Sally Beauty Supply 2007 Annual Report Download - page 59

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of a warehouse and expenses related to the realignment of its sales force, including expenditures related to the retention of certain professional distributor sales
consultants, while also experiencing lower gross profit margins on a decreased sales volume. Sales volumes declined primarily as a result of certain L'Oreal sales
as discussed earlier. Gross profit margins declined primarily as a result of the loss of L'Oreal related sales being partially replaced with lower margin products,
margin declines on remaining L'Oreal product sales. BSG's franchise-based business also experienced a decline in profitability for fiscal year 2007. Segment
operating earnings, as a percentage of net sales, was 6.8% for fiscal year 2007 compared to 9.3% for the same period in 2006.
Net Interest Expense
Interest expense, net of interest income, was $146.0 million and $0.1 million for fiscal years 2007 and 2006, respectively. The increase in interest expense was
primarily attributable to the interest associated with the new debt incurred on November 16, 2006. The interest expense was partially offset by interest income of
$1.7 million and $1.8 million for fiscal years 2007 and 2006, respectively. Included in interest expense for fiscal year 2007 is a marked to market fair value
expense adjustment for interest rate swaps of $3.0 million.
Provision for Income Taxes
Provision for income taxes was $38.1 million during fiscal year 2007 compared to $69.9 million for the same period of 2006. The decreased provision for
income taxes for fiscal year 2007 was principally the result of lower earnings before provision for income taxes due to increased interest expense. The effective
tax rate was 46.1% in fiscal year 2007 and 38.8% in fiscal year 2006. The increase in the effective tax rate was primarily related to nondeductible transaction
costs related to the Separation Transactions.
Net Earnings
As a result of the foregoing, consolidated net earnings decreased $65.7 million, or 59.6%, to $44.5 million for fiscal year 2007 compared to $110.2 million for
the same period in 2006. Net earnings, as a percentage of net sales, were 1.8% for fiscal year 2007 compared to 4.6% for fiscal year 2006. Net earnings for fiscal
year 2007 were reduced as a result of the expenses related to the Separation Transactions and increased interest expense associated with the debt incurred.
Comparison of Fiscal Years Ended September 30, 2006 and 2005
Net Sales
Consolidated net sales increased $118.8 million, or 5.3%, to $2,373.1 million for fiscal year 2006 compared to $2,254.3 million for the same period in 2005.
This increase was primarily the result of comparable store sales growth of 2.8%, the inclusion of a full reporting period for CosmoProf for fiscal year 2006 which
resulted in a 1.1% increase in net sales, the acquisition of Salon Success, which resulted in a 0.5% increase in net sales and the opening of new stores, including
98 net new stores opened during fiscal year 2006. CosmoProf was acquired in the first quarter of fiscal year 2005 and Salon Success was acquired during the
third quarter of fiscal year 2006.
Sally Beauty Supply. Net sales for Sally Beauty Supply increased $60.4 million, or 4.4%, to $1,419.3 million for fiscal year 2006 compared to $1,358.9 million
for the same period in 2005. Net sales increased primarily due to a 2.3% increase resulting from the opening of new stores, including 92 net new stores opened
during fiscal year 2006, and comparable store sales growth of 2.4%. These increases were partially offset by the effect of foreign exchange rates, which
decreased net sales by 0.2%.
Beauty Systems Group. Net sales for BSG increased $58.4 million, or 6.5%, to $953.8 million for fiscal year 2006 compared to $895.4 million for the same
period in 2005. This improvement in net sales resulted primarily from the inclusion of a full reporting period for CosmoProf for fiscal year 2006, which provided
51
Source: Sally Beauty Holding, 10-K, November 29, 2007