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Sally Beauty Holdings Inc. (SBH - Snapshot Report)’s second-quarter fiscal 2014 adjusted earnings of 36 cents a share remained flat year over year, missing the Zacks Consensus Estimate of 39 cents. Adjusted net income for the quarter also slumped 8.8% year over year to $59.2 million.

Taking one-time items, the company reported GAAP earnings of 35 cents a share, compared to 36 cents in the year-ago quarter. GAAP net income for the reported quarter was down 9.9% to $58.5 million.

Sally Beauty’s second-quarter results were adversely impacted by harsh weather conditions in the U.S., leading to more store closures when compared to last year, which in turn led to soft traffic and sluggish sales growth.

However, regions that remained unaffected by store closures witnessed improved customer traffic, facilitating second-quarter net sales to climb 2.4% to $919.5 million. Sales were compensated by introduction of new stores coupled with a 1% rise in Sally Beauty’s consolidated comparable store sales (comps). Last year, the company’s comps inched down 0.8% in the second quarter. Despite the year-over-year increase, quarterly revenues came below the Zacks Consensus Estimate of $932.0 million.

Delving Deeper

Gross profit for the quarter advanced 2.7% to $456.4 million, with the margin expanding 10 basis points (bps) to 49.6%. The company now envisions gross margin for fiscal 2014 to expand by 20–30 bps, down from the previous guidance range of 30-40 bps.

The company’s selling, general and administrative (SG&A) expenses escalated 4.5% to $312.8 million owing to increased costs like payroll expense, rent and occupancy, incurred on new stores., As a percentage of sales, SG&A rose 70 bps to 34%.

As a result of increased SG&A, Sally Beauty’s operating earnings dropped 2.9% to $124.1 million, with operating margin contracting 70 bps to 13.5%. Additionally, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), for the reported period dipped 0.3% to $148 million.

Segment Details

Sally Beauty Supply segment sales ascended 2.5% to $569.6 million, driven by favorable currency translations, additional stores and a 0.5% improvement in the segment comps. Operating margin for the segment shriveled 60 bps to 18.5%.

Sales at the Beauty Systems Group went up by 2.2% to $349.9 million, supported by new stores and a 2.2% increase in segment comps. Sales were partly offset by the negative impact of currency translations. Operating margin for the segment narrowed by 10 bps to 14.5%.

Comps at both the segments were impacted by weather disruptions causing slow traffic.

Store Count

In the trailing twelve-month period, the company introduced 120 Sally Beauty Supply outlets and 53 Beauty Systems Group outlets, taking their respective store count to 3,477 and 1,254 by the end of the second quarter fiscal 2014.

Financials

Sally Beauty ended the quarter with cash and cash equivalents of $202.5 million. Debt, net of capital leases, stood at $1.8 billion and its revolving credit facility including asset-based loan (ABL) had zero outstanding balance.

During the first half of the year, the company incurred $30.4 million as capital expenditure (capex). Going forward, Sally Beauty anticipates spending $85–$90 million in capex in fiscal 2014, excluding the effect of acquisitions.

As of Mar 31, 2014, inventories grew 8.9% year over year to $819.8 million. The increase in inventories was attributable to the surge in sales from the current stores, inventories from additional stores, inventories for the Sally U.S. operations’ 50th anniversary celebration and inventories from the new brands.                

During second-quarter fiscal 2014, Sally Beauty bought back 2.1 million shares worth $59.5 million. The company has nearly $331 million remaining under its previous share repurchase authorization of $700 million.    

Moving Forward

Management of this Zacks Rank #4 (Sell) company believes that though it has battled weather-related headwinds, store closures could not weigh on many areas which witnessed improved traffic. Hence, given its expectations of improving retail traffic, the company is optimistic about its growth prospects.

Other Stocks to Consider

Other better-ranked stocks in the retail sector include Bon-Ton Stores Inc. (BONT) and Rite Aid Corporation (RAD - Analyst Report), both holding a Zacks Rank #1 (Strong Buy) and Restoration Hardware Holdings, Inc. (RH - Snapshot Report), holding a Zacks Rank #2 (Buy).

 

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