CFOs React: Sally Beauty’s Mark Flaherty

The down market actually draws new customers to this retailer, but the CFO still is cautious when the future availability of credit is in question.

The battered U.S. economy actually holds some promise for Mark Flaherty, CFO of Sally Beauty Holdings. The company partly attributed its same-store sales increase of 3.4 percent last quarter to the higher demand of less expensive hair, nail, and skin products.

At the same time, though, the credit crunch — ever tighter as Wall Street firms keep reeling — has Flaherty carefully observing current market conditions. “We watch it very closely but…the industry space in which we operate helps keep us insulated from the conditions other retailers are facing,” Flaherty tells CFO.com.

Indeed, some newly cost-conscious consumers apparently have decided they would be better off buying their beauty wares at a Sally Beauty store, rather than a salon that sells higher-end products. The retailer’s third-quarter profits more than doubled from a year ago, to $29.4 million from $13.4 million.

“We’ve certainly seen an element of trade-down in our business with the economy,” Flaherty says. “As [CEO] Gary [Winterhalter] has pointed out, our business is an affordable luxury. It has proven historically to be fairly recession resistant during tough times.”

Sally Beauty acknowledged today’s tough times last week when it drew down $75 million of its $400 million credit line, an action similar to that taken by other companies in recent days amid the turmoil on Wall Street. In a regulatory filing, the company cited “the dislocation of the financial markets” as the reason for giving itself instant cash for its working capital needs.

“This was a prudent measure, given where the financial markets are,” Flaherty says. “It wasn’t out of concern for own liquidity. It was for the preservation of our financial flexibility and was in the best interest of our shareholders.”

But unlike General Motors, which set off investors’ alarm bells when it tapped more than 75 percent of its $4.5 billion credit facility last week, Sally Beauty acted more conservatively. The company still has $263 million available in the revolver.

It’s the type of strategy that will likely increase as companies become concerned about their access to capital in the near term, according to Fitch Ratings. In a recent note, the ratings agency predicts that “more companies [will] cement liquidity positions by drawing down revolvers.”

Many of them, including GM and Sally Beauty, have cited the U.S. economy’s uncertain times as a reason for improving their access to cash. Others were more specifically concerned with their lenders’ access to capital. For example, FairPoint Communications borrowed $200 million from its facilities right before Lehman Brothers collapsed. The investment bank, which has since filed for bankruptcy protection, had accounted for 30 percent of FairPoint’s credit line.

In general, investors see these types of draw-downs as a “red flag” about a company’s liquidity, Fitch notes. But as the trend of more companies dip into their revolvers continues — even from those businesses like Sally Beauty that did not have a relationship with Lehman — the stigma of draining credit lines should abate, Fitch contends.

Flaherty says his company has not been directly affected by financial institutions’ breakdowns. Merrill Lynch, which was bought by Bank of America this month, is responsible for only 3 percent of Sally Beauty’s credit line, and his facility’s other lenders have high credit ratings.

Yet despite feeling protected from the declining business other retailers are experiencing, Flaherty will continue to pay close attention to the financial sector’s problems and the government’s response. “What concerns me about the financial crisis is the contraction of the credit market. That certainly has an effect on the availability of credit in the future for our business,” Flaherty says. “Also, the availability of credit of the consumer — that would probably be the biggest one in my mind as well as my fellow CFOs at other companies.”

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