Sally Beauty Supply 2010 Annual Report Download

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ANNUAL REPORT 2010
WORLD CLASS BEAUTY

Table of contents

  • Page 1
    WORLD CLASS BEAUTY ANNUAL REPORT 2010

  • Page 2
    ... of professional beauty supplies with annual sales of more than $2.9 billion and net earnings of $144 million. The Sally Beauty Supply and Beauty Systems Group... 30, 2010) Sally Beauty Supply • An open-line and exclusive-label beauty products retailer offering professional beauty products to...

  • Page 3
    ... our store growth to come from outside of the United States." - Gary G. Winterhalter Global Footprint (Store Count as of September 30, 2010) Sally Beauty Supply North America United States Canada Mexico Puerto Rico North America Total International United Kingdom Belgium Chile France Germany Other...

  • Page 4
    ..., increased consolidated net earnings by 45%, topped $1 billion in annual sales at Beauty Systems Group (BSG) and reached a record annual gross margin of 53% at Sally Beauty Supply. We also executed on our strategic objectives in fiscal 2010, including growth of 145 stores, gross margin expansion of...

  • Page 5
    ... 9.5% $0 45 2007 2008 2009 2010 Sally Beauty Supply Beauty Systems Group 45% $0 8.5 2007 2008 2009 2010 Sally Beauty Supply Beauty Systems Group 8.5% primarily driven by .... Our strategic objectives remain unchanged: • To grow our annual store base 4% to 5% and, when appropriate, make ...

  • Page 6
    Financial Highlights Dollars in thousands, except per share amounts Year Ended September 30, 2010 Financial highlights Sales Sally Beauty Supply Beauty Systems Group Total company sales Consolidated gross profit Gross profit margin Operating earnings Operating earnings margin Net earnings Net ...

  • Page 7
    2010 Form 10-K

  • Page 8
    ...ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2010 -OR- អ TRANSITION REPORT...7500 Securities registered pursuant to Section 12(b) of the Act: SALLY BEAUTY HOLDINGS, INC. Name of Each Exchange on Which Registered ...

  • Page 9
    TABLE OF CONTENTS Page ITEM ITEM ITEM ITEM ITEM ITEM 1. 1A. 1B. 2. 3. 4. PART BUSINESS ...RISK FACTORS ...UNRESOLVED STAFF COMMENTS ...PROPERTIES ...LEGAL PROCEEDINGS ...REMOVED AND RESERVED ...I ...1 17 32 33 34 35 ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. ITEM 10. ITEM 11...

  • Page 10
    ... this Annual Report, references to ''the Company,'' ''Sally Beauty,'' ''our company,'' ''we,'' ''our,'' ''ours'' and ''us'' refer to Sally Beauty Holdings, Inc. and its consolidated subsidiaries for periods after the separation from Alberto-Culver Company (''Alberto-Culver''), and to Sally Holdings...

  • Page 11
    ...natural disasters or acts of terrorism; • the preparedness of our accounting and other management systems to meet financial reporting and other requirements and the upgrade of our existing financial reporting system; • we are a holding company, with no operations of our own, and we depend on our...

  • Page 12
    ... 1,051 professional distributor sales consultants who sell directly to salons and salon professionals. As of September 30, 2010, Sally Beauty Supply had 3,006 company-operated retail stores and supplied 26 franchised stores located outside the U.S. and BSG had 868 company-operated stores and...

  • Page 13
    ...are likely to be dependent on frequent trips to professional beauty supply stores, like BSG and Sally Beauty Supply. We expect that these factors will continue to drive demand for conveniently located professional beauty supply stores. • Increasing use of exclusive-label products. We offer a broad...

  • Page 14
    ... react in a timely and effective manner to changes in consumer spending patterns and preferences for beauty products. We continuously adapt our marketing and merchandising initiatives for Sally Beauty Supply in an effort to expand our market reach or to respond to changing consumer preferences. If...

  • Page 15
    ...term distribution agreement with Armstrong McCall. In 2010 that matter was settled and BSG now ...Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and regional open-line beauty supply stores, professional-only beauty supply...

  • Page 16
    ... on our financial reporting, business, financial ...supplies sub-distributors in Europe. Sales of Sally Beauty Supply accounted for approximately 63%, 64% and 63%; and BSG accounted for approximately 37%, 36% and 37% of the company's consolidated net sales for the years ended September 30, 2010...

  • Page 17
    ... and Supplementary Data'' of this Annual Report. Neither the sales nor the product assortment for Sally Beauty Supply or BSG are generally seasonal in nature. Sally Beauty Supply We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on...

  • Page 18
    ... to leading third-party branded products. The following table sets forth the approximate percentage of Sally Beauty Supply's sales by merchandise category: Fiscal Year Ended September 30, 2010 2009 2008 Hair color ...Hair care ...Brushes, cutlery and accessories Skin and nail care ...Electrical...

  • Page 19
    ... of local marketplaces is an important part of its success. The following table provides a history of Sally Beauty Supply's store count during the last five fiscal years: Fiscal Year Ended September 30, 2010 2009 2008 2007 2006 Stores open at beginning of period ...Net store openings during period...

  • Page 20
    ...our Armstrong McCall franchisees at September 30, 2010, 2009, 2008, 2007 and 2006, respectively. The increase in the number of DSCs in 2009 reflects approximately 90 distributor sales consultants previously employed by Schoeneman Beauty Supply, Inc (''Schoeneman'') prior to the Company's acquisition...

  • Page 21
    ... category: Fiscal Year Ended September 30, 2010 2009 2008 Hair care ...Hair color ...Promotional items(a) Skin and nail care . . Electrical appliances Other beauty items ...37.1% 38.5% 38.1% 29.6%... salon professionals are less sensitive about store location than Sally Beauty Supply customers. 10

  • Page 22
    ... our understanding of customers' needs. Open New Stores and Exploring New Marketplaces In the fiscal year 2010, we opened or acquired 109 and 36 net new stores for Sally Beauty Supply and BSG, respectively. Because of the limited initial capital outlay, rapid payback, and attractive return on...

  • Page 23
    ...We also offer between 5,000 and 8,000 SKUs of our Sally Beauty Supply products for sale through our website (www.sallybeauty.com), which ... in March of 2010, we acquired certain assets and the business of a former exclusive distributor of John Paul Mitchell Systems beauty products with sales primarily...

  • Page 24
    ... program for Sally Beauty Supply customers, the Beauty Club, whereby members receive a special, discounted price on products and are also eligible for a special Beauty Club e-mail newsletter with additional promotional offerings, beauty tips and new product information for a nominal annual fee. We...

  • Page 25
    ...2010 2009 2008 2007 2006 4.1% 6.2% 4.6% 2.1% 1.0% 1.8% 1.2% 2.7% 2.4% 6.9% 10.1% 4.1% 2.6% 4.5% 2.8% Same store sales growth(a) Sally Beauty Supply ...Beauty... operations of each store are supervised by a district manager, who reports to a territory manager. A significant number of our store managers...

  • Page 26
    ... As of September 30, 2010, we operated mainly through 17 distribution centers, nine of which serviced Sally Beauty Supply and eight of which serviced... $5.0 million. We believe that annual savings from this program are approximately $14.0 million for the 2010 fiscal year. Our purchasing and...

  • Page 27
    ... and Executive Officers of the Registrant'' in Item 10 of this Annual Report. Regulation We are subject to a wide variety of laws and regulations... and safety issues. As of September 30, 2010, Sally Beauty Supply supplied 26 and BSG supplied 159 franchised stores located in the U.S., Mexico and...

  • Page 28
    ...be materially and adversely affected. This report also contains forward-looking statements and ...Sally Beauty Supply competes with other domestic and international beauty product wholesale and retail outlets, including local and regional open line beauty supply stores, professional-only beauty supply...

  • Page 29
    ... the aging baby boomer population to drive future growth in professional beauty supply sales through an increase in the use of hair color and ... • the timing and effectiveness of our marketing activities, particularly our Sally Beauty Club promotions; • the level of sales made through our internet...

  • Page 30
    ... quantities or on acceptable terms in the future. Changes in Sally Beauty Supply's and BSG's relationships with suppliers occur often, and could ... stores, which accounted for approximately $100 million in U.S. sales for the 2010 fiscal year and have expiration dates at the end of 2012. Therefore, ...

  • Page 31
    ... and our effective management of our distribution facilities and capacity. If a material interruption of supply occurs, or a significant manufacturer or filler ceases to supply us or materially decreases its supply to us, we may not be able to acquire products with similar quality and consumer...

  • Page 32
    restrict our ability to market certain products, which could adversely affect our business, financial condition and results of operations. The laws and regulations applicable to us or manufacturers of the products sold by us may become more stringent. Continued legal compliance could require the ...

  • Page 33
    ..., our internet-based business may reduce the financial performance of our Sally Beauty Supply and other stores. For example, customers may choose to shop online rather than purchasing products from our Sally Beauty Supply stores. Although we believe that our participation in both e-commerce and...

  • Page 34
    ...ability to open and profitably operate new stores in existing and additional geographic areas. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,000 and $80,000, respectively, with the capital requirements for international...

  • Page 35
    ... trademark and service mark rights used in connection with our business including, but not limited to, ''Sally,'' ''Sally Beauty,'' ''Sally Beauty Supply,'' ''Sally Beauty Club Card,'' ''BSG,'' ''CosmoProf,'' ''Proclub,'' ''Armstrong McCall,'' ''ion,'' ''Beyond the Zone'' and ''Salon Services.'' We...

  • Page 36
    ... upgrade program in a number of our divisions (including our Sally Beauty Supply operations in the U.S.), which we anticipate will provide significant benefits... us to include in our Annual Report on Form 10-K our management's report on, and assessment of, the effectiveness of our internal controls over...

  • Page 37
    ...our financial and management controls, reporting systems, information technology systems and procedures under the financial reporting requirements and other rules that... Sally Holdings LLC, which we refer to as Sally Holdings, incurred approximately $1,850.0 million in debt. As of September 30, 2010,...

  • Page 38
    ... The terms of the instruments governing our indebtedness do not fully prohibit us or our subsidiaries from doing so. As of September 30, 2010, our senior credit facilities provided us commitments for additional borrowings of up to approximately $341.8 million under an asset-based senior secured loan...

  • Page 39
    ... a maximum ratio of net senior secured debt to consolidated EBITDA (as those terms are defined in the relevant credit agreement). In addition, if Sally Holdings fails to maintain a specified minimum level of borrowing capacity under the ABL facility, it will then be obligated to maintain a specified...

  • Page 40
    ... The indentures governing the Notes also contain restrictive covenants that, among other things, limit our ability and the ability of Sally Holdings and its restricted subsidiaries to: • dispose of assets; • incur additional indebtedness (including guarantees of additional indebtedness); • pay...

  • Page 41
    We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, as well as prevailing market conditions. In the absence of...

  • Page 42
    certain of our other stockholders to whom we refer to as the Lavin family stockholders, as requested by the IRS or counsel, which, if incorrect, could jeopardize the conclusions reached by the IRS and counsel. The private letter ruling also did not address certain material legal issues that could ...

  • Page 43
    Transactions (or acquired additional shares of our common stock) within the two year period following completion of the Alberto-Culver share distribution, and that amount of stock, if added to the common stock that was acquired by CDR Investors were to equal or exceed 50% of our outstanding common ...

  • Page 44
    ...provides the number of stores in the U.S. and globally, as of September 30, 2010: Sally Beauty Supply Company-Operated Franchise ...2,429 39 249 29 58 22 27 27 102 24 538 3,006 - -... ...Ronse, Belgium ...Thornliebank, Scotland ...(1) Sally Beauty Supply (2) BSG Type of Facility Warehouse Corporate ...

  • Page 45
    ... pending against us or our subsidiaries as of September 30, 2010. We are involved in various claims and lawsuits incidental to the...this will remain true going forward. On February 25, 2008, we disclosed in a Current Report on Form 8-K that on February 21, 2008, L'Oreal filed a lawsuit in the Superior...

  • Page 46
    ...reported by the NYSE, during the fiscal years ended September 30, 2010 and 2009. Quarter Ended Fiscal Year 2010: September 30, 2010 June 30, 2010 ...March 31, 2010...the last two fiscal years prior to the date of this Annual Report. We currently anticipate that we will retain future earnings to support...

  • Page 47
    ...08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 Sally Beauty Holdings, Inc. S&P 500 Dow Jones US Specialty Retailers 10NOV201020521044 TSM The Dow Jones U.S. Specialty ...08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 Sally Beauty Holdings, Inc...100.00 99.24 116.92 114.50 107.51 115.14 ...

  • Page 48
    ... Sally Beauty and its consolidated subsidiaries for the year ended September 30, 2010, 2009, 2008 and 2007, and of Sally...Sally Beauty Supply ...Beauty Systems Group ... ... Total ...Professional distributor sales consultants (end of period) ...Same store sales growth(e): Sally Beauty Supply ...Beauty...

  • Page 49
    and administrative expenses for the fiscal years 2010, 2009, 2008, 2007 and 2006 include share-based compensation expenses of $12.8...at any time during the last two fiscal years prior to the date of this Annual Report. We do not anticipate paying regular cash dividends on our common stock in the ...

  • Page 50
    ...years ended September 30, 2010, 2009 and 2008, of Sally Beauty and its consolidated subsidiaries. This section should be read in conjunction with the audited consolidated financial statements of Sally Beauty and the related notes included elsewhere in this Annual Report. This Management's Discussion...

  • Page 51
    ... Clairol, Revlon and Conair, as well as an extensive selection of exclusive-label merchandise. For the year ended September 30, 2010, Sally Beauty Supply's net sales and segment operating profit were $1,834.6 million and $320.5 million, respectively, representing 62.9% and 74.0% of our consolidated...

  • Page 52
    ...products with 16 stores located in Chile. These acquisitions furthered our expansion plans in Europe and Latin America, key targets of Sally Beauty Supply's international growth initiative. We intend to continue to identify and evaluate non-U.S. acquisition and/or organic growth targets. Our ability...

  • Page 53
    ...supply products to us.'' • Relationships with suppliers. Sally Beauty Supply/BSG and their suppliers are dependent on each other for the distribution of beauty...to terminate a long-term distribution agreement with Armstrong McCall. In 2010 that matter was settled and BSG now sells Farouk products in...

  • Page 54
    ...'s distribution network resulting in annualized cost savings of approximately $14.0 million for the 2010 fiscal year. Please see ...geographic areas. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70...our financial reporting 43

  • Page 55
    ... (including our Sally Beauty Supply operations in the... during the fiscal year 2010 was based on their...Annual Report for additional information about the Company's accounting policies in connection with business combinations. During the fiscal year 2009, we acquired Schoeneman, a 43-store beauty supply...

  • Page 56
    ...2010, we acquired Aerial Company, Inc. (''Aerial''), an 82-store professional-only beauty supply...and operate the Sally Beauty Supply and BSG distribution...Annual Report. Credit Facilities Borrowings under the Term Loans and the ABL facility are secured by substantially all of our assets, those of Sally...

  • Page 57
    ..., the interest rate for the Term Loan B was 2.51%. (d) Represents pre-acquisition debt of Pro-Duo and Sinelco. In November 2010, Sally Holdings entered into a new agreement with lenders to replace its ABL facility with a new $400 million, 5-year credit facility (the ''new ABL facility''). The new...

  • Page 58
    ...8-''Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report. Foreign Currency Option and Forward Contracts The Company is ... of earnings. In the fourth quarter of the fiscal year 2010, Sally Holdings entered into four foreign currency forward agreements which expire in...

  • Page 59
    ...and Supplementary Data'' contained elsewhere in this Annual Report. Share-Based Payments For the fiscal years 2010, 2009 and 2008, total share-based...of the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the ''2010 Plan'') and certain predecessor plans, such as the Sally Beauty Holdings 2007...

  • Page 60
    ... following table shows the condensed results of operations of our business for the fiscal years ended September 30, 2010, 2009 and 2008 (in millions): Year Ended September 30, 2010 2009 2008 Net sales ...Cost of products sold and distribution expenses ...Gross profit ...Total other operating costs...

  • Page 61
    ... key measures we rely on to gauge our operating performance (dollars in thousands): Year Ended September 30, 2010 2009 2008 Net sales: Sally Beauty Supply ...BSG ...Gross Profit ...Gross profit margin ...Selling, general and administrative expenses . Depreciation and amortization ...Earnings before...

  • Page 62
    ... Net Sales. Our net sales consist primarily of the following: • Sally Beauty Supply. Sally Beauty Supply generates net sales primarily by selling products through its stores to both professional and retail customers. Sally Beauty Supply sells hair care, hair color, skin and nail care products...

  • Page 63
    ... profit and gross profit margin data for each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2010 2009 Increase Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin...

  • Page 64
    ... improved gross margins in both business segments as more fully described below. Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $97.6 million, or 11.1%, for the fiscal year ended September 30, 2010, compared to the fiscal year ended September 30, 2009, principally as a result...

  • Page 65
    ... indicated, information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2010 2009 Increase Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share-based...

  • Page 66
    ...$4.2 million to $12.8 million for the fiscal year ended September 30, 2010, compared to the fiscal year ended September 30, 2009. This increase was...Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report for additional information about the Company's interest rate swap...

  • Page 67
    ... each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2009 2008 Increase (Decrease) Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin: Sally Beauty Supply ...BSG...

  • Page 68
    ... volume for the BSG segment, as more fully described below. Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $20.4 million, or 2.4%, for the... sales consultants (resulting from the L'Oreal contractual changes reported during fiscal year 2007) and warehouse optimization expenses of...

  • Page 69
    ..., information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2009 2008 Increase (Decrease) Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share...

  • Page 70
    ... for the fiscal year ended September 30, 2009, compared to 2.9% for the fiscal year ended September 30, 2008. Financial Condition September 30, 2010 Compared to September 30, 2009 Working capital (current assets less current liabilities) increased by $45.4 million to $387.1 million at September 30...

  • Page 71
    ...and cash equivalents. The increase in current liabilities as of September 30, 2010 includes an increase of $44.7 million in accounts payable and accrued ...of Schoeneman and Intersalon, respectively. These amounts were previously reported in Goodwill pending the valuation of the assets acquired. This...

  • Page 72
    ...respectively. These amounts were previously reported in Goodwill pending the valuation...$14.8 million to $650.3 million at September 30, 2010, as a result of share-based compensation expense, the ...company, we depend on our subsidiaries, including Sally Holdings, to distribute funds to us so that...

  • Page 73
    ...to $53.5 million. The amounts drawn are generally paid down with cash provided by our operating activities. As of September 30, 2010, Sally Holdings had $341.8 million available for additional borrowings under our ABL facility, subject to borrowing base limitations, as reduced by outstanding letters...

  • Page 74
    ...the term loan facilities and the notes, Sally Holdings may not make certain restricted payments ...such restricted payment. As of September 30, 2010, its consolidated interest coverage ratio exceeded 2.0... Intersalon, a leading distributor of premier beauty supply products with 16 stores located in Chile...

  • Page 75
    ... income taxes payable of $18.6 million and by an improvement in earnings of approximately $44.7 million for the fiscal year ended September 30, 2010, compared to the fiscal year ended September 30, 2009. Net cash provided by operating activities during the fiscal year ended September 30, 2009, which...

  • Page 76
    ....3 million on our senior term loan facilities) during the fiscal year ended September 30, 2010, compared to net repayments of debt of $148.1 million during the fiscal year ended ...substantially all of our assets, those of Sally Investment Holdings LLC, those of our domestic subsidiaries and, in the case of ...

  • Page 77
    ...maximum ratio of 4.00 as of September 30, 2010. Failure to comply with the consolidated secured leverage...and the new ABL facilities contain a covenant requiring Sally Holdings and its subsidiaries to maintain a fixed-charge...or similarly titled measures reported by other companies or reported by us in ...

  • Page 78
    ...future payment dates at September 30, 2010 (in thousands): Payments Due by ...Annual Report and ''Item 7A-Quantitative and Qualitative Disclosures about Market Risk-Interest rate risk'' for a discussion of interest rate swap agreements. The majority of our operating leases are for Sally Beauty Supply...

  • Page 79
    ... requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of... Inventory shrinkage averaged approximately 1.0% of consolidated net sales in fiscal years 2010, 2009 and 2008. A 10% increase or decrease in our estimate...

  • Page 80
    ...claim payment history, historical trends in claims incurred but not yet reported, and other components such as expected increases in medical costs, ...regular basis and adjust our accruals accordingly. As of September 30, 2010 and 2009, our balance sheet included an estimated liability related to the...

  • Page 81
    ...2011, we expect our annual effective income tax rate to be approximately 38.0%. The projected increase over the fiscal year 2010 annual effective tax rate is ... annually, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting ...

  • Page 82
    ...The Company adopted this standard during the first quarter of its fiscal year 2010 and its adoption did not have a material effect on the Company's... the measurement of liabilities at fair value, effective for interim reporting periods beginning after August 26, 2009. More specifically, this amendment...

  • Page 83
    ... fair value measurements using Level 1 and 2 inputs, if any. The Company adopted this amendment during the second quarter of its fiscal year 2010 and its adoption did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. The Company adopted...

  • Page 84
    ...cash flows. In the fourth quarter of the fiscal year 2010, Sally Holdings entered into four foreign currency forward agreements which expire..., before provision for income taxes, by approximately $1.1 million on an annual basis, without considering the effect of any interest rate swap agreements we...

  • Page 85
    ...our CEO and our CFO, which are required in accordance with Rule 13a-14 of the Exchange Act, are attached as exhibits to this Annual Report. This ''Controls and Procedures'' section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in...

  • Page 86
    ... of the controls and procedures on the information generated for use in this Annual Report. In the course of the evaluation, we sought to identify whether we ...our CEO and CFO have concluded that, as of September 30, 2010, we maintain disclosure controls and procedures that are effective in providing...

  • Page 87
    ... Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2011 Annual Meeting of Stockholders under the headings ''Ownership of Securities.'' EQUITY COMPENSATION PLAN INFORMATION The following table gives information as of September 30, 2010, about our common stock...

  • Page 88
    ... value awards under the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan. We no longer grant additional awards under the Prior Plans. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 of this Annual Report on Form 10-K is...

  • Page 89
    ... S-K The following exhibits are filed as part of this Annual Report or are incorporated herein by reference: Exhibits Exhibit No. ..., dated as of October 3, 2006, among Alberto-Culver Company, Sally Holdings, Inc., New Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated...

  • Page 90
    ... Schoeneman Beauty Supply, Inc., the Shareholders and F. Dale Schoeneman, dated September 30, 2009, which is incorporated herein by reference from Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on November 19, 2009†Amended and Restated Certificate of Incorporation of Sally Beauty...

  • Page 91
    ...reference from Exhibit 4.5.2 to the Company's Current Report on Form 8-K filed on November 22, 2006 Credit Agreement, dated November 16, 2006, with respect to an Asset-Based Loan Facility, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, any Canadian Borrower from time to...

  • Page 92
    ...Report on Form 8-K filed on November 22, 2006 Assignment and Acceptance of that certain Credit Agreement, dated as of November 16, 2006, among Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply...reference from Exhibit 4.15 to the Company's Annual Report on Form 10-K filed on November 19...

  • Page 93
    ... reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 29, 2007 Sally Beauty Holdings, Inc. Independent Director Compensation Policy, which is incorporated herein by reference from Exhibit 10.12 to the Company's Annual Report on Form 10-K filed on November 19, 2009...

  • Page 94
    ...which is incorporated herein by reference from Exhibit 10.29 to the Company's Annual Report on Form 10-K filed on November 19, 2009 2010 Form of Restricted Stock Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference...

  • Page 95
    ...Agreement with Directors, which is incorporated herein by reference from Exhibit 10.33 to the Company's Annual Report on Form 10-K filed on November 19, 2009 Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan, which is incorporated herein by reference from Appendix A to the Company's Definitive...

  • Page 96
    ... Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 18th day of November, 2010. SALLY BEAUTY HOLDINGS, INC. By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter President, Chief Executive Officer...

  • Page 97
    ...Securities Exchange Act of 1934, this report has been signed below by the ...2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010 November 18, 2010...

  • Page 98
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2010, 2009 and 2008 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Financial Statements: ...Consolidated Balance Sheets as of September 30, 2010 and...

  • Page 99
    (This page has been left blank intentionally.)

  • Page 100
    ... Public Accounting Firm The Board of Directors and Stockholders Sally Beauty Holdings, Inc.: We have audited Sally Beauty Holdings, Inc.'s (the Company) internal control over financial reporting as of September 30, 2010, based on criteria established in Internal Control-Integrated Framework...

  • Page 101
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Sally Beauty Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Sally Beauty Holdings, Inc. (the Company) and subsidiaries as of September 30, 2010 and 2009, and the related ...

  • Page 102
    ... period ended September 30, 2010 are those of Sally Beauty Holdings, Inc. and its consolidated subsidiaries. In November of 2006, Sally Holdings, Inc. was converted...elsewhere in this Annual Report on Form 10-K, we refer to these transactions as the Separation Transactions. Sally Beauty Holdings, Inc....

  • Page 103
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2010 and 2009 (In thousands, except par value data) 2010 Assets Current assets: Cash and cash equivalents ...Trade accounts receivable, less allowance for doubtful accounts of $2,756 and $2,266 at September 30, ...

  • Page 104
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2010, 2009 and 2008 (In thousands, except per share data) 2010 2009 2008 Net sales ...Cost of products sold and distribution expenses ...Gross profit ...Selling, general and ...

  • Page 105
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years ended September 30, 2010, 2009 and 2008 (In thousands) 2010 Cash Flows from Operating Activities: Net earnings ...Adjustments to reconcile net earnings to net cash provided by operating activities: ...

  • Page 106
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Years ended September 30, 2010, 2009 and 2008 (In thousands) Accumulated Other Total Common Stock Additional Paid-in Accumulated Treasury Comprehensive Stockholders' Shares Amount Capital ...

  • Page 107
    ... 30, 2010, 2009 and 2008 1. Description of Business and Basis of Presentation Description of Business Sally Beauty Holdings, Inc. and its consolidated subsidiaries (''Sally Beauty'' or ''the Company'') sell professional beauty supplies, primarily through its Sally Beauty Supply retail stores...

  • Page 108
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and ... requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosures ...

  • Page 109
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009...$1,562.6 million and $1,677.5 million, respectively. The fair value amounts reported for the Company's long-term debt are based on quoted market prices where...

  • Page 110
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010...'' contained elsewhere in this Annual Report, and Note 15 of.... Inventory Inventory consists primarily of beauty supplies and related accessories and salon equipment...

  • Page 111
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008... at least annually, and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is ...

  • Page 112
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010...reviewed for impairment at least annually, and whenever events or changes... estimated losses incurred but not yet reported. The Company estimates the ultimate cost...

  • Page 113
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 Other advertising costs are expensed when incurred. Advertising costs of $64.6 million, $55.2 million and $50.6 million for the fiscal years 2010, ...

  • Page 114
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and... be solely in the control of the Company. Accordingly, the Company reported $0.9 million and $1.8 million in ''Stock options subject to redemption'' ...

  • Page 115
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 Comprehensive Income Comprehensive income reflects changes in accumulated stockholders' equity (deficit) from sources other than transactions with ...

  • Page 116
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 ...to the measurement of liabilities at fair value, effective for interim reporting periods beginning after August 26, 2009. More specifically, this ...

  • Page 117
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 Level 2-Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets ...

  • Page 118
    ... expense, exceeds the average price per share for the period. 7. Share-Based Payments In January of 2010, the Company adopted the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (the ''2010 Plan''), a share-based compensation plan which allows for the issuance of up to 29.8 million shares...

  • Page 119
    ..., 2.7 million and 2.8 million stock options and approximately 118,000, 123,000 and 136,000 restricted share awards, respectively, under the 2010 Plan, the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the ''2007 Plan'') or the Alberto-Culver Company Employee Stock Option Plan of 2003...

  • Page 120
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The following table presents a summary of the activity for the Company's stock option plans for the fiscal year ended September 30, 2010: Weighted ...

  • Page 121
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, ...grant, of the stock options issued to the Company's grantees during the fiscal years 2010, 2009 and 2008 was $4.15, $2.33 and $3.73, respectively. The total fair...

  • Page 122
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The following table presents a summary of the activity for the Company's restricted stock awards for the fiscal year ended September 30, 2010... 2010 ...

  • Page 123
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The following table presents a summary of the activity for the Company's RSUs for the fiscal year ended September 30, 2010... 30, 2010 2009 2008...

  • Page 124
    ...operating segment for the fiscal years 2009 and 2010 are as follows (in thousands): Sally Beauty Supply Balance at September 30, 2008 ...Additions, ...in connection with such 2009 acquisitions. These amounts were previously reported in Goodwill pending completion of the final valuations of the assets...

  • Page 125
    ...to, in the aggregate, as ''other intangible assets'') by operating segment at September 30, 2010 and 2009 (in thousands): Sally Beauty Supply Balance at September 30, 2010: Intangible assets with indefinite lives: Trade names ...Other intangibles ...Total ...Intangible assets subject to amortization...

  • Page 126
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 11. Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2010 2009 Compensation and benefits . Interest ...

  • Page 127
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 Contingencies Legal Proceedings There were no material legal proceedings pending against the Company or its subsidiaries, as of September 30, 2010....

  • Page 128
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010...75% $1,559,591 (a) London Interbank Offered Rate (''LIBOR''). (b) At September 30, 2010, the interest rate for the Term Loan B was 2.51%. (c) Represents pre-...

  • Page 129
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 subsidiaries, Sally Capital Inc., issuing senior notes in an aggregate amount of $430.0 million and senior subordinated notes in an aggregate ...

  • Page 130
    ... made during the fiscal year 2010, the Company recorded losses on...annually. Furthermore, the agreements underlying the Company's credit facilities contain terms which significantly restrict the ability of Sally Beauty's subsidiaries to pay dividends or otherwise transfer assets to Sally Beauty...

  • Page 131
    ...purchases and self-insurance programs which totaled $14.5 million and $13.4 million at September 30, 2010 and 2009, respectively. 14. Sally Beauty Holdings, Inc. Stand-Alone Financial Information Sally Beauty Holdings, Inc. is a holding company and has no material assets or operations other than its...

  • Page 132
    ... Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 Sally Investment Holdings LLC, which is a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings, does not have any assets or operations of any kind. Summary...

  • Page 133
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and ... cash flow hedges was recognized during the fiscal years 2010, 2009 and 2008. Amounts reported in OCI related to interest rate swaps are reclassified ...

  • Page 134
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 In November of 2006, Sally Holdings entered into certain interest rate swap agreements with an aggregate notional amount of $500 million. These ...

  • Page 135
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and ... not designated as hedging instruments ...Liability Derivatives As of September 30, 2010 Balance Sheet Location Fair Value Other assets $ - $ - Other...

  • Page 136
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of earnings for the fiscal ...

  • Page 137
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of earnings for the fiscal ...

  • Page 138
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, ... the terms of the 401k Plan, employees may contribute a percentage of their annual compensation to the 401k Plan up to certain maximums, as defined by the 401k...

  • Page 139
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The provision for income taxes for the fiscal years 2010, 2009 and 2008 consists of the following (in thousands): Year Ended September 30, 2010 ...

  • Page 140
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 The... of $76.5 million and $56.4 million as of September 30, 2010 and 2009, respectively, as such earnings have been permanently reinvested in the...

  • Page 141
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 September 30, 2010, operating loss carry-forwards of $22.6 million expire between 2012 and 2030 and operating loss carry-forwards of $30.7 million ...

  • Page 142
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010.... These amounts were previously reported in Goodwill pending completion of... of Schoeneman, a 43-store beauty supply chain located in the central northeast...

  • Page 143
    ... year 2010. Generally, we funded these acquisitions with cash from operations. In May of 2008, the Company acquired Pro-Duo, a 40-store beauty supply chain ... (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both...

  • Page 144
    ... is as follows (in thousands): Year Ended September 30, 2010 2009 2008 Net sales: Sally Beauty Supply ...BSG ...Total ...Earnings before provision for income taxes: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses(a) ...Share-based compensation...

  • Page 145
    ... On October 1, 2010, the Company acquired Aerial Company, Inc. (''Aerial''), an 82-store professional-only beauty supply chain operating in ... will be recorded in our consolidated statements of earnings. In November 2010, Sally Holdings entered into a new agreement with lenders to replace its ABL ...

  • Page 146
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2010, 2009 and 2008 21. Quarterly Financial Data (Unaudited) Certain unaudited quarterly consolidated statement of earnings information for the fiscal years ended ...

  • Page 147
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  • Page 148
    ...that: (1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement of...in the registrant's internal control over financial reporting. Date: November 18, 2010 By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter...

  • Page 149
    ...that: (1) I have reviewed this Annual Report on Form 10-K of Sally Beauty Holdings, Inc.; (2) Based on my knowledge, this report does not contain any untrue statement ...role in the registrant's internal control over financial reporting. Date: November 18, 2010 By: /s/ MARK J. FLAHERTY Mark J. Flaherty...

  • Page 150
    ... 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the ''Company'') on Form 10-K for the fiscal year ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 151
    ... 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Sally Beauty Holdings, Inc. (the ''Company'') on Form 10-K for the fiscal year ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 152
    ... Stockholders. A copy of the Sally Beauty Holdings, Inc. 2010 Form 10-K, as filed with the Securities and Exchange Commission, is available on the investing section of the Company's website at investor.sallybeautyholdings.com. Investor inquiries or a copy of the Company Annual Report or Form 10-K or...

  • Page 153
    SALL YBEAUTY HOLDINGS, INC. 3001 Colorado Boulevard Denton, Texas 76210 sallybeautyholdings.com