Sally Beauty Holdings Inc (SBH) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sally Beauty Holdings fiscal 2012 second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session. Instructions will be given to you at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Karen Fugate. Please go ahead.

Thank you. Before we begin, I would like to remind you that certain comments, including matters such as forecasted financial information, contractor business, and trend information made during this call may contain forward-looking statements within the meaning of Section 21-E of 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, and similar words or phrases.

These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in the Sally Beauty Holdings SEC filings, including its most recent annual report on Form 10-K for the fiscal year ended September 30, 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 second 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 then take you through the fiscal 2012 second quarter in more detail.

As you may have seen from our press release this morning, we had an exceptional second quarter across both business segments. Consolidated same store sales growth reached 9.1% over positive comps of 6% in the second quarter last year. This record growth was primarily driven by higher traffic and average ticket, as well as the benefit of an extra day in February and milder weather relative to last year.

Consolidated sales were $889.3 million for strong year-over-year growth of 10.9%. This strong growth led to significant SG&A leverage of 130 basis points and operating margin expansion of 160 basis points, or 14.8%. Net earnings in the second quarter increased by 37.6% to $67.8 million, or $0.35 per share. We ended the quarter with a total store count of 4,392, an increase of 185 stores or growth of 4.4% over last year, of which 4% was organic.

Turning to our segment performance starting with Sally Beauty Supply. Same store sales growth for Sally Beauty hit a record high of 9.3% versus 6.2% in the prior year. Net sales reached $554 million for strong growth of 12.9%. An increase in total transactions and higher average ticket continued to be the primary drivers behind our strong sales performance.

Gross profit margin at Sally Beauty ended the quarter at 54.2% versus 54.4% in the year ago quarter, a decline of 20 basis points. On a sequential basis, gross margin was up 30 basis points over our 2012 first quarter gross margin of 53.9%. Gross margin expansion during the quarter was dampened by our initiative in the UK to transition to a new distribution center. We expect this transition will negatively impact our UK gross margins over the next couple of quarters.

Operating earnings reached $111.3 million for growth of 18.5%. Operating margin was 20.1%, an improvement of 100 basis points over last year's second quarter. Operating margin improvement was due to strong sales performance and SG&A leverage in our North American businesses.

During the second quarter, our beauty club card memberships grew 24.3%. Sales from our club members were up 31.5% over prior year and were a key contributor to transaction growth and higher average ticket.

Now, turning to our BSG segment. Our BSG segment had same store sales growth of 8.7%, with net sales of $335.3 million, growth of 7.8%. This strong performance is primarily due to higher transactions and continued success in adding new brands and territory rights in more of our geographies.

BSG's gross profit margin was up 70 basis points to 40.8%. Gross profit margin performance was due to favorable customer and product mix. Operating earnings increased by $12.1 million, or 36% in the second quarter. Operating margin improved by 280 basis points to reach 13.6% for the quarter. This strong performance was due to gross margin expansion and SG&A leverage.

In summary, Sally Beauty Holdings had an excellent second quarter with strong sales performance and earnings growth. We reduced our long-term debt by $100 million, lowering our debt ratios consistent with our capital structure objectives. As we head into the second half of the fiscal year, I am optimistic that we will continue to deliver solid results and execute on our long-term objectives.

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

Thanks, Gary. Net sales for the second quarter were $889.3 million, an increase of 10.9%. Same store sales for the same period grew 9.1%. During the first six months of fiscal 2012, consolidated same store sales grew 8.1% exceeding our expectations.

Due to the strong performance, we believe that our full-year same store sales growth for 2012 will be in the range of 5% to 7% versus our previous expectations of 4% to 5%. We continue to believe that over the long-term, same store sales will grow in line with our historical trends of 4% to 5%.

Consolidated gross profit was $436.8 million, or 49.1% of sales, a 20 basis point improvement from the fiscal 2011 second quarter. Second quarter SG&A expenses were $289.2 million and represented 32.5% of sales, a 130 basis point improvement from the 2011 second quarter. This leverage improvement is primarily driven by strong sales performance in both of our segments.

Unallocated corporate expenses, including share-based compensation, were $25.3 million, or 2.8% of sales, versus the 2011 second quarter expenses of $21.8 million and 2.7% of sales. Consolidated operating earnings in the second quarter increased 24.6% to reach $131.7 million. Operating margin was up 160 basis points to 14.8%.

Interest expense during the quarter totaled $22.4 million, a year-over-year decrease of $5.4 million. This decrease was due to lower outstanding borrowings and lower interest rates on the long-term debt. For the fiscal 2012 second quarter, our effective tax rate was 38% versus 36.7% for the fiscal 2011 second quarter. The tax rate was higher in the fiscal 2012 second quarter due to nonrecurring tax benefits reported in the fiscal 2011 second quarter. We continue to estimate that our annual effective tax rate for the fiscal 2012 year to be in the range of 37% to 38%.

GAAP and adjusted net earnings in the second quarter were $67.8 million, growth of 37.6%. Diluted earnings per share were $0.35 compared to $0.26 in the fiscal 2011 second quarter. Adjusted EBITDA for the second quarter grew 22.5% to $150.5 million compared to $122.9 million in the prior year's quarter. This strong performance is primarily due to sales growth, gross margin expansion, and SG&A leverage.

In turning to the balance sheet, inventories increased $52.4 million, or 8.2%, compared to ending inventory on March 31, 2011. This year-over-year increase is primarily due to sales growth in existing stores, additional inventory for new store openings, and acquisitions.

Capital expenditures for the first six months for the fiscal year were $27.5 million. For the fiscal year 2012, we continue to expect capital expenditures, excluding acquisitions, to be in the range of $65 million to $70 million.

During the second quarter, we reduced our term B loan by $100 million, lowering our consolidated leverage ratio to approximately 2.3 times. Our total debt balance, excluding capital leases, at the end of March 31, 2012 was $1.350 billion. As we head into the second half of the year, we continue to work with our Board to consider other uses for our excess cash that may include stock repurchases and/or dividends. We have no mandate yet but are actively considering our options.

As you know, our Company generates a significant amount of cash. During the last five and a half years, we have had the luxury of growing our business through acquisitions and organic growth while using the remaining cash to pay down over $0.5 billion of long-term debt, as well as taking advantage of the strengthening credit markets to refinance portions of our capital structure.

We currently expect to take advantage of a favorable debt market conditions to refinance our term B loan in the near future. The timing and the amount of debt that may be repurchased or otherwise retired or refinanced will be decided upon at the sole discretion of the Board of Directors and depend on market conditions. Gary?

Thanks Mark. In summary, we had a great second quarter and when combined with our strong first quarter results, our year-to-date performance is outstanding. For the first six months of fiscal 2012, net sales are up 10%, driven by same store sales growth of 8.1%. Our consolidated gross margin is up 70 basis points, with operating margin expansion of 160 basis points over the prior year. I anticipate this performance will continue and lead us to another six months of strong results.

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). Our first question will come from the line of Simeon Gutman of Credit Suisse. Please go ahead.

Thanks. Good morning and congratulations on the results.

Thanks, Simeon. Good morning.

Good morning. On gross margin, a few questions. If you X-out Europe or the UK impact, were the core drivers in place, would we have seen the typical gross margin expansion there?

Let me address gross margin right off the bat here because it is -- to me it's a nonissue and I don't want people to be concerned about it longer term. There were actually three things that impacted Sally's gross margin in the quarter. One was, as we put in our press release and I just mentioned in the call, we are in the process of transitioning some of our distribution in the UK from a third-party provider that we went to about a year ago back into our own distribution. So there has been some distribution costs related to that which hits our margin line.

The other thing that has impacted Sally's margin for the quarter is when Easter falls as early as it did, Easter is a significant promotional event for us, particularly in our African-American categories, which typically are lower margin categories to begin with. So we had a very successful Easter promotion and it all hit in the second quarter, as compared to last year being in the third quarter. And also as you look at last year, the increase from Q1 to Q2 in our margins last year were enormous; it was over 100 basis points. So we had a very tough comparison to make.

The third thing that I will say is we came out of Q1 with Sally margins significantly higher than we had planned for and significantly higher than the 50 basis points that I have always kind of given all of you guidance on, and we decided to reinvest in the business and take advantage of Easter being in the second quarter and we really drove the business hard in the second quarter, which I think is evidenced by the increase in our beauty club card member sales, which is, as all of you know, one of our priorities in our business. And it is doing really, really well.

So going forward, we're going to have some issues with the UK distribution costs in Q3 and Q4, but I believe they will be more than offset by a normal quarter promotion-wise and we don't have any shifting holidays in the third quarter. Although, the third quarter last year did have Easter in it, so you kind of get the reversed impact of that.

And we see the same impact in our comps. I want to make sure that everyone understands, as we put in our press release, that we did have an extra day essentially with the calendar in Q2 this year and in April you lose a day. We are closed on Easter Sunday, so you completely lose that day plus you lose the impact of April.

And I know that everyone's coming out with horrible numbers in April and before you ask the question, I'll just address it that our April was actually slightly better than our plan. We planned April to be a little soft. It compared to our normal run rate this year, simply because you are closed on Easter Sunday, or at least we are, and the impact that you get from Easter being later in April in the third quarter for us is fairly significant. So we also, addressing comps again, we also had the benefit of a relatively mild winter in Q2, particularly compared to last year, both in the US and in Europe.

Okay. I guess one follow-up, and thanks for all that color. One follow-up on the UK distribution. Should we think about it as when the process is complete that the business recaptures -- or the costs go away and the business recaptures the margin that was lost, or does the business not only recapture but becomes more efficient in the future and, therefore, can --.

Yes, yes. The reason we're moving away from it is we believe, and our history tells us, that we can do the distribution of the part that we moved to a third-party provider at a lesser cost. And I fully expect going into next fiscal year for our margins to not only achieve where they have been in the past in the UK, but exceed those for a couple of reasons.

Our margins in general in the UK and Europe are increasing as they are here at Sally, primarily due to the increased sales of our own brand goods over there. So, yes, the answer to your question is definitely yes. The good news is that we have been able to work through these issues and not impact our sales in the UK. Our sales actually in the UK and Europe for the quarter, our comps were quite good.

That preempted my next question which was to talk about that, but I -- were they good and how did they compare to how you planned the business?

They were above it.

Okay. And then you mentioned some of this just a second ago about mild weather, but is there any way to -- it is probably difficult to quantify, but have you tried to quantify what some of the drivers of the quarter, either mild weather and I don't know if you have any discernable impact from some of the Hunger Games traffic and maybe some -- how you have retained some of those customers if you have been able to post that and what it has done for the business?

Let me try and address those one at a time. First of all, trying to quantify weather is difficult. One thing that is fairly easy to quantify is in the second quarter last year we had 90 whatever days they were in the quarter and this year we had that plus one. So if you just do simple math there, it's a little less than 1% that you are going to get out of the leap year addition.

The weather, as I said, I don't like to put a lot of emphasis on weather. But it was so significant last year in the US, particularly in that quarter, and in Europe that you have to mention it because the year before, we had a significant amount of stores that were literally closed for several days.

So to quantify that is really difficult but it is a factor. Your third comment regarding Hunger Games, Hunger Games was a huge success, but it was anniversarying things like crackle from last year. So it -- we knew we had to anniversary that business and we did.

As a matter of fact, our nail categories are still growing extremely strongly because it wasn't just Hunger Games, this new gel polish is just huge and it is a much higher price point polish. So not only are we seeing units coming out of it but you are seeing the dollars much more significantly than you would in a normal nail polish just because of the price point.

We also, on the BSG side of our business, we have a brand that we have a close relationship that we have launched called Venique in the nail category that has done extremely well in the quarter. Also let me make one more comment on margin. When you look at our margin strictly at the POS level, which would not include the distribution costs and anything else that is going on that affects margin other than the raw POS margin, our POS margins were excellent for the quarter.

All right. Thanks again for all the color.

Thank you. We will go next to the line of Meredith Adler at Barclays. Please go ahead.

I just want to follow a little bit more. You talked about sales in the UK being strong and last quarter you talked about sales in Europe being very strong, and I think you talked about getting products that you didn't have before. Can you talk a little bit more about what is going on in Europe? I know weather kind of confused things but more generally what is going on?

Sure. Our business in the UK is actually quite strong and our comps are good there. Fortunately, the distribution efforts are not destroying our service levels and impacting our sales there. And as I just said, our POS margin, primarily driven by a lot of our new products that are in brands that we own or control the distribution of, are growing much better than average, so it is giving us a nice bump in margin.

In Europe, the acquisition that we made last fall in the Netherlands is performing right in line with our investment case. We are very pleased with that. We look forward to more growth in the Netherlands. Germany had a nice quarter, and Belgium and France, particularly France, are just growing very, very rapidly.

Most of our new store growth in Europe has been in France for the quarter and will continue to be on a percentage basis. So we are very pleased with Europe. As I think all of you know, we are in the process of putting in an international ERP system over there, which we would hope a year from now will be in place. That is going to allow us to just bring a lot of things together.

Today, we operate on four or five different IT systems over there because of acquisitions, and as we have done in many of the acquisitions, particularly BSG here over the years. When you get everybody on the same system, there's not only a lot of cost takeout opportunities, but there is -- you just have much better insight into your margins and your costs and everything else. And I really look forward to that being a significant turning point in the profitability there.

And then we haven't talked really very much about BSG and you had an eye-popping improvement in the operating margin. Could you talk a little bit about what is doing that? Some of it I think you said was maturing of acquisitions that was in the press release? What else --?

As you know, BSG made two significant acquisitions over the last two years, Ariel being just a year ago this past fall. We are now seeing a lot of the synergies that we put in place and the cost takeouts through that consolidation, which was happening last year. We are up against that this year so it looks very good, particularly in the first two or three quarters of this year, BSG should have great -- just should have great comps from an operating standpoint. Also, and this was something I've mentioned but maybe not mentioned it enough in the past, we are doing really well in renewing leases at a very favorable rate, which helps our operating costs.

And these renewals, the majority of them are five year renewals, so when you drop from an average of 8% or 9% renewal rates, which is what we were running prior to the financial crisis, down into the very low single digit increases and that follows you for the next five years, that is major, because for us, the only expense we have direct store expense that's more than rent is payroll, so that is significant. And also with the increased sales and the great comps we have been having, you get a lot of leverage on payroll in the stores. So it is all just working for us right now, Meredith. We are very pleased. Our people are just executing extremely well. And life is good.

Okay. And I guess just back to BSG, is there any reason to believe that anything is going to derail the current gross margin? Obviously, it won't be up as much every quarter but probably you said it would still be up in the third quarter. But can we think of the level as being something that continues?

Meredith, I have been saying for years and it was happening for years prior to us spinning out and you all getting to know us better that our margins increased typically 50 basis points a year, and that's driven by all the profit enhancers that we discuss every quarter. I don't expect that to change. We are running ahead of that on a year-to-date basis right now, and I expect us to end the year in line with that.

And, no, I don't see anything changing because I don't see any of the drivers changing. Our control label and own brand sales are increasing still faster than our overall sales increase rate. Our shift in the Sally business towards more of a retail percentage continues with the beauty club card and the CRM program. I fully expect for that to continue.

There is no reason on the horizon, at least, that I see that wouldn't. BSG, there was just a report put out by the PTR Group which does a lot of research in our industry on booth renting, and it confirms everything I have been saying to all of you for years now that booth renting is growing at a rapid rate which on the BSG side and on the Sally side, but more so on the BSG side.

That is a store customer, so BSG's store piece of the business continues to accelerate at a faster rate than our sales consultants, which is also good for our margins. So all of our margin drivers are in place and, fortunately, I guess it isn't -- to a large degree, we don't control it. They're natural margin enhancers that are happening just because of the trends in our business and our industry.

Okay. Great. Thank you.

Thank you, Meredith.

Thank you. Our next question comes from the line of William Reuter at Bank of America. Please go ahead.

Good morning.

Good morning, Bill.

You mentioned on the Sally side that comps were up both based upon traffic as well as ticket. Can you talk about whether there was any inflation in the increase in ticket or if it was just more items?

There is a little bit of inflation. We are seeing some cost increases come out of Asia, particularly, mostly in human hair. I've mentioned this in the last couple of calls that believe it or not there is a shortage of human hair globally and it is the supply and demand. And the -- it is getting difficult to get. It is a fast-growing category for us, although it is a relatively small percentage of our business.

But costs in that category in the last six months have literally doubled. So there is some inflation in there. Again, it's -- that is not a huge category for us, so I can't tell you that there is a lot of inflation in the overall number, but there is some.

Okay. And then in terms of the market broadly for US professional beauty supplies, do you have a sense for how the industry grew in 2011 and what your expectation is for 2012 industry growth?

Yeah, actually was it 6? Yeah, we just got some numbers on the industry growth for 2011, and it says it was 6%.

And then for 2012, do you have kind of expectations for how that might grow?

The expectations that came out of that same report basically are saying 4% or 5% growth for the next five years. I don't know that I want to go out that far in predicting industry growth. But we have always exceeded the industry growth and I expect that we will going forward, I certainly hope so.

And the industry, as I have said and shown all of you in many charts for years, is a very consistent and stable industry. Historically, it has grown 3% to 5% over the last 20-some years, though the 4% or 5% expectation for the next five years is certainly in line with history, and, personally, I would say that I'm pretty comfortable that that will be in line with what happens.

Okay. And then lastly, you paid down $100 million of debt in the quarter. I'm wondering if you could talk just briefly about how you are thinking about future debt reduction versus other uses of free cash flow, whether those are acquisitions or returns of money to shareholders?

I think you know as we said in kind of our earlier remarks, we are certainly considering other uses of cash. We publicly talked about that our sweet spot in terms of our leverage is between two to two and a half times. We are right now at the midpoint of that. We are actively having dialogue in terms of what are some of the other uses of cash in terms of any kind of shareholder friendly activities, whether it be in the form of a share repurchase or dividend program. But I want to make it clear that our priority first and foremost is to grow the business.

We still believe there is plenty of organic runway to grow as well as acquisition footprints, both in Europe, as well as in the North America footprint on BSG. With that said, we are generating cash as you can plainly see much quicker than our needs for our investment in the current operating cycle, so certainly those dialogues are actively being discussed. As far as we do have a refinancing event that will be coming up here shortly and we are having talks with the Board, as well, very actively in that regard, and I expect in a fairly timely manner that we should have some more clarity around that to share with you.

Okay. That's all for me. Thank you.

Thank you. We will go next to the line of Kevin Coyne at Goldman Sachs. Please go ahead.

Hi, this is Celeste Everitt on for Kevin. How are you?

Good, how are you?

Good, thanks. Turning to SG&A this quarter, you had really strong operating leverage. Could you please comment on how we should think about this for the second half of the year and into fiscal 2013?

As I mentioned on the BSG side, we are still realizing nice synergies, particularly out of the Ariel acquisition from last year. On the BSG side, those synergies will probably as far as anniversarying them and feeling them, they will be behind us going into 2013, but BSG continues to make small acquisitions that are not as large in the way of synergies, but in some cases, they are even more synergistic because you keep almost none of the overhead, which was very much the case in the Paul Mitchell acquisition that we made last November.

On the Sally side, in Europe, we obviously, as we gain scale in Europe, that is helping our operating margins which we will continue to do. Operating margins in the UK, as I also mentioned, will look much better next year once we get these distribution issues behind us. And also in Sally, with our comps running anywhere near the range they are, which this quarter was really off the charts, but even if they stay in the neighborhood of our year-to-date, which is closer to 8%, we get a tremendous amount of leverage, as I mentioned on rent and payroll. So we expect that our EBITDA will continue to grow significantly faster and our operating earnings than our top line does, which has been our history.

Okay. Thanks. That was really helpful. And then could you remind us what your capacity is on restricted payments? I think it was around $440 million last quarter?

We are up to about $465 million.

Got it. And do you have any timeframe as far as when you could potentially announce either, I guess, either the -- a potential buyback or a dividend? Is that something we could expect in the next six months?

I don't want to actually put a timeline on any kind of distribution of cash or any kind of shareholder friendly activities. Certainly, we have had a historical track record of doing things timely, and I think that also follows suit is that when you look at our refinancing activity also, we certainly want to be on this side of the term B going current. So certainly within the six month timeframe would be a fairly reasonable expectation for us.

Okay. Great. Thank you.

You're welcome.

Thank you. Our next question comes from line of Jason Gere at RBC Capital Markets. Please go ahead.

Thanks. Most of the questions have been talked about, so I guess two things. One strong comps, I guess this question is kind of like finding a needle in a haystack, but were there any categories that stood out a little bit on the weaker side, like appliances or anything on the Sally side that with the macro environment was a little bit softer than plan?

Not really. I'm glad you brought up appliances, though, because they bounced back nicely. The last couple of years, we have seen appliances relatively flat or low digit growth. This quarter, they were high single digit growth, so we're very pleased with that. As far as soft categories, our African-American categories have been soft for, gosh, quite awhile now, several, two, three years, but that has more to do with hairstyles in that community than anything and it's not significantly impacting the business. And it just goes as curly hair comes back in that community, in particular, it drives a lot of maintenance products and it is cyclical, but it is one of the few categories with us actually that is.

Okay. And then just kind of, I guess, a broader question about the new stores that you are locating, maybe your real estate plan. Given the size of the Sally store being 1,700 square feet it seems easy to carve out a store in some of these malls that are out there. So maybe if you could talk about the locations. Are you finding more and more A locations out there at more attractive rents than before? And is that part of the story that is really helping the comp accelerate? I guess I'm trying to look at how are A store locations comparing to maybe C store, and how do we think about real estate going forward where you can find good locations? And I just have one other housekeeping kind of a question afterwards.

From a real estate standpoint, it is a lot like the old adage you hear about any real estate, "it's all location, location, location," and there are not a lot of new centers going up yet still because of the financial situation. The space that you see come available, if it's in an A center, you typically are not going to steal that space. There is a lot of space available in centers who have had major tenants go dark, which is not necessarily where you want to be. And I keep emphasizing that a lot of our favorable rent expense is coming from renewals where we're in a center with an established track record, even if the center is not an A center, it is an A center for us, and we are able to negotiate renewals in a very favorable way.

So I would tell you that it is not having an impact on the business. If anything, it is challenging the business to find new A locations right now. I think that a lot of our expansion, as I have said many times, is really coming outside the United States. We are opening stores as quickly as we can find them in Canada, but Canada is just not as overbuilt as the US and it's a lot more difficult to find retail space. We are also opening rapidly, as I mentioned a few minutes ago, in France and we are going to continue there. We believe we can have literally in the hundreds of stores in France and we are somewhere in the 30s right now.

So a lot of the expansion will be outside the US. And we continue to work very hard at getting a foothold in more of the South American countries, which once we get that foothold, I think we could open a lot of stores very quickly. We continue to open a lot of stores in Chile. We started with a small base of 16 stores but we have basically doubled that, and they do extremely well, as Mexico. We continue to open about 20% new stores on our base in Mexico.

So how do you think about I guess maybe over the next year or so with the square footage and that 4% to 5% range. I know international is growing faster but that is because of the law of low numbers, I guess. Are you having any difficulty in the US side or you are just you're happy with the locations that you guys have said, I know, typically you don't like to cannibalize within like three to five miles of an existing store. Even though there is not a lot of new centers out there, are you generally pleased with the locations that you are finding?

Yes, yes. As far as your guidance question, we have not changed our guidance. We typically will be opening organically 4% new units for SBH in total plus acquisitions.

And then did you comment just within Sally the growth in the comp between the US versus international? Do you have that information?

We don't break that out, but as I said the -- all of our international comps for the quarter were very favorable when you compare them with Sally US.

Okay, great. And then the last question is a housekeeping. I think in the last quarter, the SG&A was a little bit limited because of stock comp accruals. So clearly you guys and well deservingly are hitting your targets this year, so how do you guys accrue for stock comp? My understanding was that it was typically -- I didn't think it was evenly spread over the year, but are we not seeing that impact in the second quarter and the rest of the year or did a lot of it come in the first quarter? If you could just provide a little color on that, that would be really helpful.

Jason, when you look at our stock comp year-over-year, because there is some rules and restrictions around the acceleration of our stock comp based on age and other requirements such as tenure in the business, the acceleration of the majority of the stock comp expense does occur in the first quarter. And then what you typically see is a fairly ratable amount of expense being amortized into the succeeding quarters throughout the year.

Okay. That's great. Thank you very much. Great quarter, guys.

Thank you.

Thank you. We will go next to the line of Olivia Tong at Bank of America, Merrill Lynch.

Thanks, guys. Just one quick one. On the -- you mentioned for cash uses that clearly supporting the business whether it be top line growth or continued improvement in efficiencies would be the clear number one priority for cash. So as I think about that, are there other areas where you are planning for a transition similar to the UK? Are there ones that are currently ongoing that we should think about as we move into the second half?

I don't see any other, if you're really referring to any kind of more capital investment within the business from a CapEx point of view, I don't see anything that we haven't already encumbered in our guidance at this point for 2012. We do have our ERP project that we're rolling out throughout our international footprints. It is more of a mid-market package, so it is not the formidable implementation that you would typically see with the larger type of software packages. So you are not seeing a lot of spikes or volatility in our business as far as CapEx.

Got it. Thanks a bunch.

Thank you. Our next question will come from the line of Joe Altobello with Oppenheimer. Please go ahead.

Thanks. Good morning, guys. Just a couple of quick ones on comp growth. I think, Gary, earlier you mentioned that obviously with the comps being so strong, plus 8% or so, year-to-date that you do obviously envision them moderating back to more of a long-term 4% to 5% comp growth. So if I go back in my model, it seems like, and maybe I'm looking at the wrong numbers, but it seems like your comp growth on the Sally side anyway has more been in the 2% to 4% range over the past decade or so prior to 2010. Is that the right number to look at or are we at a new plateau given all the initiatives you guys have done over the last few years including CRM, etc.?

I think we said a couple of quarters ago that we were pretty comfortable in the 4% to 5% range going forward with Sally. I'm not going to say for ten years; I don't know. But I'm fairly confident that our teams are doing an excellent job with the CRM and the beauty club card programs and there is significant runway there. I don't expect to see Sally's comps drop back into that 2% to 4% range, at least in the foreseeable future.

Okay fair enough. That was obviously before the spin, too, most of that period so. In terms of the operating leverage, what comp number do you need to put up to see operating leverage at Sally?

To see leverage?

Yes. On the SG&A side.

We've said historically that we actually can get a little bit of leverage at a slightly negative comp and, again, it has to do with our margin drivers. The flip side of that is what I said a few minutes ago, when we see comps in this 8% range, we get an enormous amount of not only leverage on our SG&A, but when those margin drivers kick in at those kind of comps, it is a nice thing.

Great, thanks, Gary.

Also, Joe, I would add to that that these comps are driven as much by traffic increases as they are average sale increases. And that to me, looking at the long-term, especially comparing back to those days of 2% to 4% comps, is the thing that encourages me more than just the 8% comps. If that was happening on 2% or 3% traffic increases, I would not make a statement to you that I was comfortable in the 4% to 5% range.

Okay. Thank you.

Thank you.

Thank you. Our next question will come from the line of Linda Bolton-Weiser at Caris. Please go ahead.

Hi. I didn't see if your 10-Q was filed, but do you have like an operating cash flow number in the -- I guess the six months or the quarter?

Yes, we haven't filed the Q yet but it will be filed later on. Our cash flow from operations was about $138 million, that's about a 9.9% increase.

That's for the six months or the quarter?

Six months.

Okay. And then just correct me if I'm wrong, but on the refinancing of the term B loan, of course, equity shareholders want that, too -- we're assuming it would eliminate interest rate risk because you would be into a fixed rate situation, but it would be slightly dilutive to EPS though if you would fix into a higher interest rate than what you are currently realizing, right?

That's assuming if you're assuming in your model that we were to refinance in the high yield market in a fixed rate environment. Now, you certainly could refinance in the leverage loan market, again, with another term B, which would be variable. But under your assumptions that you are making, certainly, there will be a little bit of dilutive impact if you go to a fixed rate environment.

Okay. And then just on the gross margin when you were discussing that, I just didn't quite catch the reason for the large sequential increase in the gross margin in the comparison year. Was there something unusual that went on when you moved from the first to the second quarter last year that made that unusual, the gross margin last year?

Well, I think a lot of it last year was we were very promotional last year in the first quarter, which was our Christmas quarter. And coming out of that, the increase in the second quarter just looked huge; it was over 100 basis points. There is a lot of reasons for that, but I would tell you that I believe we were just as promotional this past first quarter but more in a value way than just price off.

We have been very successful with a lot of our bag promotions on the Sally side where the customer buys $45 worth of product and they get a very nice type of a bag with it, which is, again, it's viewed as a value promotion and it isn't just price off. So that actually helps our margin but also allows us to look very promotional to the consumer. So that is one of the things, Linda, and there are many.

And margin, it's a little difficult to control it down to the single basis point when you are looking at a whole quarter. But like I said, when we see our margins accelerating that quickly, we will reinvest some of that margin back in the business through our beauty club card program and our CRM program because we are not here to just blow off margins in any given quarter or year. We run this business for the long-term.

Right. And then just on the one of the key margin drivers is the shift in Sally Beauty to the regular customers that you alluded to from the professionals. Did you give a number on that? Like do you have a number this quarter versus last year and what the percentage of regular consumers was?

Yes, it's still running about a point above last year. We typically don't give that on a quarterly basis because it fluctuates a little bit and we do give it on an annual basis. Again, for model purposes, we've said for a long time that it is about a point per year shift.

And it is over 80% now, right?

No, no, it is still in the mid 70s.

Oh, okay. Okay. Thanks a lot.

You're welcome.

Thank you. Our next question will come from the line of Karru Martinson at Deutsche Bank. Please go ahead.

Hi, it's Pat Dimeglio stepping in for Karru.

Hi, Pat.

Just on the acquisition front, do you have any more color for us whether it is size or whether you are looking at US versus international? Anything in the pipeline?

Well, as I have said in the past, the pipeline or the available acquisitions, Pat, are going to be more plentiful outside the US. The ones in the US will be primarily on the BSG side of the business, they will be going forward almost all tuck-ins, and we still find a significant amount of opportunity for BSG in the US, although they are smaller ones. So the top line impact of the smaller one is obviously not going to be as great, but the EBITDA impact is even more significant than the large ones because they are in effect true fold-ins.

Okay. Thank you. And then lastly, on private label, can you just give some color on penetration for the quarter?

That also has been increasing about a point a year. We are in the mid-40s and it continues to run, about a point over where it was last year, and it's another number that we really give on an annual basis.

Okay, thanks a lot. That's all for me.

Thank you.

Thank you. We'll go next to the line of Jill Caruthers at Johnson Rice. Please go ahead.

Good morning. Just to follow up, I know you touched upon it, but could you give us a little bit more details on the metrics that you commented were given your margins were so strong coming out of the first quarter you drove the second quarter business strong -- hard. Did you -- essentially, was it more to marketing dollars or is it more focused on beauty club customers or whatnot?

We typically invest more in our customer acquisition end of the program, which is really the CRM program, and hopefully when we bring more of those potential customers in and get them into the beauty club card program that's where we realize the long-term benefit from that.

Okay. And then just last question. It looks like your Sally segment the EBIT margin of 20.1% looks like it is a peak number from going back what I have in the model. Could you talk about where do you think that margin level can go in the future?

Well, again, I don't see any of the margin enhancing drivers that are causing that to happen changing in the near future. So I would just tell you to add those variables to the model and the control label, our own brand sales, continue to increase about a point a year. The retail business continues to increase about a point a year. There is a little bit of LCC action in there. And for the foreseeable future, that's not going away. So however that flows through the model is pretty much what it is going to be.

Appreciate it. Thank you.

You're welcome, Jill.

Thank you. We will go next to the line of Jacob Zitter at Robert W. Baird. Please go ahead.

Thank you. Just quickly is there any update with the CRM input implementation in the UK or is that a function of the broader ERP?

No, it isn't a function of the ERP, and it is beginning over there as it was here in the US. It is a long process, you have to build a significant database before it has a whole lot of value, but our partner in the CRM program here in the US is now operating in the UK and we will be moving forward just like we did in the early days here. I would not look for a significant impact any time soon because, like I said, this was started gosh, 15, 16, 17 years ago in the US and it takes a long time to build a database of knowledge about these customers to be able to use that knowledge to create a relationship and help the business.

Understood. But the initiative is underway; you are starting to send out the mailers and get that in there?

No, we're in the very early stages of that but you really can't send out a whole lot of mailers until you figure out who to send them to. So that is all part of the early stages of the process.

Okay, great. Thank you.

You're welcome.

Thank you. And I will turn it back to Mr. Winterhalter for closing remarks.

Thank you, operator. I'll summarize by saying we delivered consolidated sales growth of 10.9% and same store sales growth of 9.1% in our 2012 second quarter. Margin expanded 20 basis points and we achieved SG&A leverage, which contributed to a 22% EBITDA growth. Once again, thanks so much for your interest in Sally Beauty Holdings and we look forward to seeing many of you soon. Thank you.

Thank you. And, ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.