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Sally Beauty Holdings Inc. (NYSE:SBH)

F4Q2012 Results Earnings Call

November 15, 2012 11:00 AM ET

Executives

Karen Fugate - Investor Relations

Gary Winterhalter - Chairman, President and CEO

Mark Flaherty - Senior Vice President and CFO

Analysts

Meredith Adler - Barclays

Ike Boruchow - J.P. Morgan

Simeon Gutman - Credit Suisse

Erika Maschmeyer - Robert W. Baird

Olivia Tong - Bank of America-Merrill Lynch

Karru Martinson - Deutsche Bank

William Reuter - Bank of America-Merrill Lynch

Jill Caruthers - Johnson Rice

Operator

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 the 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.

Karen Fugate

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 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 being file 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 reconciliations of its adjusting item 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.

Gary Winterhalter

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 $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 in company growth and our stock buyback.

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 6.3% in the prior year. In the fiscal 2012 fourth quarter, same store sales growth for Sally U.S. was challenged by three categories, to be more specific, in the nail category we are anniversaring a couple of major launches that occurred last year.

In our hair extension category, we are adjusting to significant cost increases in human hair and 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 U.S., we continued to realize positive trends from our customer acquisition strategy. Our targeted marketing efforts this year reached over 38 million prospective customers through eight 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 our Beauty Club Card customer remains consistently higher than the average for our non-card customer. We believe our targeted marketing initiative 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 represents 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 topline 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 impunitive damage. 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?

Mark Flaherty

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 foreign -- 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 through 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 a year ago quarter. The fiscal 2012 fourth quarter results includes a $10.2 million charge related to 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 $10.3 million in income tax benefits due to a tax planning opportunity that involved a limited restructuring for U.S. income tax purposes.

Our GAAP net earnings in the fiscal 2012 fourth quarter were $65.6 million, a 20.7% increase from the net earnings in a 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 is 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-year increase is 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 $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 leverages ratio of 2.5 times is at the higher end of our targeted leverage range of 2 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’ve 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 ‘13 to be out of the ordinary.

We expect fiscal ‘13 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 anticipated to be in 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%. And 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 U.K. Warehouse. Gary?

Gary Winterhalter

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.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question will come from the line of Meredith Adler with Barclays. Your line is open.

Meredith Adler - Barclays

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

Gary Winterhalter

Meredith, the slowdown that we saw was completely related to the three categories that I mentioned. As a matter of fact, I’ll give you a piece of the 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.

So it’s strictly related to those categories. I don’t have a concern about those categories going forward for the reasons that we have explained. We do have a couple of more quarters of anniversaring, 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 appliance, although we had a very big December last year in appliances.

I think we’ll 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’ve been in the past. So that would tell you that the slowdown was in the non-club card customer, which makes sense to us.

Meredith Adler – Barclays

Okay. And then, I’d like to ask just another question about acquisition. I know there’s probably isn’t anything big for BSG, now that Aerial was done. I know you are also still trying to grow, I think you described as brand footprint.

Gary Winterhalter

Yeah.

Meredith Adler – Barclays

Could you maybe just talk a little bit about, what the potential is to do that, and is it a significant driver to the topline? I suspected the driver to the bottom line because it’s very accretive, but maybe you could talk about that?

Gary Winterhalter

Yeah. When you say significant, is it going to drive BSG, two or three percentage points on the topline? No. But does it have the potential to grow BSG somewhere between 0.5 and 1.5 percentage points? Yeah. 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 topline and helped their comps quite a bit.

So there are a lot of geographies left, virtually with every brand we carry around the U.S. and Canada. It’s very difficult to speculate, if or when those will happen, but we’re always pursuing that and that will be the way that BSG shows growth beyond its organic growth plan.

And as you’ve mentioned a moment ago that’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.

Meredith Adler - Barclays

And then 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 benefitting from these acquisitions specifically or anything else?

Mark Flaherty

Well, we are benefitting 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. So it’s a combination of a lot of things and keep in mind that the business on the BSG store continues to transition to the stores.

So, 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.

Meredith Adler - Barclays

Great. Thank you very much.

Gary Winterhalter

Thank you.

Operator

Our next question comes from the line of Ike Boruchow with J.P. Morgan. Your line is open.

Ike Boruchow - J.P. Morgan

Hi, everyone. Thanks for taking my questions. Congratulations on another great year.

Gary Winterhalter

Thank you, Ike.

Ike Boruchow - J.P. Morgan

So, 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 form a high level maybe parse out retail behavior of your shopper right now versus the salon or booth renting trends you are seeing. Just trying to figure out, why we would see a sequential slowdown at the Sally in Q4 with a pickup at BSG sequentially?

Gary Winterhalter

Keep in mind the things that I just mentioned with BSG bringing on some more brands, and the continued shift towards the store business, that’s one part of it. Also keep in mind that Sally’s business today is 75% retail.

And 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 over 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. So 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.

Ike Boruchow - J.P. Morgan

Okay. Great. Thanks. And then just 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? And 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 deleverage in the first half when we think about operating margins?

Gary Winterhalter

Well, I’m hoping that we won’t see deleverage. And the investments you’re talking about specifically are very important to us. And when they’re finished, it’s going to give us the ability to increase our leverage.

Specifically on the Sally side, those are the rollout of our POS system, which is getting close to half done in the U.S. And 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 U.K. distribution project, which we expect to have that finished by March. That’s going to ultimately, particularly starting in fiscal ‘14, really reduce our distribution cost, particularly compared to the last couple of years, but even lower than it had been previous to this whole project taking place.

And the third investment is the international ERP system which as we’ve talked about, we operate on about -- Ike, I think its six different IT platforms in Western Europe. And 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. So, all three of these projects have very good payoffs for us in ‘14 and beyond.

Ike Boruchow - J.P. Morgan

Great. Thank you so much. Good luck.

Gary Winterhalter

Thank you.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Credit Suisse. Your line is open.

Simeon Gutman - Credit Suisse

Thanks. Good morning and a nice job on another good year.

Gary Winterhalter

Thanks.

Simeon Gutman - Credit Suisse

You are welcome. A couple of questions. In the press release that you referenced to the good start to Q1. Can you talk to whether that’s a function of some of those categories, Gary, taking part some of those issues easing or is that the core pieces of the business getting better?

Gary Winterhalter

Well, we have seen the pressure already anniversarying in the nail category easing a bit simply because the product down the road we get here, the less steep the anniversarying is each quarter and each month. So that is helping.

As we come into the holiday season here, I believe that we’ll see the same thing start to happen with electricals, the hair extension category, part of it as you recall, I was talking about earlier in the year 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. And I kind of liking it to a gallon a gas. When gas goes up significantly, there is a bit of sticker shot but once everybody determines that, 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 hair -- human hair extensions.

Now, having said all that the effects of this hurricane we had in the North East, really put a damper on our Halloween sales, which is a significant business for particularly Sally at the end of each October. And 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. And as you well know from living in that part of the country, there is 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 and 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.

So I’m hoping that we’ll get the benefit of that business by being prepared and 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.

Simeon Gutman - Credit Suisse

Okay. And then switching topics to the buyback, can you just talk, I guess, what the plans are for the organization as far as buyback pace and cadence? And is it more of a recurring type program or you’re going to be very cognizant of some model that’s going to dictate when you step in and out of the market. And part of the question is, I guess, some of us were surprised that more stock wasn’t repurchased in the early, I guess, in the onset of the program?

Gary Winterhalter

Simeon, this is fixed. Under the $300 million share repurchase program, we’re under 10b5 plan. So we 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. And given that we are getting out of the earning season and we are 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. But there is some systemic cadence to it, but we also will be very opportunistic at the end of the quarter in terms of reevaluating its results. And if we see an opportunity to do something different, that will be something that the board will discuss further.

Simeon Gutman - Credit Suisse

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?

Gary Winterhalter

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. Now, keep in mind that none of these we’re talking about either in Western Europe or in South America are significant in size.

Simeon Gutman - Credit Suisse

Right. But I guess there is not really any changing positive developments in the South America, especially in the Brazil market.

Gary Winterhalter

Not at this point. No.

Simeon Gutman - Credit Suisse

Okay. Thank you

Gary Winterhalter

You’re welcome.

Operator

Thank you. Our next question comes from the line of Erika Maschmeyer with Robert W. Baird. Your line is open.

Erika Maschmeyer - Robert W. Baird

Thanks. And I’ll add my congratulations on a nice year.

Gary Winterhalter

Thanks, Erika.

Erika Maschmeyer - Robert W. Baird

Could you talk a little bit more about your expectations for your fiscal ‘13, 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 should we expect going in the comp to be below the range that you threw out there and then also some more 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?

Mark Flaherty

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 had some natural drive-in -- margin drivers in our business. And 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 and 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. So 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 U.K. 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 and dropped shifting a lot of product.

So I think that the U.K. -- again they have the same issues with the extra day and weather comparison there also as I’ve mentioned earlier in the U.K. and Europe had very favorable weather. So to answer your question directly I hesitate to forecast what our second comp -- 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.

Erika Maschmeyer - Robert W. Baird

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 any on your acquisition efforts there. How much bigger do you think that program could be as a penetration of our retail sales and could you talk a little bit more and remind us of your tactics on that front?

I know you said your eight mailers. I think over the past year and 38 million women how many kind of more untapped customers are there out there and where are you in terms of shifting the second docile of customers up to the first docile. I guess any color you could give there would be helpful?

Gary Winterhalter

Sure. Well, let me start by saying that we kind of have $10 million in our sites right now over the next two or three years. And 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 U.S. 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. So, that will only help us to further grow that program by being more meaningful, even to some of those lower docile customers.

So, 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, and it will just give us a lot more insight into it.

Now, as I mentioned in the past, we are in the very early stages of cranking this up in the U.K. Our partner here in the U.S. just in the last 12 months has started up a business in the U.K. And again, this is a very long process, particularly when you’re starting from scratch. Keeping in mind here in the U.S., 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 have the data.

So that’s an enormous difference from starting at zero, which we will be doing in the U.K. So, I still feel very confident that this is our primary marketing effort and the primary driver of our retail sales at Sally going forward.

Erika Maschmeyer - Robert W. Baird

That is helpful. And then just a clarification question, could you roughly break out how much of your hair color sales at Sally are to retail versus professionals?

Gary Winterhalter

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

Erika Maschmeyer - Robert W. Baird

Okay. Thank you.

Gary Winterhalter

Thank you. You’re welcome.

Operator

Our next question comes from the line of Olivia Tong with Bank of America/Merrill Lynch. Your line is open.

Olivia Tong - Bank of America-Merrill Lynch

Thank you. First question is, just can you tell us what you’re expecting for interest expense in 2013, given the new debt? And then secondly, can you talk a little bit 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 four to five same store sales target given the tough comp, you mentioned that with all the destruction around Sandy that could be near term hurt.

So what are you seeing in other categories that are helping, obviously you mentioned that the comps are getting a tad bit easier on nail, but sounds like the other categories are still pretty tough. Is it hair -- is it greater accelerating underlying growth in hair care and hair color or maybe you could give us some more granularity on that? Thank you.

Gary Winterhalter

Yeah. 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 of those categories were up double digit in Q4. So 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. So, I really can’t comment much far to the net, I think we are 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.

Mark Flaherty

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

Gary Winterhalter

Are you there, Olivia?

Operator

And I believe, she has disconnected.

Gary Winterhalter

Okay. Thank you.

Operator

And we’ll go to the next question from Karru Martinson with Deutsche Bank. Your line is open.

Karru Martinson - Deutsche Bank

Good morning. So, when we look at the retail versus professional customer at Sally, I think you mentioned retail is now 75% as you pursue CRM, I mean where do we see that let’s say in the next two or three years?

Gary Winterhalter

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 rollout of the POS and kind of a new phase of experimenting with marketing with our CRM program with even better data that 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 and that could accelerate the retail business faster than its current pace. But 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.

Karru Martinson - Deutsche Bank

And certainly not looking for you guys to give away your trade secret, but I mean, what are some of the things that are resonating with the customers in the CRM marketing that you converts them to a beauty customer. I mean is there something that you’re seeing consistently with that customer base, it becomes that loyal shopper for you?

Gary Winterhalter

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

Karru Martinson - Deutsche Bank

You mentioned you’re a kind of at the high end of your target leverage range right now. I mean you have the opportunity to buyback shares. I mean what’s the thought process on bringing the leverage back down to either the middle or the low end of that leverage target range?

Mark Flaherty

Certainly, we’ll more or less play within the band of the two to two and half 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 two to two and half times based on all of the activities and some of the shareholder friendly activities that we’ve been barked on now, we feel very comfortable with the range and the outlook that we’ve provided.

Karru Martinson - Deutsche Bank

I know we’ve discussed it in the past, but it’s been any change in your thinking in terms of investment grade as a target?

Mark Flaherty

Well, I certainly won’t turn it down. But as far as, when we had this conversation before Karru, at the time we ran the market particularly refinancing all of our capital structure. It didn’t necessarily one more -- necessarily buy a federal pricing per se, because we’ve been very good at -- I think 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.

So with that said is that, if S&P or Moody’s or the rating agencies as a whole decide over the next six months to a year, two years to make as investment grade had no problem that whatsoever. But 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.

Karru Martinson - Deutsche Bank

Thank you very much, guys. Appreciate the time.

Gary Winterhalter

Thanks, Karru.

Operator

Thank you. Our next question comes from the line of William Reuter with Bank of America/Merrill Lynch. Your line is open.

William Reuter - Bank of America-Merrill Lynch

Good morning.

Gary Winterhalter

Good morning, Bill.

William Reuter - Bank of America-Merrill Lynch

I’m curious whether in relation to Hurricane Sandy, you guys had any supply disruption from your vendors. I guess whether there could be some out of stocks come holiday that time.

Gary Winterhalter

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.

So, I don’t think we’re going to have any of those issues. And another point is, we did not have any distribution centers of our own that were impacted. So, I’m not expecting any supply disruption either from our suppliers or from our own distribution centers.

William Reuter - Bank of America-Merrill Lynch

Okay. And then lastly for me, in terms of your CapEx guidance of 85 to 90 next year, do you know how that’s going to breakdown into a couple of other buckets that you’ve discussed in terms of your projects?

Gary Winterhalter

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. And certainly, one big item that’s in there, which I called out in our remarks was the U.K. warehouse and the piece of the U.K. 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 rollout in Europe, specifically Central Europe to bring that system up live. We now have Mexico up and live. And then 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 footprint and the cycling through to keep these stores fresh.

When you look at those items and then kind of look at the regular kind of run rate of our normal CapEx in the way of breaks down, it’s very proportional to the prior years of which about two thirds of our CapEx is still dedicated towards store construction.

William Reuter - Bank of America-Merrill Lynch

Okay. Thank you very much. That’s all for me.

Gary Winterhalter

Thank you

Operator

Thank you. Next, we’ll go to line of Jill Caruthers with Johnson Rice. Your line is open.

Jill Caruthers - Johnson Rice

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

Gary Winterhalter

Yeah. If you combine and it’s about 30%.

Jill Caruthers - Johnson Rice

Okay. And then just some clarification on electricals you’ve talked about the shift going from flat iron to curl. It was my understanding that when you have a change in apparel fashion or what not that actually create some incremental sales demand as the customer needs to buy the new equipment or what have you -- could you talk about how there is a pressure is it a pricing difference between the two or?

Gary Winterhalter

Well, 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 then the flat iron business would be slowing down anyway simply because women that use flat irons already have multiple flat irons. So, 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.

So, 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 and over the last couple of years, the quality of the flat irons has gotten much better. So, you don’t have them -- you don’t have to replace flat irons. Particularly, if you’re not using them as frequently, so it’s a good point, we’re just not seeing that happening in this particular case.

Jill Caruthers - Johnson Rice

Okay. And then just last question. On the three major investments you talked about for fiscal ‘13 the POS and the European D.C. and the international ERP. The timing that that will flow through the different quarters, is there any -- is that weighted to a certain quarter or what not or just looking at how we should model those investments?

Gary Winterhalter

I would weighed -- well, the only one that I would weight a little differently than the other two would be the U.K. warehouse that has got a very finite day two at which by -- it’s an end of the second quarter event, which we’ll conclude. The other items are more of a continuing event over the entire year.

Jill Caruthers - Johnson Rice

Thank you.

Operator

Thank you. Our next question comes from the line of Meredith Adler with Barclays. Your line is open.

Meredith Adler - Barclays

So 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 that’s 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.

Gary Winterhalter

Yeah. We have a business, a small business in Spain, Meredith. I had 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 would and 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 is a lot of the suppliers that we deal with particularly in Europe are just raving about the business that they are seeing there.

Meredith Adler - Barclays

Okay. That was it. Thank you.

Gary Winterhalter

Thanks, Meredith.

Operator

And with that, I’d like to turn it back over to Gary for any closing comments.

Gary Winterhalter

Thanks, Operator. In summary, we had a terrific 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.

Operator

Thank you. And ladies and gentlemen, 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.

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