Sally Beauty Supply 2012 Annual Report Download

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TIMELESS
2012 ANNUAL REPORT

Table of contents

  • Page 1
    TIMELESS 2012 ANNUAL REPORT

  • Page 2
    ... an international specialty retailer and distributor of professional beauty supplies with annual revenues over $3.5 billion and net earnings of $233 million. The Company operates primarily through two business units, Sally Beauty Supply and Beauty Systems Group (BSG), and is the largest distributor...

  • Page 3
    ... Germany Chile Netherlands Ireland Spain International Total Total Store Count BSG Direct Sales Consultants (STORE COUNT AS OF SEPTEMBER 30, 2012) Beauty Systems Group Total Company Sally Beauty Supply 2,596 42 149 81 2,868 241 45 40 35 33 22 17 8 441 3,309 - 1,062 2 30 96 1,190 1,190 1,044...

  • Page 4
    DEAR STOCKHOLDERS: On almost every level, Fiscal Year 2012 was another remarkable year for Sally Beauty Holdings. Both our businesses, Sally Beauty Supply and Beauty Systems Group, delivered record results, a testament to our unique business model and talented workforce. Besides outstanding ...

  • Page 5
    ... 13.5% $400 12.5% $300 11.5% $200 $100 45% $0 2008 2009 2010 2011 2012 15.5% 14.5% 48% 47% Gross Profit Margin 49% 10.5% 9.5% Sally Beauty Supply Beauty Systems Group Sally Beauty Supply Beauty Systems Group results from our customer acquisition strategy. Through our marketing efforts, we...

  • Page 6
    FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended September 30, 2012 Financial highlights Net Sales Sally Beauty Supply Beauty Systems Group Total company sales Consolidated gross profit Gross profit margin Operating earnings Operating earnings margin Consolidated ...

  • Page 7
    2012 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, 2012 -OR- អ TRANSITION REPORT...Act: Title of Each Class Name of Each Exchange on Which Registered SALLY BEAUTY HOLDINGS, INC. Common Stock, par value $.01 per share New ...

  • 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 ...MINE SAFETY DISCLOSURES ...I ...1 17 31 31 32 33 ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. ITEM 10. ...

  • Page 10
    ...Sally Beauty Holdings, Inc. and its consolidated subsidiaries unless otherwise indicated or the context otherwise requires. CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS Statements in this Annual Report... to supply products to us; • the possibility of material interruptions in the supply of...

  • Page 11
    • 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; • being a holding company, with no operations of our own, and depending on our subsidiaries for cash; • our ...

  • Page 12
    ... and 2010 were from customers located in the U.S. For the year ended September 30, 2012, our consolidated net sales and operating earnings were $3,523.6 million and $499.4 million, respectively. Sally Beauty Supply began operations with a single store in New Orleans in 1964. BSG became a subsidiary...

  • 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
    ... ''We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.'' • Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the distribution of...

  • Page 15
    ... to us.'' • High level of competition. 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 stores, salons, mass merchandisers, drug stores and...

  • Page 16
    ...supplies sub-distributors in Europe. Sally Beauty Supply accounted for approximately 62%, 62% and 63% and BSG accounted for approximately 38%, 38% and 37% of the Company's consolidated net sales for the years ended September 30, 2012... Supplementary Data'' contained elsewhere in this Annual Report. 5

  • Page 17
    ... 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 store count. As of September 30, 2012, Sally Beauty Supply operated 3,284...

  • Page 18
    ... an attractive alternative to higher-priced leading thirdparty brands. Exclusive-label products accounted for approximately 45% of Sally Beauty Supply's product sales in the U.S. during the 2012 fiscal year. Generally, the exclusive-label brands have higher gross margins than the leading third-party...

  • Page 19
    ... is an important part of its success. The following table provides a history of Sally Beauty Supply's store count (including franchised stores) during the last five fiscal years: Fiscal Year Ended September 30, 2012 2011 2010 2009 2008 Stores open at beginning of period ...Net store openings during...

  • Page 20
    ...and 328 distributor sales consultants of our Armstrong McCall franchisees at September 30, 2012, 2011, 2010, 2009 and 2008, respectively. (b) The increase in ...reflects approximately 90 distributor sales consultants employed by Schoeneman Beauty Supply, Inc. (''Schoeneman'') prior to the Company's ...

  • Page 21
    ... the approximate percentage of BSG's sales attributable by merchandise category: Fiscal Year Ended September 30, 2012 2011 2010 Hair care ...Hair color ...Promotional items(a) Skin and nail care . . Electrical appliances Other beauty items ...36.4% 37.0% 37.1% 29.8% 29.6% 29.6% 12.0% 12.9% 13.2% 10...

  • Page 22
    ...) during the last five fiscal years: Fiscal Year Ended September 30, 2012 2011 2010 2009 2008 Stores open at beginning of period ...Net store openings...U.S. and Puerto Rico, we offer up to 9,000 and 14,000 SKUs in Sally Beauty Supply and in BSG, respectively, (in each case, in our stores or online)...

  • Page 23
    new product information for a nominal annual fee. Our BSG professional distributor sales ... September 30, 2012 2011 2010 2009 2008 6.5% 6.1% 6.4% 6.3% 5.5% 6.1% 4.1% 6.2% 4.6% 2.1% 1.0% 1.8% 1.2% 6.9% 2.6% Same store sales growth(a) Sally Beauty Supply ...Beauty Systems Group ...Consolidated...

  • Page 24
    ...our store base. In the fiscal year 2012, we opened 129 and 39 Sally Beauty Supply stores and BSG stores, respectively, excluding ...annual organic store growth between 4% and 5% of our total stores for the foreseeable future. Grow Internationally International sales represent 22% of Sally Beauty Supply...

  • Page 25
    ... and reduce administrative expenses related to BSG's distribution network which has resulted in annualized cost savings of at least $14.0 million. We also offer between 6,000 and 9,000 SKUs of our Sally Beauty Supply products for sale through our website (www.sallybeauty.com) and have recently begun...

  • Page 26
    ... they sell. Additionally, Sally Beauty Supply recruits individuals with retail ...each store are supervised by a district manager, who reports to a territory manager. A significant number of our...from manufacturers through supply contracts and by purchase orders. For the fiscal year 2012, our five...

  • 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, 2012, Sally Beauty Supply supplied 25 and BSG supplied 159 franchised stores located in the U.S., Mexico and...

  • Page 28
    ...the types of products and services we sell. 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 stores, salons, mass merchandisers, drug stores and...

  • Page 29
    ...in turn, could adversely affect our sales and profitability. We expect the aging baby boomer population to drive future growth in professional beauty supply sales through an increase in the use of hair color and hair loss products. Additionally, we expect continuously changing fashion-related trends...

  • Page 30
    ... our marketing activities, particularly our Sally Beauty Club and ProCard promotions; • seasonal...quality or who may be unwilling to continue to supply products to us. We do not manufacture any...of the products we sell. During the fiscal year 2012, our five largest suppliers were Procter & Gamble Co.,...

  • Page 31
    ... other reasons, we may not be able to acquire desired merchandise in sufficient quantities or on acceptable terms in the future. Changes in Sally Beauty Supply's and BSG's relationships with suppliers occur often, and could positively or negatively impact the net sales and operating profits of both...

  • Page 32
    If products sold by us are found to be defective in labeling or content, our credibility and that of the brands we sell may be harmed, marketplace acceptance of our products may decrease, and we may be exposed to liability in excess of our products liability insurance coverage and manufacturer ...

  • Page 33
    ...-based business may be unsuccessful or may cause internal channel conflict. We offer many of our beauty products for sale through our websites in the U.S. (such as www.sallybeauty.com, www.cosmoprofbeauty... our internet-based business may reduce the financial performance of our Sally Beauty Supply 22

  • Page 34
    ... choose to shop online rather than purchasing products from our Sally Beauty Supply stores. Although we believe that our participation in both ... our current or potential internet customers to consider competing distributors of beauty products. These events could have an adverse effect on our business...

  • Page 35
    ...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 36
    ... 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 37
    ...temporary closure of stores or distribution centers, the temporary lack of an adequate work force, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those products) from domestic or foreign suppliers, the temporary disruption in the delivery of...

  • Page 38
    ... 404 of the Sarbanes-Oxley Act of 2002, which require 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 financial reporting. Furthermore, our independent registered public accounting firm must attest to and...

  • Page 39
    .... In connection with the Separation Transactions, certain of our subsidiaries, including Sally Holdings LLC, which we refer to as Sally Holdings, incurred approximately $1,850.0 million in debt. As of September 30, 2012, we had an aggregate principal amount of approximately $1,617.2 million of...

  • Page 40
    ...prohibit us or our subsidiaries from doing so. As of September 30, 2012, our senior credit facility provided us commitments for additional borrowings of up to...The ABL facility contains covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to: • change their line ...

  • Page 41
    ...ventures); • engage in mergers, consolidations or sales of all or substantially all of Sally Holdings' assets; • engage in certain transactions with affiliates; and • permit restrictions on Sally Holdings' subsidiaries' ability to pay dividends. The restrictions in the indentures governing our...

  • Page 42
    ... for a term of five years with customary renewal options. The following table provides the number of stores in the U.S. and globally, as of September 30, 2012: Sally Beauty Supply CompanyOperated Franchise ...2,596 42 236 34 81 33 42 35 22 149 14 646 3,284 - - 5 6 - - 3 - - - 11 25 25...

  • Page 43
    ... ...Lincoln, Nebraska ...Guadalupe, Nuevo Leon, Mexico . (1) Sally Beauty Supply (2) BSG ITEM 3. LEGAL PROCEEDINGS We are involved, from ...of Mixed Chicks, LLC. After conclusion of a trial, however, on November 2, 2012, a jury found that infringement had occurred on the trademark and trade dress in...

  • Page 44
    believe that we are in material compliance with such laws and regulations, although no assurance can be provided that this will remain true going forward. ITEM 4. MINE SAFETY DISCLOSURES Not applicable 33

  • Page 45
    ... ...December 31, 2010 . Holders As of November 9, 2012, there were 1,197 stockholders of record of our common stock. Dividends We have not declared or paid dividends at any time during the two fiscal years prior to the date of this Annual Report. We currently anticipate that we will retain future...

  • Page 46
    ... year included in the data: $350 $300 $250 $200 $150 $100 $50 $0 9/07 3/08 9/08 3/09 9/09 3/10 9/10 3/11 9/11 3/12 9/12 Sally Beauty Holdings, Inc. S&P 500 Dow Jones US Specialty 8NOV201219023334 Retailers TSM The Dow Jones U.S. Specialty Retailers Index (NYSE: DJUSRS) is a comprehensive view of...

  • Page 47
    ... 65,697 99,117 0.55 0.54 181,691 183,306 $ $ $ 2012 Results of operations information: Net sales ...Cost of products sold and distribution expenses... diluted ...Operating data: Number of stores (at end of period): Sally Beauty Supply ...Beauty Systems Group ...$3,523,644 1,780,385 1,743,259 1,179,206...

  • Page 48
    repayment in full of the term loan B, including unamortized deferred financing costs expensed and call premiums paid. Please see Note 14 of the ''Notes to Consolidated Financial Statements'' in ''Item 8-Financial Statements and Supplementary Data'' for additional information about the Company's debt...

  • Page 49
    ...2012, of Sally Beauty. 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...30, 2012, compared to 13.7% for the fiscal year ended September 30, 2011; • Sally Beauty Supply and BSG...

  • Page 50
    ...were $3,523.6 million and $499.4 million, respectively. We believe Sally Beauty Supply is the largest open-line distributor of professional beauty supplies in the U.S. based on store count. As of September 30, 2012, Sally Beauty Supply operated 3,284 companyoperated retail stores, 2,596 of which are...

  • Page 51
    ...within certain geographic territories. For the year ended September 30, 2012, BSG's net sales and segment operating profit were $1,325...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...

  • Page 52
    ... ''We depend upon manufacturers who may be unable to provide products of adequate quality or who may be unwilling to continue to supply products to us.'' • Relationships with suppliers. Sally Beauty Supply and BSG, and their respective suppliers are dependent on each other for the distribution of...

  • Page 53
    ... administrative expenses related to BSG's distribution network which has resulted in annualized cost savings of at least $14.0 million. Please see ''Risk...geographic areas. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70,...

  • Page 54
    ... our divisions (primarily in our Sally Beauty Supply operations in the U.S.), which we...not have a material adverse effect on our financial reporting, business, financial condition or results of operations. ...In addition, during the fiscal year 2012, the Company completed several other individually...

  • Page 55
    ...facility. Our Separation from Alberto-Culver In November 2006, Sally Beauty separated from the Alberto-Culver Company, which we refer to...facility and with cash from operations. Share Repurchase Program On August 27, 2012, we announced that our Board has approved a share repurchase program authorizing...

  • Page 56
    ... enables us to sell approximately 11.6 million Mexican pesos ($0.9 million, at the September 30, 2012 exchange rate) at the contractual exchange rate of 12.9048 and (e) a foreign currency forward ... Item 8-''Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report. 45

  • Page 57
    ... predecessor plans, such as the Sally Beauty Holdings 2007 Omnibus Incentive Plan. For the fiscal years 2012, 2011 and 2010, the total...of Mixed Chicks, LLC. After conclusion of a trial, however, on November 2, 2012, a jury found that infringement had occurred on the trademark and trade dress in ...

  • Page 58
    ...limited restructuring, for U.S. income tax purposes, completed in the fiscal year. As a result, the effective income tax rate for the fiscal year 2012 (35.4%) was lower than our historical effective tax rate of approximately 37.0%. For the fiscal year ended September 30, 2011, consolidated operating...

  • Page 59
    ... 17.5% 10.4% 11.7% 3,032 1,027 4,059 ... Same store sales growth(d) Sally Beauty Supply ...6.5% 6.3% 4.1% BSG ...6.1% 5.5% 6.2% Consolidated ...6.4% 6.1% 4.6% (a) For the fiscal year 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge resulting from a loss contingency. For...

  • Page 60
    ... 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 retail customers and salon professionals. Sally Beauty Supply sells products for hair color and care, skin and nail...

  • Page 61
    ... profit and gross profit margin data for each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2012 2011 Increase Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin...

  • Page 62
    ...2012, incremental sales from businesses acquired in the preceding 12 months contributed approximately $99.1 million, or 7.9%, less to the annual ...ended September 30, 2012, compared to 48.8% for the fiscal year ended September 30, 2011. Sally Beauty Supply. Sally Beauty Supply's gross profit increased...

  • Page 63
    ... indicated, information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2012 2011 Increase Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share-based...

  • Page 64
    ... offset by the credit from the litigation settlement in the fiscal year 2011, without a comparable benefit in the fiscal year 2012. Sally Beauty Supply. Sally Beauty Supply's segment operating earnings increased by $48.6 million, or 12.7%, to $429.5 million for the fiscal year ended September 30...

  • Page 65
    ...on our senior term loan B facility until such facility was repaid in May 2012, compared to the average outstanding principal balance in such facility during the fiscal ... and Supplementary Data'' contained elsewhere in this Annual Report for additional information about the Company's interest rate...

  • Page 66
    ... profit and gross profit margin data for each reportable segment (dollars in thousands). Fiscal Year Ended September 30, 2011 2010 Increase Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin...

  • Page 67
    ..., increased to 48.8% for the fiscal year ended September 30, 2011, compared to 48.2% for the fiscal year ended September 30, 2010. Sally Beauty Supply. Sally Beauty Supply's gross profit increased by $111.3 million, or 11.4%, for the fiscal year ended September 30, 2011, compared to the fiscal year...

  • Page 68
    ... indicated, information concerning our operating earnings for each reportable segment (dollars in thousands): Fiscal Year Ended September 30, 2011 2010 Increase Operating Earnings: Segment operating profit: Sally Beauty Supply ...BSG ...Segment operating profit ...Unallocated expenses ...Share-based...

  • Page 69
    Beauty Systems Group. BSG's segment operating earnings increased by $52.2 million, or 46.4%, to ... Statements in Item 8-''Financial Statements and Supplementary Data'' contained elsewhere in this Annual Report for additional information about the Company's interest rate swaps and ''Liquidity and ...

  • Page 70
    ... in current liabilities. The increase in current assets as of September 30, 2012, includes an increase in cash and cash equivalents of $176.7 million, an... million, partially offset by the effect of the expiration, in May 2012, of certain interest rate swaps in a liability position ($6.5 million at ...

  • Page 71
    ...million shares of the Company's common stock in a private transaction in May 2012 for $200.0 million, partially offset by share-based compensation expense and ...expenditures. As a holding company, we depend on our subsidiaries, including Sally Holdings, to distribute funds to us so that we may pay our...

  • Page 72
    ... position and other considerations. During the first half of its fiscal year 2012 prior to its repayment and termination, we had made optional prepayments in the... conditions. Please see ''Risk Factors'' in Item 1A of this Annual Report. We utilize our ABL facility for the issuance of letters of ...

  • Page 73
    As of September 30, 2012, Sally Holdings had $377.8 million available for additional borrowings under our ...For example, in November 2011, we acquired the Floral Group, a distributor of professional beauty products then with 19 stores located in the Netherlands, for approximately A22.8 million (...

  • Page 74
    ... $34.6 million and an increase in excess tax benefits from share-based compensation of $10.7 million for the fiscal year ended September 30, 2012, compared to the fiscal year ended September 30, 2011. Net cash provided by operating activities during the fiscal year ended September 30, 2011 increased...

  • Page 75
    ...those of Sally Investment, a wholly-owned subsidiary of Sally Beauty and the direct parent of Sally Holdings,... of earnings. As of September 30, 2012, we had $377.8 million available for... 2019''). The senior notes due 2019 bear interest at an annual rate of 6.875% and were issued at par. In connection...

  • Page 76
    ...notes due 2019 and 2022 is payable semi-annually, during the Company's first and third fiscal quarters. Sally Holdings used the net proceeds from the offering..., are fully fungible with the senior notes due 2022 issued in May 2012 and bear interest at the same rate. In connection with the issuances of...

  • Page 77
    ... notes due 2019 and 2022 is payable semi-annually, during the Company's first and third fiscal ...Ratio exceeds 4.0 to 1.0. At September 30, 2012, the Company's Secured Leverage Ratio was approximately ...terms which restrict the ability of Sally Beauty's subsidiaries to incur additional indebtedness...

  • Page 78
    ... Restricted Payments. Under the ABL facility, as amended, Sally Holdings may make Restricted Payments if availability under the ABL.... As of September 30, 2012, the Consolidated Fixed Charge Coverage Ratio was approximately 3.5 to 1.0. When used in this Annual Report, the phrase ''Consolidated EBITDA...

  • Page 79
    ...contractual cash obligations and commitments outstanding by future payment dates at September 30, 2012 (in thousands): Payments Due by Period More than 5 1-3 years 3-5... elsewhere in this Annual Report for additional information about the Company's operating leases. The amounts reported above, do not...

  • Page 80
    ...operating leases are for Sally Beauty Supply and BSG stores, ... buildings. Off-Balance Sheet Financing Arrangements At September 30, 2012 and 2011, we had no off-balance sheet financing arrangements... make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and ...

  • Page 81
    ...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, 2012 and 2011, our balance sheet included an estimated liability related to the...

  • Page 82
    ...to tax benefits (approximately $10.3 million) resulting from a limited restructuring, for U.S. income tax purposes, completed in the fiscal year 2012. The lower fiscal year 2011 annual effective tax rate, compared to our historical effective tax rate, was primarily due to tax benefits resulting from...

  • Page 83
    ..., they are reviewed for impairment at least annually, and whenever events or changes in circumstances ...that it is more likely than not that the reporting unit's fair value is less than its carrying... estimates on our assumptions as of September 30, 2012. Our estimates for future periods may be based ...

  • Page 84
    ... that Step 2 of the goodwill impairment test be performed for such reporting units if it is more likely than not that an impairment of goodwill exists. The Company adopted this amendment during the first quarter of its fiscal year 2012 and its adoption did not have a material effect on the Company...

  • Page 85
    ...it is more likely than not that the asset is impaired. This amendment is effective for fiscal years beginning after September 15, 2012. Early application is permitted. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a multinational corporation, we are subject to certain market...

  • Page 86
    ... accounts is sufficient to cover customer credit risks at September 30, 2012. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Please see ''Index to Financial Statements'' which is located on page 89 of this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND...

  • Page 87
    ... 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, 2012, we maintain disclosure controls and procedures that are effective in providing...

  • Page 88
    ... effectiveness of our internal control over financial reporting as of September 30, 2012 using the criteria set forth by the Committee...Financial Reporting on page F-1 of the financial statements, which begin on page 89 of this Annual Report. Changes in Internal Control over Financial Reporting. ...

  • Page 89
    ... and to reduce the size of the Board to nine members. On September 19, 2012, the Board appointed Christian A. Brickman to fill the one vacancy on the Board resulting... The information required by Item 11 of this Annual Report on Form 10-K is incorporated herein by reference from our Proxy Statement...

  • Page 90
    ...Report on Form 10-K is incorporated herein by reference from our Proxy Statement related to the 2013 Annual Meeting of Stockholders under the heading ''Ownership of Securities.'' EQUITY COMPENSATION PLAN INFORMATION The following table gives information as of September 30, 2012... Sally Beauty Holdings...

  • Page 91
    ...part of this Annual Report or are ...Sally Holdings, Inc. and New Aristotle Holdings, Inc., which is incorporated herein by reference from Exhibit 2.01 to the Company's Current Report on Form 8-K filed on October 30, 2006†Stock Purchase Agreement entered into on October 1, 2010 by and among Beauty...

  • Page 92
    ... Company's Annual Report on Form 10-K filed on December 22, 2006 Assumption Agreement, dated as of December 20, 2011 made by Sally Beauty Holdings, Inc...'s Current Report on Form 8-K filed June 14, 2012 Security Agreement by Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, ...

  • Page 93
    ... named therein, Sally Beauty Holdings, Inc., Sally Investment Holdings LLC and Bank of America, N.A., as administrative agent and as collateral agent, which is incorporated herein by reference from Exhibit 4.10 to the Company's Quarterly Report on Form 10-Q filed on February 2, 2012†Indenture...

  • Page 94
    ... April 27, 2007 2009 Form of Stock Option Agreement for Employees pursuant to the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan, which is incorporated herein by reference from Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on November 20, 2008 2009 Form of Restricted Stock...

  • Page 95
    ... Wells Fargo Securities, LLC, which is incorporated herein by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 9, 2011 Form of Sally Beauty Holdings, Inc. 2012 Annual Incentive Plan, which is incorporated herein by reference from Exhibit 10.34 to the Company...

  • Page 96
    ...10.4 to the Company's Current Report on Form 8-K filed November 5, 2012 2012 Form of Restricted Stock Unit Agreement for Independent Directors pursuant to the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan.* Amended and Restated Sally Beauty Holdings, Inc. Annual Incentive Plan* Amended and...

  • Page 97
    ... to Rule 406T of Regulation S-T, the following financial information from our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the...

  • Page 98
    ...the 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 15th day of November, 2012. SALLY BEAUTY HOLDINGS, INC. By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter Chairman of the Board, President...

  • Page 99
    ... requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf...15, 2012 Director November 15, 2012 Director November 15, 2012 Director November 15, 2012 Director November 15, 2012 Director November 15, 2012 Director November 15, 2012 Title ...

  • Page 100
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2012, 2011 and 2010 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2012 and ...

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  • Page 102
    ... 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, 2012, based on criteria established in Internal Control-Integrated Framework...

  • Page 103
    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, 2012 and 2011, and the related ...

  • Page 104
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2012 and 2011 (In thousands, except par value data) 2012 Assets Current assets: Cash and cash equivalents ...Trade accounts receivable, net . Accounts receivable, other ...Income taxes receivable ...Inventory ......

  • Page 105
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2012, 2011 and 2010 (In thousands, except per share data) 2012 Net sales ...Cost of products sold and distribution expenses ...Gross profit ...Selling, general and administrative ...

  • Page 106
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years ended September 30, 2012, 2011 and 2010 (In thousands) 2012 Cash Flows from Operating Activities: Net earnings ...Adjustments to reconcile net earnings to net cash provided activities: Depreciation and ...

  • Page 107
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Years ended September 30, 2012, 2011 and 2010 (In thousands) Accumulated Other Total Common Stock Additional Paid-in Accumulated Treasury Comprehensive Stockholders' Shares Amount Capital ...

  • Page 108
    ... ended September 30, 2012, 2011 and 2010 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, through its Sally Beauty Supply retail stores...

  • Page 109
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 disclosures of contingent liabilities in the financial statements. Our most significant estimates relate to: the valuation of inventory, vendor ...

  • Page 110
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Inventory Inventory consists primarily of beauty supplies...and significant distribution centers at least annually, and sooner when management has ...

  • Page 111
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012... are reviewed for impairment at least annually, during our second fiscal quarter,...it is more likely than not that the reporting unit's fair value is less than its ...

  • Page 112
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012...Company. The Company maintains an annual stop-loss insurance policy for the... 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, 2012, 2011 and 2010 .... Balance sheet accounts are translated into U.S. dollars (the Company's reporting currency) at the rates of exchange in effect at the balance ...

  • Page 114
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Accumulated Other Comprehensive (Loss) Income The components of accumulated other comprehensive (loss) income are as follows at September 30, 2012 ...

  • Page 115
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 ...statement of stockholders' equity but does not change the items that must be reported. In addition, in December 2011, the FASB issued ASU No. 2011-...

  • Page 116
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 market participants at the measurement date. ASC 820 establishes a three-level hierarchy for measuring fair value and requires an entity to ...

  • Page 117
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 (b) Foreign currency options, collars and forwards (hereafter, ''foreign exchange contracts''), and interest rate swaps are valued for purposes of ...

  • Page 118
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 transactions. The plans will cover the repurchase of shares over the next six fiscal quarters. Repurchases of shares of the Company's common ...

  • Page 119
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 2011 ...predecessor share-based plans such as the 2007 Plan. For fiscal years 2012, 2011 and 2010, the total income tax benefit recognized in our ...

  • Page 120
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 The following table summarizes information about stock options under the Company's share-based compensation plans at September 30, 2012: Options ...

  • Page 121
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 exercises was $18.9 million, $6.2 million and $0.5 million, respectively. The total cash received during the fiscal years 2012, 2011 and 2010 from ...

  • Page 122
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and ... accounts was as follows (in thousands): Year Ended September 30, 2012 2011 2010 Balance at beginning of period ...Bad debt expense ...Uncollected...

  • Page 123
    ... Assets The changes in the carrying amounts of goodwill by operating segment for the fiscal years 2011 and 2012 are as follows (in thousands): Sally Beauty Supply Balance at September 30, 2010 ...Acquisitions ...Foreign currency translation ...Balance at September 30, 2011 ...Acquisitions ...Foreign...

  • Page 124
    ... were not individually material and/or to net purchase price adjustments. In addition, during the fiscal year 2012, $15.0 million of the increase in Sally Beauty Supply's goodwill was attributable to the Company's acquisition of Kappersservice Floral B.V. and two related companies (together, the...

  • Page 125
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Amortization expense totaled $13.7 million, $12.4 million and $8.7 million for the fiscal years 2012, 2011 and 2010, respectively. As of September ...

  • Page 126
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 13. Commitments and Contingencies Lease Commitments The Company's principal leases relate to retail stores and warehousing properties. At September...

  • Page 127
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011.... The Company has no significant liabilities for loss contingencies at September 30, 2012 and 2011. 14. Short-term Borrowings and Long-Term Debt Details of ...

  • Page 128
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 ...senior notes due 2019''). The senior notes due 2019 bear interest at an annual rate of 6.875% and were issued at par. In connection with issuance ...

  • Page 129
    ...method, are fully fungible with the senior notes due 2022 issued in May 2012 and bear interest at the same rate. In connection with the issuances of...semi-annually, during the Company's first and third fiscal quarters. Please see Note 20 for certain financial statement data pertaining to Sally Beauty,...

  • Page 130
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Maturities of the Company's long-term debt are as follows at September 30, 2012 (in thousands): Fiscal Year: 2013 ...2014 ...2015 ...2016 ...2017 ...

  • Page 131
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012...As of September 30, 2012, the Consolidated Fixed Charge Coverage Ratio was approximately 3.5 to 1.0. When used in this Annual Report, the phrase ''Consolidated ...

  • Page 132
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012...loss) income (''OCI'') until the swap agreements expired in May 2012. Amounts reported in OCI related to interest rate swaps were reclassified into interest ...

  • Page 133
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 The Company uses foreign exchange contracts including, at September 30, 2012, foreign currency forwards with an aggregate notional amount of $12.0 ...

  • Page 134
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 The table below presents the effect of the Company's derivative financial instruments on the Company's consolidated statements of earnings for the ...

  • Page 135
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 eligibility requirements and who are not members of a collective bargaining unit. Under the terms of the 401k Plan, employees may contribute a ...

  • Page 136
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 ... million, $35.8 million and $12.0 million in the fiscal years 2012, 2011 and 2010, respectively. Tax reserves are evaluated and adjusted as ...

  • Page 137
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 2027 and operating loss carry-forwards of $53.8 million have no expiration date. At each September 30, 2012... their examination report. The Company...

  • Page 138
    ... approximately $17.0 million. In addition, during the fiscal year 2012, the Company completed several other individually immaterial acquisitions at an aggregate... (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to ...

  • Page 139
    ...081,459 $2,916,090 Depreciation and amortization: Sally Beauty Supply ...BSG ...Corporate ...Total ...Capital expenditures: Sally Beauty Supply BSG ...Corporate ...Total ... $ $ $ $ $ $ $ $ $ (a) For the fiscal year 2012, Sally Beauty Supply's operating profit reflects a $10.2 million charge...

  • Page 140
    ...cash flows for each of the fiscal years in the three-year period ended September 30, 2012 of: (i) Sally Beauty Holdings, Inc., or the ''Parent;'' (ii) Sally Holdings LLC and Sally Capital Inc., or the ''Issuers;'' (iii) the guarantor subsidiaries; (iv) the non-guarantor subsidiaries; (v) elimination...

  • Page 141
    ... Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Condensed Consolidating Balance Sheet September 30, 2012 (In thousands) Sally Holdings Sally Beauty LLC and NonHoldings, Sally Capital Guarantor Guarantor Consolidating Inc. and Inc. Subsidiaries Subsidiaries...

  • Page 142
    ... Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Condensed Consolidating Balance Sheet September 30, 2011 (In thousands) Sally Holdings Sally Beauty LLC and NonHoldings, Sally Capital Guarantor Guarantor Consolidating Inc. and Inc. Subsidiaries Subsidiaries...

  • Page 143
    ..., 2011 and 2010 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2012 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries Subsidiaries Eliminations and Subsidiaries $ - - - - 674 - (674...

  • Page 144
    ... Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2011 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 145
    ... Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Condensed Consolidating Statement of Earnings Fiscal Year Ended September 30, 2010 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 146
    ..., 2011 and 2010 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2012 (In thousands) Sally Holdings LLC and NonSally Beauty Sally Capital Guarantor Guarantor Consolidating Holdings, Inc. Inc. Subsidiaries Subsidiaries Eliminations and Subsidiaries $ 3,161 $ 69,049 $ 53...

  • Page 147
    ... Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2011 (In thousands) Sally Holdings NonSally Beauty LLC and Sally Guarantor Guarantor Consolidating Holdings, Inc. Capital Inc. Subsidiaries...

  • Page 148
    ... 30, 2012, 2011 and 2010 Condensed Consolidating Statement of Cash Flows Fiscal Year Ended September 30, 2010 (In thousands) Sally Holdings LLC and Sally Capital Inc. $ 125,000 Guarantor Subsidiaries $ 31,148 NonGuarantor Subsidiaries $ 61,906 Consolidating Eliminations $- Sally Beauty Holdings...

  • Page 149
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2012, 2011 and 2010 22. Quarterly Financial Data (Unaudited) Certain unaudited quarterly consolidated statement of earnings information for the fiscal years ended ...

  • Page 150
    ...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 ...in the registrant's internal control over financial reporting. Date: November 15, 2012 By: /s/ GARY G. WINTERHALTER Gary G. ...

  • Page 151
    ...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... in the registrant's internal control over financial reporting. Date: November 15, 2012 By: /s/ MARK J. FLAHERTY Mark J. Flaherty...

  • Page 152
    ... 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, 2012 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 153
    ... 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, 2012 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 154
    ...Stockholders. A copy of the Sally Beauty Holdings, Inc. 2012 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...

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