Sally Beauty Holds Enthusiastic Investor Presentation

| About: Sally Beauty (SBH)
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Garry Winterhalter, CEO of Sally Beauty Holdings (NYSE:SBH) held an investor presentation for the first time since SBH was spunoff from Alberto-Culver (NYSE:ACV).

Key quotations include Winterhalter's thoughts on the threats posed by direct marketing and product diversion, how SBH differentiates its products, and the opportunities for growth.

One of the first things I noticed was how enthusiastic Gary Winterhalter is about the future of SBH. In his opening, he said that the management team is "very passionate and very proud," "Sally is a great company," and that the spinoff presents a "tremendous opportunity." It is always good to see this enthusiasm and entrepreneurial spirit as it is one of the factors that makes a good spinoff.

Growth Strategy

* Margins grow as customers shift to controlled label and as retail grows faster than professional. [This natural margin enhancement has already been going on for years]
* Better sourcing of products from Far-East, which eliminates the middlemen
* Increasing customer loyalty, headed by Sally President Mike Spinozzi who led similar initiatives at Borders Books
* Consolidating distribution centers, advertising, AR, management, etc.
* Increasing new store growth in US, Canada, and Mexico

On product differentiation

"Our desire is to carry nothing that's available in the retail channel because it doesn't fit our umbrella of being a purveyor of professional beauty supplies."

"High in-stock position is extremely important."

"When [professionals] come to us for a product that they only use once or twice a year, it's a very low turning product for us, but we have to have it in stock because that's their expectation of us."

Downside: They don't turn inventory as much as some retailers.
Upside: They higher margins than most retailers.

On the threat of direct sales

"[Manufacturers direct sell to] very large salons … and that's actually fine with us because we don’t do real well in those big salons anyway."

"[Big salons] all want huge discounts and they all want to be the only person on the block carrying that particular product line."

He said it is only economical for manufacturers to go after 8% of salons, which represent only about 20% of the money.

On product diversion

How product diversion affects SBH: Half of their products in salons are resold to individuals.
When those individuals can buy the same product [at a discount] in their pharmacy, this hurts SBH’s business.

"[Manufacturers] need numbers and they kind of turn their head."

"You will see us being very active along with Regis in fighting this problem."

On debt repayment and free cash flow

"We think we have a lot of free cash flow on top of the debt service to further pay down debt."

He later stated that debt is relatively inexpensive in the current environment and there's no need to go to extreme measures to pay it down. [This was in response to an analyst who suggested franchising stores to generate cash]

Author's Note: SBH is up over 20% since we initiated coverage.

SBH 1-yr chart


Disclosure: Author is long SBH