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Sally Beauty Holdings, Inc. 2011 Annual Report
I S A T H I N G O F B E A U T Y
2011 ANNUAL REPORT

Table of contents

  • Page 1
    2011 ANNUAL REPORT IS A THING OF BEAUTY

  • Page 2
    ... an international specialty retailer and distributor of professional beauty supplies with annual revenues of $3.3 billion and net earnings of $214 million. The Company operates primarily through two business segments, Sally Beauty Supply and Beauty Systems Group (BSG), and is the largest distributor...

  • Page 3
    Sally Beauty Holdings, Inc. || 2011 Annual Report Global Footp r int (Store Count as of September 30, 2011) Sally Beauty Supply Beauty Systems Group Total Company North America United States Puerto Rico Canada Mexico North America International United Kingdom Belgium Chile Ireland France Germany ...

  • Page 4
    ...2007฀to฀$3.3฀billion฀in฀fiscal฀year฀2011,฀a฀ compound annual growth rate of 6.8%. •฀Gross฀... growth of 4% to 5%. Business Segment Financial Results Sally Beauty Supply Net sales at our Sally Beauty segment were $2.0฀billion,฀an฀increase฀of฀9.7%.฀Sales฀growth฀ ...

  • Page 5
    Sally Beauty Holdings, Inc. || 2011 Annual Report customer mix continues to drive our gross margin ... both the top and the bottom lines. That is a true testament to the people at Sally Beauty Holdings who are performing valiantly to grow our business and create value for our shareholders. As...

  • Page 6
    ... Profit Margin $2,000 47% $300 12% $1,000 46% $150 10% 0 2007 2008 2009 2010 2011 45% 0 2007 2008 2009 2010 2011 8% Sally Beauty Supply Beauty Systems Group Sally Beauty Supply Beauty Systems Group Fina ncial Hig hlig hts Fiscal Year Ended September 30, Dollars฀in฀thousands...

  • Page 7
    Growth IS A THING OF BEAUTY 2011 For m 10 - K

  • Page 8

  • Page 9
    ...ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 2011 -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 10
    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 34 ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. ITEM 9. ITEM 9A. ITEM 9B. ITEM 10. ITEM ...

  • Page 11
    ...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 12
    • 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 13
    ..., 2010 and 2009, respectively, were from customers located in the U.S. For the fiscal year ended September 30, 2011, our consolidated net sales were $3,269.1 million. Sally Beauty Supply began operations with a single store in New Orleans in 1964 and was acquired in 1969 by our former parent company...

  • Page 14
    ... by a large number of localized retailers and distributors, with only a few having a regional presence and significant channel share. We believe that Sally Beauty Supply is the only open-line distributor in the U.S. with a national network of retail stores. In addition, the Company's website (www...

  • Page 15
    ... 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 international growth targets. Our...

  • Page 16
    ... 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 17
    ...BSG's distribution network which has resulted in annualized cost savings of at least $14.0 million...requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory... have a material adverse effect on our financial reporting, business, financial condition or results of operations....

  • Page 18
    ...Data'' contained elsewhere in 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 19
    ... 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, 2011 2010 2009 Hair color ...Hair care ...Skin and nail care ...Brushes, cutlery and accessories Electrical...

  • Page 20
    ... 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, 2011 2010 2009 2008 2007 Stores open at beginning of period ...Net store openings during...

  • Page 21
    ... during the last five fiscal years: Fiscal Year Ended September 30, 2011 2010 2009 2008 2007 Professional distributor sales consultants(a) ...1,116 1,051 ...reflects approximately 90 distributor sales consultants employed by Schoeneman Beauty Supply, Inc. (''Schoeneman'') prior to the Company's ...

  • Page 22
    ... forth the approximate percentage of BSG's sales attributable by merchandise category: Fiscal Year Ended September 30, 2011 2010 2009 Hair care ...Hair color ...Promotional items(a) Skin and nail care . . Electrical appliances Other beauty items ...37.0% 37.1% 38.5% 29.6% 29.6% 28.4% 12.9% 13.2% 12...

  • Page 23
    ...929 828 46 - 874 (a) Stores acquired in the fiscal year 2011 include 82 stores owned by Aerial prior to the Company's acquisition...offer up to 8,000 and 10,000 SKUs in Sally Beauty Supply (in our stores and online) and BSG stores... beauty tips and new product information for a nominal annual membership...

  • Page 24
    ...as set forth in the following table: Fiscal Year Ended September 30, 2011 2010 2009 2008 2007 6.3% 5.5% 6.1% 4.1% 6.2% 4.6% 2.1% 1.0% 1.8% 1.2% 2.7% 6.9% 10.1% 2.6% 4.5% Same store sales growth(a) Sally Beauty Supply ...Beauty Systems Group ...Consolidated ... (a) Same stores are defined as company...

  • Page 25
    ...our store base. In the fiscal year 2011, we opened 126 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 21% of Sally Beauty Supply...

  • Page 26
    ... acquisition targets and organic growth targets both domestically and internationally, with a focus on expanding our exclusive BSG territories and allowing Sally Beauty Supply to enter new geographic areas principally outside the U.S. Please see ''Risk Factors- We may not be able to successfully...

  • Page 27
    ...each store are supervised by a district manager, who reports to a territory manager. A significant number of our... 2011, we operated mainly through 17 distribution centers, eight of which serviced Sally Beauty Supply...million. This program has resulted in annualized cost savings of at least $14.0 million ...

  • Page 28
    ... 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, 2011, Sally Beauty Supply supplied 25 and BSG supplied 156 franchised stores located in the U.S., Mexico and...

  • Page 29
    ...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 30
    ...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 31
    ... 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 2011, our five largest suppliers were Procter & Gamble Co...

  • Page 32
    ... quantities or on acceptable terms in the future. Changes in Sally Beauty Supply's and BSG's relationships with suppliers occur often, and could ... accounted for approximately $108.0 million in U.S. sales for the fiscal year 2011 and expire in 2012. Therefore, there can be no assurance that the impact...

  • Page 33
    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 34
    ..., 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 35
    of operations. For example, such conflict could cause some of our current or potential internet customers to consider competing distributors of beauty products. These events could have an adverse effect on our business, financial condition and results of operations. We may not be able to ...

  • Page 36
    ...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 37
    ... 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 38
    ...an adequate work force, the temporary or long-term disruption in the supply of products (or a substantial increase in the cost of those ...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...

  • 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, 2011, we had an aggregate principal amount of approximately $1,413.1 million, including...

  • Page 40
    ...prohibit us or our subsidiaries from doing so. As of September 30, 2011, our senior credit facilities provided us commitments for additional borrowings of up ...the Term Loans, contain covenants that, among other things, restrict Sally Holdings and its subsidiaries' ability to: • dispose of assets; ...

  • Page 41
    ...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 ... among other things, limit our ability and the ability of Sally Holdings and its restricted subsidiaries to: • dispose of assets;...

  • Page 42
    Our ability to comply with the covenants and restrictions contained in the senior credit facilities and the indentures for the Notes may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants and restrictions could result in a default ...

  • Page 43
    Risks Relating to Our Separation from Alberto-Culver and Relating To Our Largest Stockholder If the share distribution of Alberto-Culver common stock in the transactions separating us from Alberto-Culver did not constitute a tax-free distribution under Section 355 of the Internal Revenue Code of ...

  • Page 44
    Actions taken by the Lavin family stockholders or by the CDR investors could adversely affect the tax-free nature of the share distribution of Alberto-Culver common stock in connection with the transactions separating us from Alberto-Culver. Sales and/or acquisitions by the Lavin family stockholders...

  • Page 45
    ...the number of stores in the U.S. and globally, as of September 30, 2011: Sally Beauty Supply CompanyOperated Franchise 2,509 41 242 32 70 28 35 30 133 13 583 3,133 - - ...Nebraska ...Guadalupe, Nuevo Leon, Mexico . (1) Sally Beauty Supply (2) BSG Type of Facility Corporate Headquarters Warehouse ...

  • Page 46
    ITEM 3. LEGAL PROCEEDINGS There were no material legal proceedings pending against us or our subsidiaries as of September 30, 2011. We are involved in various claims and lawsuits incidental to the conduct of our business in the ordinary course. We carry insurance coverage in such ...

  • Page 47
    ...reported by the NYSE, during the fiscal years ended September 30, 2011 and 2010. Quarter Ended Fiscal Year 2011: September 30, 2011 June 30, 2011 ...March 31, 2011...during the two fiscal years prior to the date of this Annual Report. We currently anticipate that we will retain future earnings to ...

  • Page 48
    ... for the fiscal year included in the data: 11/06 3/07 9/07 3/08 9/08 3/09 S&P 500 9/09 3/10 9/10 3/11 9/11 Sally Beauty Holdings, Inc. Dow Jones US Specialty Retailers TSM 8NOV201121022888 The Dow Jones U.S. Specialty Retailers Index (NYSE: DJUSRS) is a comprehensive view of entities...

  • Page 49
    ... 984 1.2% 6.9% 2.6% $ 367,198 $ $ $ 2011 Results of operations information: Net sales ...Cost of products ...Sally Beauty Supply ...Beauty Systems Group ... ... Consolidated ...Professional distributor sales consultants (at end of period) ...Same store sales growth(e): Sally Beauty Supply ...Beauty...

  • Page 50
    ... the acquisition. We have not declared or paid dividends at any time during the last two fiscal years prior to the date of this Annual Report. We do not currently anticipate paying regular cash dividends on our common stock. We currently anticipate that we will retain future earnings to support...

  • Page 51
    ... for the fiscal years ended September 30, 2011, 2010 and 2009, 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. This Management's Discussion and Analysis of...

  • Page 52
    ... were $3,269.1 million and $448.5 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, 2011, Sally Beauty Supply operated 3,133 company-operated retail stores, 2,509 of which...

  • Page 53
    ...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 54
    ...'' and ''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/BSG and their respective suppliers are dependent on each other for the distribution of...

  • Page 55
    ... administrative expenses related to BSG's distribution network which has resulted in annualized cost savings of at least $14.0 million beginning in the fiscal... areas. The capital requirements to open a U.S.-based Sally Beauty Supply or BSG store, excluding inventory, average approximately $70...

  • Page 56
    ...our divisions (primarily in our Sally Beauty Supply operations in the U.S.), which... have a material adverse effect on our financial reporting, business, financial condition or results of operations.... In addition, during the fiscal year 2011, we completed several other individually immaterial ...

  • Page 57
    ...the acquisitions completed during the fiscal year 2009. These amounts were previously reported in Goodwill pending the valuation of the assets acquired. During the fiscal year 2009, we acquired Schoeneman, a 43-store beauty supply chain located in the central northeastern United States, at a cost of...

  • Page 58
    ...facilities and optional prepayments thereof. Our Notes are unsecured obligations of Sally Holdings and its co-issuer and are guaranteed on a senior basis...contained elsewhere in this Annual Report. Details of long-term debt (excluding capitalized leases) as of September 30, 2011 are as follows (...

  • Page 59
    ...the underlying notional amount. In November 2006, Sally Holdings entered into certain interest rate swap agreements ...Data'' contained elsewhere in this Annual Report. Foreign Currency Option, Collar ... held by the Company at September 30, 2011 have contractual Euro to U.S. dollar exchange rates...

  • Page 60
    ... Data'' contained elsewhere in this Annual Report. Share-Based Compensation Plans For the fiscal years 2011, 2010 and 2009, total share...and certain predecessor plans, such as the Sally Beauty Holdings 2007 Omnibus Incentive Plan. For the fiscal years 2011, 2010 and 2009, the total income tax...

  • Page 61
    ...for the fiscal years ended September 30, 2011, 2010 and 2009 (in millions): Fiscal Year Ended September 30, 2011 2010 2009 Net sales ...Cost of ...of net sales for the respective periods: Fiscal Year Ended September 30, 2011 2010 2009 Net sales ...Cost of products sold and distribution expenses ......

  • Page 62
    ... margin ...Number of stores at end-of-period (including franchises): Sally Beauty Supply ...BSG ... Same store sales growth(c) Sally Beauty Supply ...BSG ...Consolidated ... 6.3% 5.5% 6.1% (a) For the fiscal year 2011, consolidated operating earnings reflect a net favorable impact of $21.3 million...

  • Page 63
    ... 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 64
    ... 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 65
    ... sales, or consolidated gross margin, 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...

  • Page 66
    ... 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 67
    ...November 2009 with no comparable amount in the fiscal year 2011 (please see Note 16 of the Notes to Consolidated Financial 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...

  • Page 68
    ...the fiscal year ended September 30, 2011, compared to $143.8 million for...reportable segment (dollars in thousands). 2010 Net sales: Sally Beauty Supply ...BSG ...Consolidated net sales ...Gross profit: Sally Beauty Supply ...BSG ...Consolidated gross profit ...Gross profit margin: Sally Beauty Supply...

  • Page 69
    ...30, 2009, principally due to higher sales volume and 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...

  • Page 70
    ... 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 71
    ... Statements and Supplementary Data'' contained elsewhere in this Annual Report for additional information about the Company's interest rate ... ratio of current assets to current liabilities was 1.91 to 1.00 at September 30, 2011, compared to 1.95 to 1.00 at September 30, 2010. The increase in working...

  • Page 72
    ... to $29.5 million at September 30, 2010 due primarily to vendor rebates accrued. Inventory increased by $60.9 million to $665.2 million at September 30, 2011, compared to $604.4 million at September 30, 2010 due primarily to the effect of stores opened and to the inventory of businesses acquired in...

  • Page 73
    ...in capital increased by $30.9 million to $681.3 million at September 30, 2011, as a result of share-based compensation expense, the exercise of stock options ...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 74
    ..., the weighted average interest rate on our borrowings under the ABL credit facility was 3.3%. As of September 30, 2011, Sally Holdings had $366.5 million available for additional borrowings under our ABL credit facility, subject to borrowing base limitations, as reduced by outstanding letters of...

  • Page 75
    ...facility). As of September 30, 2011, Sally Holdings met all of these conditions. As of September 30, 2011, the net assets of our ...1, 2010, we acquired Aerial, an 82-store professional-only distributor of beauty products operating in 11 states in the midwestern United States, for approximately...

  • Page 76
    ... in connection with the new ABL credit facility, and an increase in proceeds from exercises of stock options of $10.1 million in the fiscal year 2011, compared to the fiscal year 2010. Net cash used by financing activities during the fiscal year ended September 30, 2010 decreased by $22.8 million to...

  • Page 77
    ... Statements and Supplementary Data'' contained elsewhere in this Annual Report. The agreements and instruments governing our debt contain ... in the fiscal year ended September 30, 2011. The term loan facilities contain a covenant requiring Sally Holdings and its subsidiaries to meet certain maximum...

  • Page 78
    ...not be comparable to EBITDA or similarly titled measures reported by other companies or reported by us in our quarterly earnings releases. We...Relating to Our Substantial Indebtedness.'' Capital Requirements During the fiscal year 2011, we had total capital expenditures of approximately $60.0 million ...

  • Page 79
    ... payment dates at September 30, 2011 (in thousands): Payments Due by...Annual Report and ''Item 7A-Quantitative and Qualitative Disclosures about Market Risk-Interest rate risk'' for information about our interest rate swap agreements. The majority of our operating leases are for Sally Beauty Supply...

  • Page 80
    ...GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of... shrinkage expense averaged approximately 1.0% of consolidated net sales in fiscal years 2011, 2010 and 2009. A 10% increase or decrease in our estimate...

  • 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, 2011 and 2010, our balance sheet included an estimated liability related to the...

  • Page 82
    ..., 2010 and 2009, the effective income tax rates were 36.4%, 36.9% and 39.9%, respectively. The decrease in the fiscal year 2011 annual effective tax rate was primarily due to tax benefits resulting from certain intercompany transactions that resulted in the release of valuation allowances during the...

  • Page 83
    ... is effective prospectively for business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2010. Early application is permitted. In May 2011, the FASB issued ASU No. 2011-04 which amended ASC Topic 820, Fair Value Measurements and Disclosures...

  • Page 84
    ..., that it is more likely than not that the reporting unit's fair value is less than its carrying amount. This amendment is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early application is permitted. ITEM 7A. QUANTITATIVE AND...

  • Page 85
    ...by the Company at September 30, 2011 expired in October 2011. The Company's foreign currency option... income taxes, by approximately $0.9 million on an annual basis, without considering the effect of any interest ...or trading purposes. In November 2006, Sally Holdings entered into certain interest rate ...

  • Page 86
    ... and design, our implementation of the controls and procedures and the effect 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 had any data errors, control problems or acts of fraud and to...

  • Page 87
    ...our CEO and CFO have concluded that, as of September 30, 2011, we maintain disclosure controls and procedures that are effective in providing ... decisions regarding required disclosure. Management's Annual Report on Internal Control over Financial Reporting. Management of the Company, including the...

  • Page 88
    ...EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 of this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2012 Annual Meeting of Stockholders under the headings ''Proposal 1-Election of Directors,'' ''Executive Officers of...

  • Page 89
    ...information as of September 30, 2011, about our common stock that... for issuance in connection with past awards under the Sally Beauty Holdings, Inc. 2010 Omnibus Incentive Plan (''the 2010...this Annual Report on Form 10-K is incorporated by reference from our Proxy Statement related to the 2012 Annual ...

  • Page 90
    ... Company, Sally Holdings, Inc., New Sally Holdings, Inc...Beauty Systems Group LLC, Lady Lynn Enterprises, Inc., 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...

  • Page 91
    ... Company's Quarterly Report on Form 10-Q filed on February 3, 2011†Amended and Restated Certificate of Incorporation of Sally Beauty Holdings, Inc.,...'s Annual Report on Form 10-K filed on December 22, 2006 Indenture, dated as of November 16, 2006, by and among Sally Holdings LLC and Sally Capital...

  • Page 92
    ...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 93
    ..., which is incorporated herein by reference from Exhibit 4.13 to the Company's Quarterly Report on Form 10-Q filed on February 3, 2011 Security Agreement by Sally Holdings LLC, Beauty Systems Group LLC, Sally Beauty Supply LLC, as the domestic borrowers and the other domestic borrowers and domestic...

  • Page 94
    ... 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 95
    ...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 from Exhibit 10.30 to the Company's Annual Report on Form 10-K filed on November 19, 2009 10.14 10.15 10.16...

  • Page 96
    ...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* List of Subsidiaries of Sally Beauty Holdings, Inc.* Consent of KPMG* Rule 13(a)-14(a)/15(d)-14(a) Certification...

  • 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, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the...

  • Page 98
    ... 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 16th day of November, 2011. SALLY BEAUTY HOLDINGS, INC. By: /s/ GARY G. WINTERHALTER Gary G. Winterhalter President, Chief Executive Officer...

  • Page 99
    ...Securities Exchange Act of 1934, this report has been signed below by the ...2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011 Director November 16, 2011...

  • Page 100
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Financial Statements Years ended September 30, 2011, 2010 and 2009 INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ...Consolidated Financial Statements: ...Consolidated Balance Sheets as of September 30, 2011 and...

  • Page 101
    ... 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, 2011, based on criteria established in Internal Control-Integrated Framework...

  • Page 102
    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, 2011 and 2010, and the related ...

  • Page 103
    ... balance sheets as of September 30, 2011 and 2010 and the related consolidated statements of earnings, cash flows, and stockholders' equity (deficit) for each of the fiscal years in the three-year period ended September 30, 2011 are those of Sally Beauty Holdings, Inc. and its consolidated...

  • Page 104
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2011 and 2010 (In thousands, except par value data) 2011 Assets Current assets: Cash and cash equivalents ...Trade accounts receivable, less allowance for doubtful accounts of $2,086 and $2,756 at September 30, ...

  • Page 105
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Fiscal Years ended September 30, 2011, 2010 and 2009 (In thousands, except per share data) 2011 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, 2011, 2010 and 2009 (In thousands) 2011 Cash Flows from Operating Activities: Net earnings ...Adjustments to reconcile net earnings to net cash provided by operating activities: ...

  • Page 107
    SALLY BEAUTY HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) Fiscal Years ended September 30, 2011, 2010 and 2009 (In thousands) Accumulated Other Total Common Stock Additional Paid-in Accumulated Treasury Comprehensive Stockholders' Shares Amount Capital ...

  • Page 108
    ... 30, 2011, 2010 and 2009 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 109
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and... estimates will be collected. Inventory Inventory consists primarily of beauty supplies and related accessories, and salon equipment for sale in the...

  • Page 110
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 such... at substantially all stores and significant distribution centers at least annually, and sooner when management has reason to believe that the...

  • Page 111
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011...are reviewed for impairment at least annually, during our second fiscal quarter,...estimated losses incurred but not yet reported. The Company estimates the ultimate ...

  • Page 112
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 ...million, $64.6 million and $55.2 million for the fiscal years 2011, 2010 and 2009, respectively, are included in selling, general and ...

  • Page 113
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, ... the Company. Accordingly, as of September 30, 2010, the Company reported $0.9 million in ''Stock options subject to redemption'' outside of accumulated ...

  • Page 114
    ... is effective prospectively for business combinations consummated on or after the first annual reporting period beginning on or after December 15, 2010. Early application is permitted. In May 2011, the FASB issued ASU No. 2011-04 which amended ASC Topic 820, Fair Value Measurements and Disclosures...

  • Page 115
    ... it is more likely than not that the reporting unit's fair value is less than its carrying amount. This amendment is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. Early application is permitted. Accounting Changes The Company...

  • Page 116
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 Level 3-Unobservable inputs for the asset or liability. Consistent with this hierarchy, the Company categorized certain of its financial assets and...

  • Page 117
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 6. Accumulated Stockholders' Equity (Deficit) The Company is authorized to issue up to 500.0 million shares of common stock with a par value of $0....

  • Page 118
    ... awards, respectively, under either the 2010 Plan or a predecessor share-based compensation plan, the Sally Beauty Holdings, Inc. 2007 Omnibus Incentive Plan (the ''2007 Plan''). Additionally, during the fiscal years 2011, 2010 and 2009, the Company granted 43,015, 66,038 and 93,500 restricted stock...

  • Page 119
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 The following table presents a summary of the activity for the Company's stock option plans for the fiscal year ended September 30, 2011: Weighted ...

  • Page 120
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 stock options, including grants under stock option plans of Alberto-Culver prior to the Separation Transactions. Expected volatility is derived ...

  • Page 121
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 The following table presents a summary of the activity for the Company's restricted stock awards for the fiscal year ended September 30, 2011: ...

  • Page 122
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 During fiscal year 2011, all RSUs vested. Therefore, there are no remaining unrecognized compensation costs to be expensed as of September 30, 2011...

  • Page 123
    ...reported in Goodwill pending completion of the final valuations of the assets acquired and liabilities assumed. As described in Note 19, during the fiscal year 2011...and the increase in Sally Beauty Supply's goodwill in the amount of $0.3 million during the fiscal year 2011 was attributable to ...

  • Page 124
    ...and accumulated amortization for intangible assets subject to amortization by operating segment at September 30, 2011 and 2010 (in thousands): Sally Beauty Supply Balance at September 30, 2011: Intangible assets with indefinite lives: Trade names ...Total ...Intangible assets subject to amortization...

  • Page 125
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 12. Accrued Liabilities Accrued liabilities consist of the following (in thousands): September 30, 2011 2010 Compensation and benefits . Interest ...

  • Page 126
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 Contingencies Legal Proceedings There were no material legal proceedings pending against the Company or its subsidiaries, as of September 30, 2011....

  • Page 127
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 14. Short-term Borrowings and Long-Term Debt Details of long-term debt are as follows (in thousands): September 30, 2011 ABL facility ...Term loan ...

  • Page 128
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010... on the senior notes and senior subordinated notes is payable semi-annually. The senior notes carry optional redemption features whereby the Company has...

  • Page 129
    ... facilities contain terms which significantly restrict the ability of Sally Beauty's subsidiaries to pay dividends or otherwise transfer assets to Sally Beauty. Maturities of the Company's long-term debt are as follows at September 30, 2011 (in thousands): Fiscal Year: 2012 ...2013 ...2014 ...2015...

  • Page 130
    ...purchases and self-insurance programs which totaled $16.0 million and $14.5 million at September 30, 2011 and 2010, respectively. 15. 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 131
    ... Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 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 132
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, ...hedges was recognized during each of the last three fiscal years. Amounts reported in OCI related to interest rate swaps are reclassified into interest expense,...

  • Page 133
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 September 30, 2012, the entire amount reported in OCI ($6.5 million, before income tax) will be reclassified into interest expense. Non-designated ...

  • Page 134
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009...of Derivative Instruments Asset Derivatives As of September 30, 2011 Balance Sheet Location Fair Value Derivatives designated as hedging instruments...

  • Page 135
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of earnings for the fiscal ...

  • Page 136
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 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, 2011, 2010 and 2009 The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of earnings for the fiscal ...

  • Page 138
    ...Years ended September 30, 2011, 2010 and 2009 17. 401(k) and Profit Sharing Plan The Company sponsors the Sally Beauty 401(k) and Profit Sharing ... 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 ...

  • Page 139
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 The difference between the U.S. statutory federal income tax rate and the effective income tax rate is summarized below: Year Ended September 30, ...

  • Page 140
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 sheet date. Management does not expect the outcome of tax audits to have a material adverse effect on the Company's financial condition, results ...

  • Page 141
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 The changes in the amount of unrecognized tax benefits for the fiscal year ended September 30, 2011 and 2010 are as follows (in thousands): 2011 ...

  • Page 142
    ... Area Information The Company's business is organized into two separate segments: (i) Sally Beauty Supply, a domestic and international chain of cash and carry retail stores which offers professional beauty supplies to both salon professionals and retail customers in North America and parts of...

  • Page 143
    ... is as follows (in thousands): Year Ended September 30, 2011 2010 2009 Net sales: Sally Beauty Supply ...BSG ...Total ...Earnings before provision for income Segment operating profit: Sally Beauty Supply ...BSG(a) ...Segment operating profit ...Unallocated expenses(a)(b) ...Share-based compensation...

  • Page 144
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 Geographic Area Information Geographic data for the fiscal years ended September 30, 2011... Notes bear interest at an annual rate of 6.875%, were ...

  • Page 145
    Sally Beauty Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Continued) Fiscal Years ended September 30, 2011, 2010 and 2009 22. Quarterly Financial Data (Unaudited) Certain unaudited quarterly consolidated statement of earnings information for the fiscal years ended ...

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  • Page 147
    ...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 16, 2011 By: /s/ GARY G. WINTERHALTER Gary G. ...

  • 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... in the registrant's internal control over financial reporting. Date: November 16, 2011 By: /s/ MARK J. FLAHERTY Mark J. Flaherty...

  • Page 149
    ... 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, 2011 as filed with the Securities and Exchange Commission on the date hereof (the...

  • 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, 2011 as filed with the Securities and Exchange Commission on the date hereof (the...

  • Page 151
    ...copy of the Sally Beauty Holdings, Inc. 2011 Form 10-K, as filed with the Securities and Exchange Commission, is available on the investing section of the Company's website at http://investor.sallybeautyholdings. com.฀Investor฀inquiries฀or฀a฀copy฀of฀the Company's Annual Report or Form...

  • Page 152
    3001 Colorado Boulevard Denton, Texas 76210 sallybeautyholdings.com