Sally Beauty Holdings Inc (SBH) 2012 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by, and welcome to the Sally Beauty Holdings Fiscal 2012 Fourth-Quarter and Full-Year Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given to you at that time.

(Operator Instructions)

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 meaning of Section 21-E of the securities exchange act of 1934. Many of these forward looking statements can be identified by the use of the words such as may, will, should, expect, anticipate, estimate, assume, continue, project, plan, believe, and similar words or phrases. These matters are subject to a number of factors that could cause actual results to differ materially from expectations. Those factors are described in Sally Beauty Holdings, SEC filings, including its most recent annual report on Form 10-K being filed today. The Company does not undertake any obligation to publicly update or revise its forward-looking statements.

The Company has provided a detailed explanation and reconciliation of its adjusting items and non-GAAP financial measures in its earnings press release and on its website. With me on the call today are Gary Winterhalter, Chairman, President, and CEO; and Mark Flaherty, Senior Vice President and CFO. 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 Fourth-Quarter and Full-Year Earnings Call. I will begin today's discussion with a high-level review of our full-year financial results, and Mark will then take you through the fourth quarter in more detail. As you saw from our press release this morning, Sally Beauty Holdings had another very strong year, delivering record results in both businesses. Consolidated sales in fiscal 2012 exceeded $3.5 billion, for growth of 7.8%. This strong sales performance was primarily the result of same-store sales growth of 6.4%, and new store openings of 1.8%. The impact of unfavorable foreign currency exchange of 70 basis points partially offset this growth.

Gross profit ended the year at $1.7 billion, growth of 9.3%, achieving a gross profit margin of 49.5%. Gross margin expanded 70 basis points, primarily due to the shift in customer and product mix in both our businesses. Consolidated SG&A, including unallocated expenses, was $1.2 billion, an increase of 8.5%. SG&A as a percent of sales in fiscal 2012 was 33.5%, up 30 basis points over the prior year. Included in the Sally Beauty Supply segment in fiscal 2012 is a $10.2-million charge related to a potential settlement of litigation. In fiscal 2011, SG&A included a favorable impact of a $21.3-million credit from a litigation settlement net of non-recurring charges. Excluding the 2011 credit, fiscal year 2012 SG&A as a percentage of sales would have been favorable to the prior year.

Operating margin in fiscal 2012 improved 50 basis points to reach 14.2%. This increase was primarily the result of gross profit margin expansion. GAAP net earnings were $233.1 million, up 9% over last year, with earnings per share of $1.24. Adjusted earnings per share, excluding the unfavorable impact of refinancing charges, and charges related to the potential litigation settlement, were $1.42, growth of 33%. Fiscal 2012 adjusted EBITDA ended the year at $591 million, an increase of $89 million, or growth of 18% over fiscal 2011. We generated $298 million in net operating cash, which funded our investments and Company growth, and our stock buy-back. We ended the fiscal year with a global store count of 4,499, an increase of 4.4%, or 190 net new stores.

Turning to segment performance for the fiscal year 2012, starting with Sally Beauty Supply. Net sales reached $2.2 billion for strong growth of 9.2%, driven primarily by higher transactions and average ticket in Sally North America, as well as strong growth in our European and Latin American businesses. Same-store sales for fiscal 2012 grew 6.5%, versus a 6.3% in the prior year. In the fiscal 2012 fourth quarter, same-store sales growth for Sally US was challenged by three categories. To be more specific, in the nail category, we are anniversarying a couple of major launches that occurred last year. In our hair extension category, we are adjusting to significant cost increases in human hair. Electricals are transitioning from flat irons that support the long straight hair look, to curling irons as curly hair is becoming more popular. Our core categories, hair care and color, performed very well during the quarter, with double-digit growth.

Gross profit margin at Sally Beauty expanded 60 basis points for the year to reach a record 54.6%. This strong performance reflects the continued shift in product and customer mix. Operating earnings grew 12.7% to reach $430 million. Operating margin was 19.5%, a 60-basis-point improvement over prior year. Excluding the $10.2-million charge related to the litigation, operating margin would have been significantly higher in fiscal year 2012.

On the marketing side for Sally US, we continue to realize positive trends from our customer acquisition strategy. Our targeted marketing efforts this year reached over 38 million prospective customers through eighth mailers. As a result, we have over 6.5 million beauty club card holders, and member sales now represent over 49% of our retail sales. The average sale for a beauty club card customer remains consistently higher than the average for a non-card customer. We believe our targeted marketing initiatives and beauty club customer conversion efforts will continue to lead to growth in store traffic and higher average ticket in fiscal 2013.

Our BSG segment had same-store sales growth of 6.1%, versus 5.5% in fiscal 2011. Net sales reached $1.3 billion, for growth of 5.4%. This strong performance was driven primarily by growth in same-store sales and 39 net new stores. BSG's gross profit margin was up 70 basis points to a record 41%. The gross profit margin increase was primarily due to the continued shift in sales to the stores, which now represent 64% of BSG's total sales. Operating margin at BSG improved by 70 basis points to reach 13.8% for the year. This strong performance was primarily due to gross margin expansion and operating leverage. Our strategy at BSG remains the same -- to continue store expansion both organically and through acquisition, and to increase our brand footprint in existing geographies and new territories.

In summary, 2012 was another strong year for Sally Beauty Holdings. We delivered record results in both our businesses. On a consolidated basis, we grew our top line by 8%, with same-store sales growth of 6.4%. Gross margin increased by 70 basis points, and EBITDA growth was 18%. Looking ahead to fiscal year 2013, we will remain disciplined in our investments for growth and capital management to further enhance shareholder return.

Before I turn it over to Mark, I'd like to briefly comment on the $10.2 million charge in our fourth quarter related to the potential settlement of litigation that I mentioned earlier. The Company was accused of trademark and trade dress infringement by a small hair care manufacturer. Although we believe that we did not infringe upon their rights and trade dress, a jury in California awarded the manufacturer actual and punitive damages. Based upon the verdict rendered, we have recorded a $10.2 million charge in the Sally Beauty Supply segment for the fiscal 2012 fourth quarter, which we believe to be the best estimate of our possible loss. We intend to appeal this decision, and continue to vigorously pursue the matter. Now Mark will provide more financial detail for the fourth quarter. Mark?

Thanks, Gary. Consolidated net sales for the fourth quarter increased 5.4% to $882.6 million. This increase is principally driven by same-store sales growth of 4.3% and new store openings of 1.6%. The favorable impact of -- the unfavorable impact of foreign exchange rates of $8.2 million, or 93 basis points, partially offset our sales growth. Gross margins in the fourth quarter improved 60 basis points to 49.9% over the fiscal 2011 fourth quarter. Both operating segments drove gross margin improvement though favorable product and customer mix.

Fourth-quarter SG&A expenses, including unallocated corporate expenses, were $305.5 million, or 34.6% of sales, an 80-basis-point increase from the year-ago quarter. The fiscal 2012 fourth-quarter results includes a $10.2-million charge related to a potential settlement of litigation. Excluding this 2012 charge, our fourth-quarter SG&A as a percentage of sales would have been favorable over the prior year. Consolidated operating earnings in the fourth quarter increased 3.2% to reach $117.9 million. Operating margin was 13.4%, a 20-basis-point decline over the prior year. The fourth-quarter performance was negatively impacted by the $10.2-million charge for potential settlement of litigation.

Interest expense net of interest income for the fourth quarter was $25.2 million. Interest expense declined $2.3 million over last year's fourth quarter, primarily due to lower interest rates. For the fiscal year 2012, our effective tax rate was 35.4%, versus 36.4% in the prior year. In the fiscal 2012 fourth quarter, we recognized a $10.3 million in income tax benefits due to a tax-planning opportunity that involved a limited restructuring for US income tax purposes. Our GAAP net earnings in the fiscal 2012 fourth quarter were $65.6 million, a 20.7% increase for the net earnings in the year-ago quarter. GAAP earnings per share were $0.35, compared to the fiscal 2011 fourth-quarter earnings per share of $0.29. After adjusting for the $10.2- million charge for the potential litigation settlement, adjusted net earnings for the fiscal 2012 fourth quarter were $72.2 million, an increase of 32.7%. Adjusted earnings per share were $0.39, compared to $0.29 in the year-ago quarter. Adjusted EBITDA for the fourth quarter was $148 million, an 11.6% increase compared to the $132.6 million in the prior year's quarter. This increase was primarily due to strong sales and higher gross margin.

Looking at the components of our balance sheet at September 30, 2012, inventory increased $70 million, or 10.5% compared to ending inventory on September 30, 2011. This year over- ear increase was primarily due to sales growth in existing stores, additional inventory from new store openings, and acquisitions. Capital expenditures finished the year within our previously stated guidance of $69 million. As of September 30, 2012, our debt, excluding capital leases, totaled approximately $1.6 billion. This $1.6 billion is inclusive of the $150 million of additional debt raised in September to take advantage of favorable market conditions and to maintain our forward-looking leverage ratios. The net proceeds will be used for general corporate purposes. As a result of this financing event in September, our consolidated leverage ratio of 2.5 times is at the high end of our targeted leverage range of 2.0 to 2.5 times.

At the end of August 2012, our Board of Directors approved a new stock repurchase program authorizing the Company to repurchase up to $300 million of common stock over an 18-month period beginning October 1, 2012. As of November 14, we have purchased approximately $40 million under this program. Going forward, we will provide quarterly guidance updates as to our progress towards this authorization.

Let me finish by summarizing our thoughts for fiscal year 2013. Historically, the key drivers of our business have been very consistent. Accordingly, we do not anticipate any business trends in fiscal 2013 to be out of the ordinary. We expect fiscal 2013 consolidated same-store sales growth of 4% to 5%. Same-store sales growth in the first-half of fiscal 2013 is expected to trend towards the low end of this range due to the unusually strong same-store sales growth in the first half of fiscal year 2012. We expect organic store growth of 4% to 5%, and when appropriate, to make strategic and synergistic acquisitions internationally and domestically.

Gross margin expansion is anticipated to be in the range of 50 to 60 basis points. Consolidated SG&A, including unallocated corporate expenses as a percentage of sales, is expected to be flat or slightly lower than fiscal year 2012. Unallocated corporate expense, including $19 million of share-based compensation, is expected to be the range of $115 million to $125 million. Our 2013 effective tax rate is expected to be in the range of 36.5% to 37.5%. Finally, capital expenditures, excluding acquisitions, are expected to be in the range of $85 million to $90 million, and includes expenditures related to our new UK warehouse. Gary?

Thanks, Mark. We are pleased with our 2012 performance, and anticipate that the drivers of our business will continue to generate strong operational and financial performance in fiscal 2013 and beyond. 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)

Meredith Adler, Barclays

I was wondering, there was a sequential slow-down in the comps of the Sally Beauty Supply. I was wondering whether you saw anything like you had seen during the summer, where the biggest slow-down was a result of the non-card members, and whether you have any thoughts -- if that's true -- why that might be the case?

Meredith, the slow-down that we saw was completely related to the three categories that I mentioned. As a matter of fact, I will give you a piece of data that we don't normally give, and we won't be giving going forward. But, if we were to remove those three categories from this year and last year, Sally's comps would have gone up almost two full percentage points. It's strictly related to those categories. I don't have a concern about those categories going forward, for the reasons that we've explained.

We do have a couple more quarters of anniversarying, particularly the nail category and the hair category. I'm confident that our merchants have put together a good plan for Christmas for the electrical appliances. Although we had a very big December last year in appliances, I think that we will perform well again this year. Getting more specific to your question, our Beauty Club card member sales were up 18% in the quarter, which is very consistent with where they have been in the past. That would tell you that the slow-down was in the non-club card customer, which make sense to us.

Okay, and then I'd another question about acquisitions. I know there probably isn't anything big for BSG now that Ariel was done. I know you're also still trying to grow -- I think you described it as brand footprint. Could you maybe just talk a little bit about what the potential is to do that, and is it a significant driver to the top line? I suspect it's a driver to the bottom line because it's very accretive, but maybe you could talk about that?

Yes. When you say significant, is it going to drive BSG two or three percentage points on the top line? No. But does it have the potential to grow BSG somewhere between 0.5 and 1.5 percentage points? Yes, and it depends on what the brands are, and what the geographies are. As you might recall, about this time last year, we acquired the distribution rights to Paul Mitchell in Ohio and West Virginia. That impacted about 75 of our BSG stores significantly on the top line, and helped their comps quite a bit.

There are a lot of geographies left, virtually with every brand we carry around the US and Canada. It's very difficult to speculate if or when those will happen, but we're always pursuing them. That will be the way that BSG shows growth beyond its organic growth plan. As you mentioned a moment ago, it's extremely accretive growth for us for obvious reasons. We're taking revenue without taking much in the way of expense when we do that.

My final question would be actually about the comp that was reported in the fourth quarter for BSG, which was really nice. Is there anything you point to? Is it because you're benefiting from these acquisitions specifically, or anything else?

While we are benefiting from the acquisitions, we did pick up a couple of small brands through the year. The Paul Mitchell acquisition in Ohio, West Virginia I just mentioned played into that. It's a combination of a lot of things. Keep in mind that the business on the BSG store continues to transition to the stores. A little bit of the store comp increase is at the expense of the sales force, which is why you see BSG comps actually growing faster than its total business. But as you also know, that's a more profitable sale for us. We're not necessarily doing anything to drive that to happen, but it's naturally occurring because of the transition and the continued move to a booth-renting business model.

Great. Thank you very much.

Ike Boruchow, JPMorgan.

Hello everyone. Thanks for taking my question, and congratulations on another great year. I had two questions. First Gary, can you talk about the two segments and what you're seeing there over the last several months? Any changes on the Sally side that maybe you aren't seeing on the BSG side? I guess from a high level, maybe parse out retail behavior of your shopper right now, versus the salon or booth-renting trends you're seeing. Just trying to figure out why we'd see a sequential slow-down at the Sally in Q4 with a pick-up at BSG, sequentially?

Keep in mind the things that I just mentioned with BSG bringing on some more brands, and the continued shift toward the store business. That's one part of it. Also keep in mind that Sally's business today is 75% retail. The categories that I discussed in our prepared remarks and a moment ago with Meredith, being nails, hair extensions, and electrical appliances, are also Sally's heaviest retail categories. So when those slow and 75% of your business is retail, and a higher percentage of those particular categories is retail, that's going to impact Sally's comps much more so than BSG comps.

Also, if you recall our comments of the last couple of quarters, the salon business is moving along pretty steadily right now. The last report we saw was that the salon industry was up about 6%. Hair color is a big piece of that. A very large percentage of BSG's business is in hair color, so that helps. The differences between the two business, being the retail and the professional-only component, really come into play here in the question that you asked.

Okay. Great, thanks. One quick one. On the SG&A front, it sounds like you guys aren't expecting to see the same type of leverage this year that you have the past two years. Can you talk maybe about the investments that you've planned over the next 12 months? I guess based on your outlook, for -- it sounds like a slightly slower comp in the first half versus the back half. Should we be thinking about potential expense de-leverage in the first half when we think about operating margins?

Well, I'm hoping that we won't see de-leverage. The investments you're talking about, specifically, are very important to us. When they're finished it's going to give us the ability to increase our leverage, specifically on the Sally side. Those are the roll-out of our POS system, which is getting close to half done in the US. That really enhances our ability to continue to further use our CRM program. The second investment is the second half, so to speak of the UK distribution project, which we expect to have that finished by March. That's going to ultimately -- particularly starting in fiscal 2014 -- really reduce our distribution costs, particularly compared to the last couple of years, but even lower than it had been previous to this whole project taking place.

The third investment is the international ERP system, which as we've talked about, we operate on about -- gosh, I think it's six different IT platforms in western Europe. Once we get all of our businesses on the same IT platform, it's going to allow us to grow more rapidly and more efficiently, plus it will also allow us to eliminate a fair amount of back office expense and some distribution expense. All three of these projects have very good pay-offs for us in 2014 and beyond.

Great. Thank you so much. Good luck.

Simeon Gutman, Credit Suisse

A couple of questions. In the press release, the reference to the good start to Q1 -- can you talk to whether that's a function of some of those categories, Gary, or some of those issues easing, or is that the core pieces of the business getting better?

Well, we have seen the pressure or the anniversarying in the nail category easing a bit, simply because the further down the road we get here, the less steep the anniversarying is each quarter and each month. That is helping. As we come into the holiday season here, I believe that we will see the same things start to happen with electricals, the hair extension category -- part of it, as you recall us talking about earlier in the year, it was simply a shortage. It wasn't just the significant cost increases we saw -- we couldn't get product. That is subsiding.

Now we are getting a good flow of product; however, it's still at a significantly higher price point. I kind of liken it to a gallon of gas. When the gas goes up significantly there is a bit of sticker shock. But once everybody determines that hey, this is the new price, you kind of accept it, and if you want hair extensions, you're going to pay the new price, particularly if you want human hair extensions.

Now having said all that, the effects of this hurricane that we had in the Northeast really put a damper on our Halloween sales, which is a significant business for, particularly, Sally at the end of each October. As I think we mentioned, either in our press release or discussed earlier, we had over 500 stores between Sally and BSG closed for the last couple of days of October and into the early part of November. As you well know from living in that part of the country, there's still a lot of issues with power, and we still have a very small amount of stores still closed because of the lack of power.

Now what we're trying to do, and we just had a short meeting this morning on it, is we have quite a bit of experience from Katrina and other Florida hurricanes in the aftermath of these things as far as the impact on our Business. So we're trying to prepare ourselves for small salons that want to get back into business that need equipment quickly, and basic shop supplies, and things like that. I'm hoping that we'll get the benefit of that business by being prepared in helping our customers get back on their feet in that area. But it's going to have an impact on our first quarter, as I suspect it will on most retailers who operate in that part of the country.

Okay. Switching topics to the buy-back. Can you just talk against us what the plans are for the organization as far as buy-back pace and cadence? Is it more of a recurring-type program, or are you going to be very cognizant of some model that's going to dictate when you step in and out of the market? Part of the question is, I guess some of us are surprised that more stock wasn't repurchased in the early -- I guess at the onset of the program.

Simeon, it's that under the $300-million share repurchase program we're under a 10b5 plan. We're predicated based on the model in terms of the volume and the amount of shares traded on a daily basis. However, I think it's going to be more of a function of being opportunistic in terms of where the market is. Given that we're getting out of the earnings season and we're getting more into what you see as more of the economic news that affects the market, certainly we will watch the market very closely and be opportunistic. But as far as anything else beyond that, I'm not going to go into a lot of detail on the actual plan. There is some systemic cadence to it, but we also will be very opportunistic at the end of the quarter in terms of re-evaluating its results. If we see an opportunity to do something different, that will be something that the Board will discuss further.

Okay, and then one more on acquisitions. Can you discuss whether Europe or Latin America or -- I don't know if you prioritize between those markets, but where we might see the next one being done between those two areas?

My guess would be Western Europe. Not because that's necessarily our priority, but in reality, I think we will find the deal flow there, and the ability to get them done from a governance standpoint easier there than we are finding in South America. Keep in mind that none of these we're talking about, either in Western Europe or in South America, are significant in size.

Right. But I there's not really any changing positive developments in the South America, especially in the Brazil market?

Not at this point, no.

Okay, thank you.

You're welcome.

Erika Maschmeyer, Robert W. Baird.

Can you talk a little bit more about your expectations for your fiscal 2013, particularly in Q2? You just had such a tough comparison against the extra day in Easter and the weather. Could we see the comp, or I guess, or should we expect going in the comp to be below the range that you threw out there? Also, a similar question on the gross margin leverage side. Do you expect kind of more of that leverage to be driven by the back half of the year when you've got stronger comps?

Well, of course I would expect the back half of the year to get better leverage, simply because you have higher comps; but as you know, we have some natural driving -- margin drivers in our business. I still believe that we can get leverage at a fairly low comp. Now also taking into consideration the three fairly significant projects that we're investing in this year. Not a lot of that is capital, but there are expenses associated with those projects, as well.

Specifically about the second quarter, you're right. That will be our largest comp comparison that we're up against. If you take out the factors of the extra day, the weather comparison, and Easter, it really brings the second-quarter comp down very similar to what the first-quarter comp is. Discounting those factors, I think we will have an equally difficult time in both quarters, because I look at both quarters more as the 7% to 7.5% comp, discounting the extra day and some of the other things that took place there.

The UK ends in the second quarter. Right now Mark and I both actually just spent some time over there, and I was very pleased that I don't think the distribution problems we've had at this point are having a big impact on sales. We're doing a very good job of helping the 3PL with one of our own distribution centers, and our suppliers are being very cooperative in drop-shipping a lot of product.

I think that the UK -- again, they have the same issues with the extra day and the weather comparison there, also. As I mentioned earlier, the UK and Europe had very favorable weather. To answer your question directly, I hesitate to forecast what our Second Quarter comp will be, but I think again, discounting the known factors there, it will be similar in competing with the comp that we'll have this first quarter.

Okay, and then switching topics a little. Could you talk about the potential for the Beauty Club card program? I know you've hesitated in the past to put in -- and any on your acquisition efforts there? How much bigger do think that program could be as a penetration of retail sales? Could you talk a little bit more and just kind of remind us of your tactics on that front?

I know you said you had eight mailers over the past year, and 30 million women. How many more untapped customers are there out there? Where are you in terms of shifting the second decile customers up to the first decile? Any color you could give there would be helpful. Thanks.

Sure. Let me start by saying that we kind of have 10 million in our sights right now over the next two or three years. I think based on what we do know, and based on the average ticket of the non-card customers, that we believe we can get there in that time period. Now, I think also adding to that, as I mentioned a few minutes ago, the new POS system that we are in the process of rolling out to the Sally US stores gives us a lot of enhanced ability to use the data that we're getting in a more efficient way with our CRM program.

That will only help us to further grow that program by being more meaningful, even to some of those lower-decile customers. I'm excited about that. I think that once we have that in place for at least a year, which is probably almost two years from now, we're going to have a much better feel of how far beyond 10 million can this go, what percentage of our retail business can it really be. It'll just give us a lot more insight into it.

As I mentioned in the past, we are in the very early stages of cranking this up in the UK. Our partner here in the US just in the last 12 months has started up a business in the UK. Again, this is a very long process, particularly when you're starting from scratch -- keeping in mind here in the US, even though this program we started three and a half or four years ago, we had about 3 million Beauty Club card members already. We just weren't doing a lot with the data. But we had the data, so that's an enormous difference from starting at zero, which we will be doing in the UK. I still feel very confident that this is our primary marketing effort and the primary driver of our retail sales at Sally going forward.

That is helpful. Just a clarification question. Could you roughly break out how much of your hair color sales at Sally are to retail versus professionals?

Yes. We really don't break the categories down. Obviously, we have that information, but we don't break it down, really for competitive reasons.

Okay, thank you.

Olivia Tong, Bank of America Merrill Lynch.

Thanks a bunch. First question is just -- can you tell us what you're expecting for interest expense in 2013, given all the -- given the new debt? Secondly, can you talk a little about what you're seeing so far in October and the beginning part of November that give you confidence to reach the lower end of that 4% to 5% continuing-store sales target, given the tough comp?

You mentioned that with all the destruction around Sandy that could be a near-term hurt. What are you seeing in other categories that are helping? Obviously, you mentioned that the comps are getting a tad bit easier in nails, but it sounds like the other categories are still pretty tough. Is there greater accelerating underlying growth in hair care and hair color? Maybe you could give some more granularity on that. Thank you.

I'll take the second half of that, and then Mark will comment on our interest expense. As I mentioned in our prepared remarks, the core of our business is still hair care and hair color, and both those categories were up double digit in Q4. That gives me a lot of confidence that our basic business is still very healthy, and I'm expecting that to continue.

One of the things that gives me a bit of confidence going into this first quarter relative to your question of being at the lower end of the comps is even in spite of the hurricane, we did finish the month of October at the lower end of that comp range.

Now I will also tell you that last year in this quarter, December was by far our biggest month. I really can't comment much farther than that. I think we're well-prepared for the Christmas season business. I'm expecting we'll have a very strong holiday season. Whether or not we can comp last year's December, which obviously will be the month that makes the quarter, remains to be seen. Mark, do you want to take the interest expense?

Yes, sure. Olivia, barring any other refinancing events this year, we should be in the neighborhood of $100 million to $105 million.

Karru Martinson, Deutsche Bank

Good morning. When we look at the retail versus professional customers, at Sally you mentioned retail is now 75%. As you pursue CRM, where do we see that in the next two to three years?

Karru, I expect it to continue right on the same trend that it is now over the next two or three years, which is a shift of about one percentage point a year. I think possibly, as I mentioned earlier, once we get past the roll-out of the POS, and kind of a new phase of experimenting with marketing with our CRM program with even better data the new POS program will provide us, that could accelerate after 2014.

But it remains to be seen. If we get everything out of this new system that we expect, there is no reason that we couldn't kind of turn up the gas on that program. That could accelerate the retail business faster than its current pace. Right now, to answer your question for the next couple of years, my expectation is very much the same trend that we've been on for the last 10 or 15 years.

Certainly not looking for you guys to give away your trade secrets, but what are some of the things that are resonating with the customers in the CRM marketing that converts them to a Beauty customer? Is there something that you're seeing consistently with that customer base who becomes that loyal shopper for you?

I think a lot of it has to do with the profiling that we do, which enables us to really target these customers. When you can target the marketing you obviously can do more marketing, because you are eliminating a lot of potential customers that just don't fit the profile. I think it's simply a matter of being efficient with what we're doing.

You mentioned you're kind of at the high end of your target leverage range right now. You have the opportunity to buy back shares. What's the thought process on bringing the leverage back down to either the middle or the low end of that leverage target range?

Certainly, we'll more or less play within the band of the 2.0 to 2.5 times. What you saw, Karru, is that we decided to be very preemptive in terms of our forward look of our leverage ratio by taking advantage of the market conditions in September to do the add-on of the $150 million. That kind of put us at the top end of that range. But staying within the band of the 2.0 to 2.5 times based on all of the activities and some of the shareholder-friendly activities that we've embarked on now, we feel very comfortable with the range and the outlook that we've provided.

I know we have discussed it in the past but has there been any change in your thinking in terms of investment grade is a target?

Well, I certainly won't turn it down. But as far as when we've had this conversation before, Karru, at the time we were in the market, particularly refinancing all of our capital structure, it didn't necessarily -- one more notch didn't necessarily buy us better pricing, per se, because we've been very good at performing above our level in terms of the view of the market and the investor demand for our paper, given the very consistent performance of this business.

With that said, if S&P or Moody's or the rating agencies as a whole decide over the next six months to a year to two years to make us investment grade, I have no problem with that whatsoever. We've been very pleased with, given the number of upgrades that we've had, we've been very pleased with the outcome that we've been able to do in our refinancing activities.

Thank you very much guys, appreciate the time.

William Reuter, BofA Merrill Lynch

Good morning. I'm curious whether in relation to the Hurricane Sandy you guys had any supply disruption from your vendors; I guess, whether there could be some out-of-stocks come holiday time?

I don't believe that we have an issue with that. Most of our suppliers, at least from a manufacturing and distribution standpoint, don't ship out of that part of the country. Obviously our big category for the holidays is electricals. A big piece of that we do on a direct import basis. I don't think we're going to have any of those issues. Another point is we did not have any distribution centers of our own that were impacted. I'm not expecting any supply disruption either from our suppliers or from our own distribution centers.

Okay. Lastly for me. In terms of your CapEx guidance of $85 million to $90 million next year, do you know how that's going to break down into a couple of the buckets that you've discussed in terms of your projects?

Sure. It is much larger than what we have spent in the last couple of years, or the year-over-year increase is much larger. Certainly, one big item that's in there, which I called out in our remarks was the UK warehouse. The piece of the UK warehouse that's being completed this year, the amount of capital expenditures involved is about $9 million to $10 million of that increase. Other items that also are driving some of the increase is that we also are embarking on our next phase of the ERP roll-out in Europe, specifically central Europe, to bring that system up live. We now have Mexico up and live.

Also is that we are increasing our remodeling efforts on Sally North America, which is also requiring a little bit more CapEx than usual. But it's very necessary, given the size of the footprint, and the cycling through to keep these stores fresh. When you look at those items and then look at the regular run rate of our normal CapEx and the way it breaks down, it's very proportional to the prior years, of which about 66% of our CapEx is still dedicated toward store construction.

Okay, thank you very much. That's all for me.

Jill Caruthers Johnson Rice.

Good morning. Could you give us any type of quantification of the three categories you talked about that were some pressure on the sales of Sally -- the nail, hair extension, and electrical -- the percentages those three categories make up for Sally?

Yes, if you combine them it's about 30%.

Okay. Then just some clarification on the electrical as you talked about the shift going from flat iron to curl. It was my understanding that when you have a change in type hair fashion or what not, that actually creates some incremental sales demand as the customer needs to buy the new equipment, or what have you. Could you talk about how that's a pressure? Is it a pricing difference between the two?

That's part of it, but we're just not seeing that happen. I think that even if curl wasn't coming back the way it is, that the flat iron business would be slowing down anyway, simply because women that use flat irons already have multiple flat irons. I think that business was really getting saturated over the last year, even forgetting the fact that the curling irons are starting to get more popular as curl comes back into fashion. I think in some cases what you're saying definitely happens. I just think that there was an awful lot of flat irons in the market. Over the last couple of years, the quality of the flat irons has gotten much better. You don't have to replace flat irons, particularly if you're not using them as frequently. It's a good point. We're just not seeing that happening in this particular case.

Okay, last question. On the three major investments you talked about for fiscal 2013 -- the POS, and the European DC, and the international ERP. The timing that will flow through the different quarters, is there any -- is it weighted to a certain quarter or what not? Just looking at how we should model those investments?

I would weight -- well, the only one that I would weight a little differently than the other two would be the UK warehouse. That has got a very finite date to it which -- it's an end-of-the-second-quarter event, which will conclude. The other items are more of a continuing event over the entire year.

Thank you.

Meredith Adler, Barclays.

I just want to ask you as you think about Western Europe, would you branch out beyond maybe the countries that are doing okay, well like France and Germany, and would you look at some of the countries that have been more troubled, but maybe are big users of beauty products, like Spain or Italy?

Yes. We have a business, a small business, in Spain, Meredith. I've been over there twice in the last year, and I think we've got some great opportunities in Spain, particularly the northern half of the country. I also think that Switzerland could be a great opportunity for us, as well. I also -- not in the near-term future -- but I think a lot of the Eastern Bloc countries are just booming in our particular categories right now, being Czechoslovakia, and Poland, and Hungary. There's a lot of the suppliers that we deal with, particularly in Europe, are just raving about the business that they are seeing there.

Interesting. Okay, that was it. Thank you.

Thanks Meredith.

With that, I'd like to turn it back over to Gary for any closing comments.

Thanks operator.

In summary, we had a traffic year, ending with strong financial results and executing on our key initiatives. I think it positions us well as we head into fiscal 2013. I'd like to thank you all again for your interest in Sally Beauty Holdings, and we look forward to seeing you in the new year. Thank you.

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