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Sally Beauty Doubles Profit

Revenues and same-store sales rise as firm trims interest expenses.

Third-quarter profits at Sally Beauty Holdings Inc. more than doubled on a 3.4 percent increase in same-store sales, which executives attributed in part to customers trading down from pricier salon brands to less-expensive hair care products.

Net earnings for the quarter ended June 30 leapt 118.3 percent to $29.4 million, or 16 cents a diluted share, from $13.4 million, or 7 cents, in the same period last year.

An interest rate swap that resulted in a $7.6 million noncash credit helped reduce Sally’s interest expenses to $29.9 million, from $36.8 million in the year-ago quarter, contributing to the boost in profits. Adjusted earnings per share came in at 13 cents after the firm accounted for the interest credit, beating Wall Street analysts’ earnings estimates of 10 cents per share.

Quarterly revenues were up 6.6 percent to $676.8 million from $634.9 million a year ago.

At the end of the third quarter, the company had 2,801 Sally Beauty Supply stores, which rang up sales of $428 million, a 6.1 percent increase over last year. Sales at the firm’s 915 Beauty Systems Group stores were up 7.6 percent to $248.9 million.

Comparable-store sales rose 2.1 at Sally Beauty Supply and were up by 7.2 percent at BSG.

Given the economic downturn, “There is a little bit of trade down from pricier salon brands,” Gary Winterhalter, president and chief executive officer of Sally Beauty Holdings, said when asked by an analyst during a conference call Thursday about comp-store growth. He added that “a lot of growth we’ve been experiencing in recent months is due to [Sally’s] marketing initiatives.”

The retailer carries lines from Clairol, L’Oréal, Wella and Conair in its Sally stores, while its BSG locations also carry Wella in addition to Paul Mitchell, Sebastian, Goldwell and Tigi. Private label penetration in the quarter reached 41 percent.

During the third quarter, Sally finalized its acquisition of 40-store Belgian beauty supply chain Pro-Duo NV for $30 million.

While balancing growth with debt reduction is the firm’s main strategic focus, acquisition is also part of the equation, according to Winterhalter. Without naming specific targets, he said acquisition activity would be focused outside the U.S., as it was with Pro-Duo, and that small “tuck-in” buys could be made to complement the firm’s existing holdings or be used as an avenue into a new market.

He also noted that the firm’s partnership with Paris Hilton for hair extensions, which was unveiled in May, has helped bring a younger customer into stores and “has accelerated growth in some of our other categories and product lines geared [toward] that generation.”

During the first nine months of the year, profits vaulted 103 percent to $56.1 million, or 31 cents a share, from $27.6 million, or 15 cents, in the same period a year ago. Revenues were up 5.4 percent to $1.96 billion, from $1.87 billion in the prior year.