Sally Beauty Holdings Inc (SBH) 2013 Q1 法說會逐字稿

Welcome to the Sally Beauty Holdings fiscal 2013 first quarter earnings conference call. At this time, all participants are in a listen-only mode. You will have an opportunity to ask questions after the presentation. Instructions will be given at that time.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to our host, 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 12-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 for the fiscal year ended September 30, 2012.

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, Chairman, 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 2013 first quarter earnings call. I will begin today's discussion with a high level review of our financial results and business initiatives. Mark will then take you through the fiscal 2013 first quarter in more detail.

As you may have seen from our press release this morning, fiscal 2013 is off to a good start, considering the difficult year-over-year sales comparisons. Consolidated sales in the first quarter grew 4.7%, versus 9% in last year's first quarter. This sales performance is attributed to net new store openings and consolidated same-store sales growth of 2.8%. Same-store sales growth was challenged by the record growth rate of 7.1% we achieved in the fiscal 2012 first quarter. Considering these difficult comparisons, we are pleased with our financial performance this quarter and remain confident that we will achieve our objectives for the year.

Gross profit margin in the first quarter expanded by 30 basis points, to reach 49.1%. And SG&A as a percent of sales improved by 10 basis points. Both of these improvements led to operating margin expansion of 40 basis points. Net earnings in the first quarter were $59 million, with earnings per share of $0.32. Our store base increased by 3.7%, or 162 stores, ending the quarter was a total store count of 4,525.

Turning to segment performance, starting with Sally Beauty Supply. Same-store sales growth for Sally Beauty was 1.6%, versus a record high of 8% in the prior year. Net sales grew 4.2%, to reach $559 million. Sales growth at Sally was somewhat softer than we anticipated, primarily due to the handful of merchandise categories that continue to be a challenge. Our Beauty Club and customer acquisition programs performed well, driving traffic and higher average ticket in our US stores. Beauty Club Card memberships increased to 6.9 million, and sales from our BCC members increased 13.4%.

The ongoing shift in product and customer mix drove gross profit margin expansion of 50 basis points, to reach 54.4%. Operating earnings grew 5% to reach $106.1 million, with operating margin of 19%, improvement of 20 basis points from the prior year. In the UK, our new warehouse initiative is on schedule and we expect the facility will commence shipping by the end of March and be fully operational by the end of April.

Now turning to our BSG segment. BSG had strong same-store sales growth of 5.6%, versus 5% in the fiscal 2012 first quarter. Net sales grew 5.5%, to reach $346.6 million. This growth is attributed to solid performance in our corporate and franchise stores, as well as in our full-service business. BSG's gross profit margin was 40.4%, flat over the prior year. Operating margin at BSG improved 90 basis points, to reach 14.1%. This strong performance was primarily due to sales growth and SG&A leverage.

To summarize, Sally Beauty Holdings performed well during the quarter, considering the challenging year-over-year sales comparisons. We expanded gross margin and realized SG&A leverage, which led to high single-digit earnings growth. We executed on our share buyback initiative by purchasing approximately half of our $300 million authorization from October 1 through January 31. As we head into the second quarter, we've often mentioned that we will be up against difficult comparisons, due to the same-store sales growth driven by Leap Year, Easter promotions and strong growth in certain categories that led to a 9.1% comp in the second quarter of 2012. While we understand this will be a challenge, we remain confident in our ability to achieve our operating objectives for the fiscal year.

Now I will turn it over to Mark to provide more financial detail for the first quarter. Mark?

Thanks, Gary.

Consolidated net sales for the first quarter was $905.4 million, an increase of 4.7%. This increase was primarily driven by 162 net new store openings and 2.8% growth in same-store sales. As many are aware, we are comping against record same-store growth in the first half of fiscal 2012. Although we believe that we can deliver same-store sales growth for the year at the low end of our 4% to 5% range, the comparisons for the first half of 2013 are likely to be in the range of 2.5% to 3%. Consolidated gross profit was $444 million, or 49.1% of sales, a 30-basis point improvement from the fiscal 2012 first quarter.

First quarter SG&A expenses were $305.7 million, and represented 33.8% of sales, a 10 basis point improvement from the 2012 first quarter. Unallocated corporate expenses, including share-based compensation, were $33 million, or 3.6% of sales, versus the fiscal 2012 first quarter expenses of $31.1 million and 3.6% of sales. For the fiscal year 2013, unallocated corporate expenses, including approximately $19 million in share-based compensation, are expected to be in the previously stated range of $115 million to $125 million.

Consolidated operating earnings in the first quarter increased 7.6%, to reach $121.9 million. Operating margin was up 40 basis points, to 13.5%. The first quarter's performance was positively impacted by SG&A leverage and higher gross margins. Interest expense during the quarter totaled $26.7 million, a year-over-year decline of $37.2 million. If you recall, in the fiscal 2012 first quarter, we closed on our senior notes offering of $750 million and used the proceeds to redeem our higher interest rates senior and senior sub notes. As a result of these transactions, we incurred pre-tax charges of $39.9 million, which is the primary increase included in our interest expense for the fiscal 2012 first quarter.

Adjusted EBITDA for the first quarter was $147.7 million, growth of 7.9%, compared to $136.9 million in the prior year's quarter. This solid performance is primarily due to sales growth, SG&A leverage, and gross margin expansion. For the fiscal 2013 first quarter our effective tax rate was 38%, versus 38.9% in the fiscal 2012 first quarter. We estimate our annual effective tax rate for the fiscal 2013 year to be in the previously stated range of 36.5% to 37.5%.

Net earnings in the first quarter were $59 million, a 96% increase compared to the fiscal 2012 first quarter GAAP net earnings of $30.1 million, and a 5.9% increase over the fiscal 2012 first quarter adjusted net earnings of $55.7 million. Net earnings for the fiscal 2013 first quarter include a $1.2 million pre-tax credit related to the partial reversal of an accrual for the settlement of a litigation matter. Adjusted net earnings in the fiscal 2012 first quarter exclude charges from the issuance of our new senior notes and the redemption of our senior and senior sub notes. Earnings per share for the fiscal 2013 first quarter were $0.32, a 100% increase over the fiscal 2012 first quarter GAAP earnings per share and a 10.3% increase compared to the prior year's adjusted earnings per share of $0.29.

In looking at the balance sheet, inventories increased $68.1 million or 9.9%, compared to the ending inventory on December 31, 2011. This year-over-year increase is primarily due to sales growth in existing stores and additional inventory from new store openings, and the UK warehouse initiative. As of December 31, 2012, our debt, excluding capital leases, totaled approximately $1.6 billion. Capital expenditures for the quarter totaled $23 million and reflect expenditures to open new stores, expenditures on existing stores, our new warehouse in the UK, and IT-related projects. For the fiscal year 2013, we iterate our capital expenditures, excluding acquisitions, to be in the range of $85 million to $90 million.

To update you on our progress of the Company's share repurchase program, we have repurchased $141 million of our common stock, or approximately 50% of the $300 million authorization, from October 1 through January 31. As of the end of the fiscal 2013 first quarter, we had approximately $159 million remaining under our current authorization.

Gary?

Thank you, Mark.

In summary, we had a good quarter, considering the record sales growth we were up against from the prior year. We achieved 4.7% top line growth, gross margin expansion of 30 basis points, and SG&A leverage. We also executed on our stock repurchase program, which we continue to believe is an attractive return of capital to our shareholders.

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)

Simeon Gutman, Credit Suisse.

Thanks, and good morning.

Good morning, Simeon.

Good morning, Gary. I wanted to start with the sales outlook. Curious what's -- pardon me if I missed it, but I believe you said still optimistic in achieving longer term outlook. Curious, what gives you the confidence in achieving it now that we do face tougher compares in the next quarter. I think the business, all things considered, with even the comp this quarter, performed quite fine against it. Keeping the bar at that level for the year, what gives you that confidence?

Well, the bar is still the 4% to 5%. I think we have also said that we do expect to be at the lower end of that for the full year. And as you know, Q3 and Q4, we are against much more moderate comps from the previous year. The categories we have been having some issues with, particularly the nail category, is coming back nicely. We've got some nice introductions coming, primarily in late Q3 and Q4, that I think will help us there. And that's been a significant part of our comp issue. And also, in the hair goods.

The latest craze seems to be the blend of human and synthetic hair, which kind of answers the cost issue that we've had with human hair. I have been telling you for at least a year that the costs on human hair went up significantly, and there was a supply issue. Now this seems to be in the middle. The pricing is much less on this than it is on 100% human hair. And we think that's going to help that category quite a bit.

So I am still comfortable and confident that we will be at the low end of that 4% to 5% for the year. Obviously, Q2 here is going to be a huge challenge. We are up against a comp that I've never seen in this company from last year, which was over 9%. We had a similar thing in December, Q1 all hinged on December. December, if you look at the Sally comp, people are disappointed with the Sally comp for Q1. But when you look at last year for December for Sally, they were over 11%. And that's just off the charts for us. I was expecting the Sally comp to be a little better than it was, but not significantly, trying to come up against that comp from Q1 of last year.

With regard to sales, how much can you control -- meaning with the Beauty Club Card -- is there any ability to maneuver within a short period of time targeting customers? Is that something that fuels optimism, or is more just the category growth and how Sally's positioned within it?

The answer to that is yes. We have some nice tools in the box regarding the Beauty Club Card customer and being able to make offers to them. Now, what I don't want us to get in is the roller coaster of chasing comps and driving down margin. And I think that it's best for us to do what we can without destroying our margins to bolster comps this quarter, but not get so hung up on trying to hit the low end of our comp guidance for this particular quarter, because it's going to set us up for the same kind of difficulties next year in Q2. So, not to say that we won't do some of that, and we plan on doing some of that. But we're just not going to chase comps at the expense of margin, because I think we would pay for it the following year, anyway.

Okay. And then on the payroll tax and the late tax refund issues, have you seen any impact to either of the businesses from those?

I don't believe we have. I think it would be somewhat difficult to really measure that. but I don't believe we have.

Okay. Thanks for the color.

Thank you.

Meredith Adler, Barclays.

Hello, guys. Thanks.

Hello, Meredith.

I was tempted to ask similar questions about what you feel is going on with the consumer, because we have seen a slowdown at other retailers. But I think you covered that well. So maybe we'll just talk a little bit about some of these IT initiatives. Specifically interested in knowing how the rollout of SAP is going, or did you not do it in the fourth quarter? And the same with expanding the new point of sale system, did you also delay that? And how is it going if you started it up now?

I think I misunderstood you. Did you asked how the rollout of the SAP system was going?

Yes.

First of all, we're not using SAP.

Oh, I'm sorry.

That's okay. But I want to clarify that, because you say SAP to some people and they go into cardiac arrest. We are introducing -- our international ERP system is Microsoft AX. We did introduce it in Mexico last summer. That's up and running. Our plan is to introduce it in Europe. We have delayed that a little bit. Right now, we plan on going live with it around the first of May. So some of the expense that we expected to have in Q2 regarding that hasn't hit us yet.

Regards to the Sally POS rollout, we did put that on hiatus only through the holidays. It is just difficult to do that kind of thing during the month of December, because the stores are busy. But we started that initiative again after the first of the year, and we are quickly approaching 700 stores. And we also are still planning to have that completed or very, very close to being completed by the end of the fiscal year.

Okay. That's great. And then I would just like to talk a little bit about what you're seeing in some of the international markets. Has there been any change in the trends that you're seeing?

No. The UK, as we said in the call, and I think was in the press release, I'm really excited about getting that distribution issue behind us. That is on plan. It is doing very well. We will start shipping the end of next month, and be fully operational the end of April, which gives me a lot confidence that all the costs and the issues that we've had with that for the last two years will be behind us before we get into fiscal '14. And by the way, that was the total cause of Sally not getting SG&A leverage in the quarter. We got it for the total business, but Sally didn't get it. And it was not because of the comps in Sally USA, it was totally driven by the expenses in the UK.

Okay. Great. Thank you.

Thank you.

Jason Gere, RBC Capital Markets.

Okay. Thanks. Hello, guys.

Hello, Jason.

I wanted to talk a little bit about the cadence of sales. You reported last November 15. We already knew that there was some Hurricane Sandy impact. So when you look at December, was that trend kind of flat? And I guess I'm trying to see the sequence, how December pushed into January in terms of comp sales, that gives you the confidence that you'll do a similar comp in the second quarter as you did in the first quarter. That's the first question.

First of all, I think I said back in that November call that we really didn't have a significant impact from the hurricane. We did have 200 stores close, but I was actually fairly pleased with October comps and I was pleased with November comps. They were actually well within our range. But as I said a few minutes ago, December on the Sally side, we were up against over an 11% comp from last year, and it was a really difficult December because of that. I have not seen that softness flow into January.

Now I am not commenting on January or Q2 specifically, because as you know from our comments last year, February with the extra day is probably the biggest challenge month in Q2. And March, I think from a sales standpoint, March will be good with the earlier Easter being the last day of the month. However, we are closed on that day. So that kind of offsets the benefit of the promotion, because you lose millions of dollars of sales when you're closed, even on a Sunday, for us.

Okay. Then when you think about -- I think you are saying same-store sales company-wide, that would 2.5% to 3% in the first half, so similar to that first quarter. To break it down between BSG and the Sally stores, do you see Sally being in that similar 1%-ish range and you'll see another strong quarter out of BSG? Or, how should we think about the composition between the two there?

I fully expect the softness to be more on the Sally side, again, because of the comps last year. If you look at BSG, Q1 last year they were 5%. This year they were a little above that. So it is well within our range, but they weren't up against the wild comps, which obviously is primarily driven by the retail business, and they don't sell retail. So that's a big factor with BSG. I would expect and fully anticipate BSG to be within the range that they've been. I think our softness, again, will be on the Sally side in Q2.

I will tell you the same thing I said in the November call. Obviously, in November we didn't have December completed yet. And obviously today, we don't have March completed yet. March will be the determining factor of Q2, because we know February -- the extra day in February is 3% right there. So we know that's going to be extremely challenging. If March comes back nicely, I believe we will be in the range you just discussed for Q2.

But again, having said that, our comps were up 2 percentage points more in Q1 last year -- in Q2, rather -- than they were in Q1, from 7% to 9%, ballpark. Granted that 1% of that in Q2 is completely due to the extra day. It's 3% for the month, but it's 1% for the quarter. So I believe that, again, given what we've seen in January, given we believe we will have some significant softness due to the calendar in February. If March is strong for us, we could still fall in the range of what you just described and what we said earlier.

Okay. Great. Second question, if you look at the inventory up 10%, can you break out how much of that is because of the UK warehouse initiative and some of the promotions? So as that cycles through, should we go back to seeing sales growth faster than inventory trends?

I don't know this year whether we'll get to that point, primarily because, as I just said, the UK issue will be with us through the end of Q2. The inventory burn off from that whole issue will take us well into Q3. So I think about roughly 50% of the inventory build had to do with the UK. The other 50% had to do with opening new stores.

So what I would say to you is by Q4, we should be through most of the inventory burn, excess inventory burn from the UK. Now also consider that we planned to have the inventory to hit the low range of our comps. And we fell a little below that, so that gives you a little extra inventory, as well. But inventory has never been a big problem for us, so I would tell you going into next year, we should be back to our more normal inventory trends relative to sales.

Okay. Then the last question, and I will hop off, is just on the buyback. It sounds like the buyback was really through December, because I think you said you had $159 million left. Unless I did my math wrong. There wasn't any buying in January?

No. We said that -- I gave you that number in the prepared remarks. It was through January 31, the numbers that we gave you.

Okay. So I guess they thought is, how do you have those internal discussions about taking on more leverage? And I know 2.5 is the number. From 6.5 down to 2.5. But right now with the confidence in the business, the second half getting better, what are those thoughts in terms of going to maybe 3 times, 3.5 over the next year or so?

Jason, I think we feel very comfortable with the 2 to 2.5 times. If you look at our normal trajectory, and given the $1.6 million of debt is fixed, you should just, through the nature of the business, delever down beyond 2.5 times. In terms of operating within that band, we are still very comfortable with that band. And we could see opportunistic activity, in terms of either some of our shareholder friendly activity or acquisitions or the growth of the business, where we might go above that for a very short period of time. But I think we still believe that we are very comfortable with the range with which we can operate the business at 2 to 2.5 times.

Okay. Great. Thanks for taking all my questions.

Thank you.

Taposh Bari, Goldman Sachs.

Good morning, guys.

Good morning. How are you?

Good. Thank you. I wanted to ask about SG&A. When you gave guidance for the year last quarter, you had said that you were expecting flat to slight deleverage on SG&A for the year, on the 4% to 5% comp. Now, I would've expected some deleverage in the first quarter, given the comparisons, but you actually got leverage. So you can talk to us about your ability to flex that line going forward, as you face some of these challenges on the comparison site?

Part of the reason is what I said earlier, we have kind of pushed back the international ERP system by a few months. Some of those expenses probably would have started hitting in Q1, had we been moving forward a little quicker with it. And again, the UK had a great deal to do with not getting that leverage. I still -- with the things we have planned, I would not expect a lot of SG&A leverage on a full-year basis. I will also tell you that when we realize we are having a little more difficult time than we may have expected or budgeted for, we pull down expenses. We have a fairly good control of labor hours in the store, labor hours in our distribution centers. Obviously, payroll is one of our biggest expenses. It's not all fixed costs where we just have to sit here and take the punches. We can react.

Okay. That's helpful. The second question I had was, obviously a lot of focus on Sally Beauty. But I wanted to ask about BSG. Good comps there, 5.5% comps. You're growing square footage 4%. Yet the sales growth of BSG is closer to 5%. I'm assuming that's because you're bringing down your consultant business. Can you talk about the dynamics there? And secondarily to that question, is that having any impact on your SG&A dollar growth, as well?

Yes and yes. The full-service business actually had a very nice quarter. They were up. The stores were up more than the full-service business, so that is why the overall growth rate is a little less than the store comps. But BSG is kind of running on all eight right now. They are doing extremely well. Everything is just happening right. We continue to get distribution with new brands, and they are executing extremely well.

Okay. Thanks a lot. Good luck.

Thank you.

Joe Altobello, Oppenheimer.

Thanks. Good morning, guys.

Hello Joe.

Hello. Most of my questions have been answered. I did want to go back to the Sally segment for a second. The gross margins up 50 bits, despite the, as you may call it, a bit of a disappointing comp. It sounded like most of that leverage you got from customer mix. Could you give us a little more color there? Was that all there was, or was there other things that were driving the margin expansion on the Sally side? Thanks.

The margin on the Sally side, as we've always kind of explained to people, almost naturally grows by that 50 basis points every year. And it has to do not only with the customer mix, but also with the private label, the product mix, as well as the LCC program. All three of those things, with the customer mix and the product mix being the bigger of the two, add to the margins. So even if comps were basically flat or negative, that shouldn't affect the margin increase, because all the other things are still in play. The only thing that would ever significantly impact the margin is if we did something promotionally and got very aggressive and tried to buy business with margin.

Okay. Great. And secondly, in terms of the December comp, you mentioned you were obviously up against a very difficult base period of plus-11%, or actually higher than 11%, a year ago on the Sally side. It sounds like holiday wasn't necessarily that bad weather, or the consumer didn't necessarily trend downward, it was simply the fact that you guys were up against very daunting comparisons this quarter.

I would say that's a good analysis of it.

Okay. Great. Thanks, guys.

Thank you, Joe.

Erika Maschmeyer, Robert W. Baird.

Thanks. Good morning.

Hello, Erika.

Hello. So just to go back to Sally, and some clarification, how big is December for you? And I know that heading into the quarter, you were excited about some of the opportunity that you had on the appliance side. That's generally a big holiday gift giving category. How did that pan out? And I guess when you mentioned that you were disappointed that Sally -- was that more of a traffic issue or a ticket issue?

First of all, being up against those kind of comps, it obviously becomes a traffic issue, I think, more than a ticket issue. To answer your first question, our December is not like most retailers. It is a little bit better month. But if you take out the fact that we are closed Christmas Day and we're closed the last few hours of Christmas Eve and New Year's Eve, on a normalized basis, December is not significantly bigger than other months. It's just more concentrated in the couple weekends before Christmas and things like that. Fortunately, we are not so dependent on December.

But as I said earlier, we just blew it out of the park in December of 2011. It's just the nature of our business. Other than the appliance category, which remains a little soft, that is the only category that really excels in December. So when that is soft, that has an impact on it, although our ticket wasn't down. Which tells me, we did have some softness in appliances, but we also did well in other categories. Bottom line is we just were up against a comp. And if I look at the comps for December and I average them out over both years, they are well within, if not on the high side, of our range.

That make sense. One of the thing that other retails have mentioned is that the season was more compressed this year, with the extra time between Thanksgiving and Christmas, towards the later part of December. Is that something that you saw, as well?

You know, again, because our business is not all retail, I think it's a little harder for us to see things like that. When everybody does their Black Friday and they depend so much on that Thanksgiving weekend, we're just not like that. We have a good day and a good weekend that weekend, but it certainly isn't what other people experience. I really don't know how to comment on that, because I don't think we have the same dynamics as a lot of the retailers do.

That is fair enough. Then, you had a bit more gross margin expansion at Sally than I would have expected, but then a little bit less at BSG, given that you're running on all cylinders. Was there anything to call out there? And if you could talk on a category basis or give any color around your comp drivers at BSG?

Keep in mind, BSG, as you know, is not a retail business. So there wasn't anything in particular, category-wise, with BSG. Most of what BSG sells, again, is sold into salons, and a great deal of that is consumed and used in the salon, especially hair color, which is a huge piece of BSG's business. BSG, when it 's not being affected by acquisitions and new line additions, is a more predictable comp business than Sally, because it doesn't have the retail piece.

So did new line additions contribute to the comp at BSG? Was that a bigger factor?

Yes, but you know it wasn't nearly as big as a factor as we've had in some cases in the past. So I would tell you that it was a little factor in it. But as I said a few minutes ago, BSG is just executing extremely well right now.

That's great. So clearly taking market share?

Yes, I believe so, because the industry isn't growing anywhere near those rates, to my belief.

And then just a clarification around some of the benefit to SG&A. So is it that last year, you excluded the charge and then this year included the pretax credit from the litigation reversal?

Last year? We took the charge in --

I'm sorry, last quarter.

We took the charge in Q4 of last year. And we took the charge based on what our expectations of the settlement were. It actually settled right at the end of the quarter, or early in this quarter. So we reversed a little of it, because it settled for a little less than the expectation was.

Okay. That makes sense, and it's helpful. Thank you.

Okay. Thank you, Erika.

Olivia Tong, Bank of America Merrill Lynch.

Thanks very much. Apologies in advance. I got on the call a little late, so apologies if you've already answered this. But are you expecting Sally Beauty sales comps to be up year over year in Q2?

Up year over year in Q2. (Laughter). You're right, you missed the first part of the call. What I said in the first part of the call, as I think all of you know, we've never had a negative comp in our business for a quarter. And if there was ever a quarter where it could happen, it's probably Q2, given the 9% comp we had and all the things that played into that last year. Having said that, I am not expecting that, but I am expecting the Sally comps, particularly, for Q2, because that's where the strength was last year, to be very soft in Q2.

Got it. Then obviously, the share repurchase levels were quite substantial this quarter. And this was an 18-month program. So how do you think about share repurchase as we go forward?

We've been very pleased with progress. I think Gary said it very well in his remarks in terms of, this is certainly, we feel, a very good use of cash in terms of a shareholder-friendly activity. We continue to monitor, very closely with the Board, our activity and our progress. But there is no additional action at this point, beyond the execution of the current plan that has been taken by our Board. So we're just continuing to execute on the program and will continue to monitor it going forward.

Great. Thanks a bunch.

Thank you, Olivia.

Linda Bolton-Weiser, B. Riley Caris.

Hello.

Hello, Linda.

I was wondering if you could just review a little bit. I know you don't really compete directly in that many areas with Ulta. But there are a few areas, like in the appliance area. I think Ulta mentioned on their last call that they had said that some kind of high-tech flat iron from Europe was actually a positive driver of their business. They actually mentioned that.

I wonder if you think Ulta might be gaining share from you in the electrical appliances? And then secondly, the part of their store where they do sell the salon-only products, what is the trend there? Do you feel they could be gaining a little bit of share from your BSG business? Can you comment on the dynamics there, to get a handle how on the competitive landscape is? Thanks.

Sure. First of all, keep in mind that Ulta, in their salon professional area, is competing in the brands that BSG carries. So if there is any share transfer, it would be from salons in those brands and it would affect BSG's comps, not Sally. Obviously, with the strength of BSG comps, I really don't think a lot of that is happening.

As to the electrical appliances, they do an excellent job with electrical appliances. The brands that they carry are a little more to the high end than what Sally carries. So I would probably be naive to think that they weren't taking a little bit of share from a higher end customer, on electrical appliances. But Ulta's been around a long time, and we have competed with them a long time. And up until this last year, appliances have been a strong category for us. So I am not ready to say that our appliance category issues are because of Ulta.

Thanks. Can I also ask about the dividend? I don't think you've mentioned it in a while, and yet you have been alluding to a possible initiation of a cash dividend for a while. What are your current thoughts on that? I know that there used to be the idea that you might of wanted an initial dividend yield to be in line with that of the S&P 500. But I believe that has risen, and it's become a higher dividend yield. So are you still thinking along those lines? Can you tell us your updated thoughts on that?

Sure, Linda. I think right now, as it stands, is that our focus has been on our share repurchase program. And the Board has not made any mandate to indicate anything structurally different than that. And certainly, if you were to initiate some sort of dividend program, we certainly would follow those types of textbook guidelines. But have there is no mandate right now in the near term for any kind of additional shareholder-friendly activity, outside of what we are already doing.

Okay. And then just finally, just a little question on the numbers, just to clarify. Your statement that there would be a flattish SG&A ratio relative to the unadjusted FY '12, which I think the adjusted FY '12 SG&A ratio is 33.2%. And the unadjusted is higher, 33.5%. So if you are flattish against the unadjusted, then that's really a higher ratio against the adjusted ratio in 2012. Do I have that right?

Yes.

Okay. So then we should be modeling, if we are using adjusted figures, we should be modeling an up SG&A ratio for FY '13, according to your comments.

That's correct.

Okay. Thank you very much.

Thanks, Linda.

William Reiter, Bank of America Merrill Lynch.

I'm curious whether there are any products where you believe that some internet competitors might be gaining share from you guys on the Sally side, and that might be one of the contributors of the same-sales stores that aren't quite as strong as we've seen in the past?

No, I don't believe that's case. I think it's truly all just lapping significant comps. I still am not aware of any site that is, first of all, doing that well in our type of product. And it remains a very small part of our business, Ulta's business. And even the business we get through our Amazon connection is very, very minor. So I don't think that that's the case. And you know, when you look at it, it would probably affect you across most categories if you were feeling that kind of -- if you were being Amazon'ed, so to speak. And our hair care, hair color, all those categories are still performing extremely well.

Okay. And then my second one is, I am curious whether the UK distribution project, whether that was any of the cause of the inventory increase we saw in the quarter and if you could quantify that?

Yes, it was exactly -- a few minutes ago we stated that 50% of the inventory gain was directly related to the UK distribution issue. The other 50% was in the stores.

Sorry. I missed that. All right. Thank you very much.

Thank you.

Jill Caruthers, Johnson Rice.

Good morning. I think you just touched on it, but just wanted to talk about the hair color categories that usually dictates a loyal repeat customer at Sally. Is it still kind of comping above the divisional comps and you're seeing continued strength there?

Oh, definitely. It definitely comped above Sally's overall comp for the quarter.

Okay. And then just to clarify, for annual gross margin guidance you gave on the November call of 50 to 60 basis points expansion, do you still like that's attainable?

Yes.

All right. Thank you so much.

Thank you.

Karru Martinson, Deutsche Bank.

Hello. It's Pat DiMeglio stepping in for Karru. Most of my questions were already answered, but just following up on the acquisition front. How's the pipeline look? Is there anything active or anything in the direct pipeline, or are you just actively looking?

We are always actively looking. There are a few small things in the pipeline. Nothing significant at this point.

Okay. Great. That's it for me. Thank you.

Thank you.

Meredith Adler, Barclays.

I actually want to go back a little bit and go back and talk about appliance sales in December. When I think about the buyer of appliances, or just the purchase of appliances, it is a gift. It may be considered a kind of discretionary item. Would you interpret the weakness in that category as saying anything to you about the health of the customer, the financial health of you customer?

No. And let me clarify a couple of things. Appliances do X amount of volume month in and month out for us. I think the piece that's a gift is the incremental to that. And again, right now, even though Ulta talked about some new technology in a flat iron from Europe, there really -- a flat iron is still a flat iron. There isn't any new, exciting technology in the appliance category right now, which is part of the problem. I don't really look at that as dictating the health of our retail consumer. I would look more at our overall retail sales to tell us more about the health of the consumer. And again, so much of what our retail consumer buys from us is just part of their beauty routine. It's not what I would call highly discretionary. So, I think the answer to that is no.

Okay. Great. Thank you.

Thank you.

(Operator Instructions)

Erika Maschmeyer, Robert W. Baird.

Thanks. Just wanted to ask you to touch on booth renting. Are you continuing to see accelerating growth for that trend?

Yes.

That's great.

Not only here, but in Europe, as well.

Fabulous. That is helpful. Thanks so much.

Thank you.

Thank you, and there are no further questions at this time. Please continue.

Thanks, Operator. To summarize, fiscal 2013 is off to a good start. We delivered consolidated sales growth of 4.7% and same sales growth of 2.8%, versus the 7.1% in the first quarter of fiscal 2012. Gross profit margin expanded 30 basis points, and we did achieve SG&A leverage, which contributed to an 8% EBITDA growth. Thank you again for your interest in Sally Beauty Holdings, and we look forward to seeing you soon.

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