at the 6 million beauty club memberships right now, recognizing that it takes time to build the databases, where do you think that program can go over the next two to three years?

I think that a goal over that time period of close to 10 million is not out of the realm of possibility. As you suggested these programs do become a lot more effective with the data that you gather over the first couple of years in particular. As that builds the 2 million we have added over the last couple of years, I believe, will continue to perform very well in the future as we learn more and more about them as customers.

Lastly, you referenced the term loan and wanting to come to market, is there anything you are looking for from the market, whether it's providing another quarter of strong numbers or are you looking for any kind of triggers on that? What is the holdup, I guess I should say?

Honestly, Karru, there is really no holdup right now. It is purely pricing and opportunity at this point. Even the swap that we have that expires in May in our view today, that isn't really a barrier, the liability on that swap is now at about $4 million. If we are going to trade a good yield to maturity that is opportunistic for us right now, we certainly would do it sooner than later.

Thank you very much, guys. I appreciate it.

Thank you.

Next we go to the line of William Reuter from Bank of America Merrill Lynch.

This is actually Spencer in for Bill. Thank you for taking my questions. I was wondering about the gross margin expansion was obviously faster or more than what you guys were talking about for the year? I was wondering if you guys could talk at all about your expectations for the remainder of the year and if you're thinking that the gross margins could expand more than 40 to 50 basis points.

Obviously from this quarter that is always possible. However, I would continue if I was trying to give you a little bit of guidance there to stick with what we have historically done. This quarter was driven by a nice increase in the retail business, which is a much higher margin for us, and I hope that continues. All signs are with the beauty club card program is that it will, but I still may be being a little conservative would stick with what we have historically done. It will vary from quarter to quarter. Fortunately for us the last several quarters have varied to the high side.

Great. I was wondering if you guys could also talk about your low-cost sourcing initiative and how that is going, and if you see any further opportunity there as well.

As we see further opportunity we are approximately 6.5% and we stated in the past that we believe we can get to about 15% which would be half of the product that is manufactured in Asia would be under our label. That percentage in total is about 30% of the Sally business. We believe we can get half of that, which would be 15%. We are about half of that, 6.5% to 7%.

There is more opportunity there. We are continuing to work on different categories. We are trying to be very diligent on quality and we are not in a hurry to push that program along. We want to make sure that we have the right packaging the right quality of product and the right cost.

One last one. As we see the warmer weather continuing can you talk at all about the traffic trends you guys are seeing?

This January is a lot nicer than last year was all over the country and in Europe. We are very pleased with what we are seeing weather-wise so far in January and I can only hope it continues through February. With the extra calendar day in February we are looking forward to a nice quarter.

Thanks, guys.

Next we'll go to the line of Chris Ferrara from Bank of America.

Thanks. Good morning, guys.

(Multiple speakers) Good morning

I guess, could we just start with the capital allocation piece, and conceptually what are the pros and cons as you think about it to dividends versus buy backs. Of course, understanding you guys aren't committing to any of this stuff right now, butas you think about it I understand the stock price is probably one way you think about it. Conceptually how do you think about dividend versus buy back if you think of those against each other?

Chris, without getting into real specifics, I think the best way to put it is we are not agnostic to one or the other but a lot of it has to do with how management and the board views our future, what our acceptable levels of leverage are and then what are some of the investments that are out there on the horizon for us that we would like to target our use of funds toward growing the business not only organically but through acquisition. There is a lot of play in that thought process beyond the text book pros and cons of dividend versus share repurchase. Hello?

He has disconnected. We'll go to the line of Jill Caruthers of Johnson Rice. Please go ahead.

Good morning

Hi, Jill.

Hi. As you continue to aggressively add your brand awareness to retail customers on the Sally side could you update us on your unit growth potential on Sally on the U.S. side.

Sure. Our expectations there haven't really changed. We believe in the U.S. Sally can have 3100 stores. We are approximately 2400 at this point.

Canada has been very, very good to us. We believe we can have 250 stores there. We are at about 70. Mexico has also been great for us. We are probably about halfway to what our original expectation of 250 in Mexico is. We are right around135.

Then just a comment on BSG. I know it is not a comp store given it's a distributor. But you really put up sizable year-over-year growth. Could you talk about what is driving that, given there are less sizable acquisitions out there and maybe any changes in the salon industry, good or bad, that's influencing that business?

Actually this morning I just saw a press release that came from the company that does the analytics on the industry growth. Their comment is that the industry grew in 2011 at 6%. And the hair care part of that growth which is where we primarily play was 3.8% so I think the industry is growing. I know the hair color industry is growing not only at the salon service level but at the distributor level.

It is also a growth category in retail. I believe we are participating in that growth. When you speak to BSG in particular we continue to add brands that are valuable to the industry which is I guess taking share. We continue to see a shift in booth renting and any time you get that customer in the store you do get impulse purchasing which I think is helping BSG's comps and I am glad you pointed out that comps in BSG are a little difficult to use as a measure of success.

One point there is what I mentioned earlier about Aerial. We took out quite a bit of revenue from Aerial's 80 stores by not repeating some of the promotions they did in our first quarter last year. And as I mentioned, they were promotions that were already in place and advertising already set when we closed the deal. When you are selling exclusive brands primarily there really isn't a lot of reason to give away a lot of margin. All you end up doing is stocking shelves in the salon. You are really not getting any more business in the long-term.

We would rather put those promotional dollars in education and things that will further salon business long-term rather than generate a lot of short term low margin sales just to get the comps looking better. So I think as you started out saying that BSG's comps are very good, I believe, in an industry that is not growing quite as fast when you look at hair care again, some of the 6% are some categories we don't get real involved with so we kind of focus on the hair care pieces of our industry and when that is growing at 3.8% and BSG's business is growing over 5%, we are pretty pleased with that.

Appreciate it. Thank you.

Thank you.

And let me open Chris Ferrara's line one more time. Please go ahead.

Sorry about that. I got dropped. It was probably on my end.

No problem.

So I guess the other thing I wanted to ask was around SG&A. You guys pretty consistently seem to be adding $20 million a quarter. Between $20 million and $25 million on a year-on-year basis. The new store count seems to be up. You are generally in the 50 range, 60 range on average per quarter. Is it fair that is the biggest incremental driver of incremental SG&A meaning new store openings and small acquisitions is that ratio, that $20 million incremental a quarter is that -- it's been so consistent over the last few quarters. That a fair measuring stick for how much SG&A will grow on certain historical growth assumptions or is there other stuff in there that might be throwing us off the trail?

It is fair that so much of the increase in SG&A is related to store rents and payroll that, yes, I would say that you can probably use that as a pretty good indicator. Also keep in mind I mentioned a few minutes ago on a percentage basis our growth will be much stronger outside the U.S. going forward than in the U.S. I have also mentioned in the past that that is a more expensive store to open.

Not only in CapEx but just the expense of getting the store open, the rents are higher they take longer to break even and to get a cash pay back. As we move forward that will probably shift a little bit. I don't think it will be hugely significant. When you look at SBH in total we continue to add some where around 50 basis points to operating margins in spite of so much of this growth being international and in higher cost countries.

That is really helpful. I guess on another note. Is there any chance you would take a shot at quantifying what you think the weather did for you this quarter? On an order of magnitude, I'm just trying to understand if it's a point, six points. I imagine it's not six points, butfrom the comp base is there any way to take a shot at that?

All of our divisions take their shots at it but it is always when there is bad weather. They say, "Aw, we lost this to weather."I know it affects our business. I think it's extremely difficult to quantify that with any accuracy. I wouldn't want to take a shot at that.

Fair enough. The last one and I am sorry when you said it when I fell off. Europe in general, we know what the macro looks like. Can you characterize the effect or lack of effect on your businesses across the international portfolio?

I believe that for the most part the economies are not greatly affecting in a negative way our business. I think there is some macro pressure, as you are suggesting. I think it is affecting some of the larger suppliers that I mentioned earlier in their ability to keep a sales force on the road. I think it is impacting some of the higher end salons who may not seeing the spa and service business they do in a better economy. The bottom line to all that, it is forcing more booth renters into the market.

I know that a couple of our largest competitors in western Europe are having a very difficult time right now. I think we are benefiting from that. I think in those two particular cases, they are operating with a very old business model in Europe, and we have the advantage of starting fresh in a lot of these countries either by acquisition, and we are trying to buy companies that look like us so we can expand, rapidly. Or we're green fielding. In France we have adding a lot of stores and it is all been green field for us.

Thanks, that's really helpful.

You're welcome.

Our final question will come from the line of Kevin Coyne from Goldman Sachs. Please go ahead.

Thank you for taking my question. Most of my questions have been answered. With regard to the potential dividend or share buyback program leverage is below 3% now, net leverage closer to mid 2%s. Where would you feel comfortable if you wanted to bring it up to pursue some of those programs? Or would you envision leverage staying neutral as you go through those?

It is interesting, Kevin. We have talked all along. This business model handles leverage very nicely. We are comfortable at any level right now. Specifically what maximizes our overall [weight] cost-to-capital in our view between 2 and 2 and a half times.

That is pretty much been a fairly consistent thesis we have seen and tested internally, but certainly if we are looking at maintaining a level of leverage for the long-term certainly we may have to be a little bit variable to that but not to a large degree in terms of maintaining an acceptable level of leverage in that band. Meaning that you could see it go up slightly and then moderate back within those levels. But overall I would say it is just the two to two and a half times is the sweet spot. We are 2.6% or 2.7% today and you know if you look at just our historical cash flow projections certainly we will be there sooner than later.

That is very helpful and congratulations again on a great quarter.

I will turn it back to Mr. Gary Winterhalter. Please go ahead.

Thank you, Operator. To summarize, fiscal 2012 is off to a terrific start. We delivered consolidated sales growth of 9% and same stores sales growth of 7.1%. Gross profit margin expanded 100 basis points and we achieved SG&A leverage which contributed to the 20% EBITDA growth. I anticipate this strong performance will continue and lead us to another great year. Thank you for your interest in Sally Beauty Holdings and we look forward to seeing you soon.

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