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Bear of the Day: Sally Beauty Holdings (SBH)

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There are plenty of interesting investing opportunities in the world of specialty retail as traditional brick-and-mortar stores continue to adapt to changing consumer habits. However, not all specialty retail plays are made the same, and it looks like Sally Beauty Holdings (SBH - Free Report) is a stock to avoid right now.

Sally Beauty is a specialty retailer and distributor of professional beauty products. It operates over 4,000 stores worldwide and distributes recognizable brands like Clairol, L’Oreal, Well, and Conair.

Shares of Sally Beauty have declined over the past three months, underperforming the broader industry in that time. This is at least partially due to the company’s most recent earnings report, which included weak performance and guidance.

In its most recent quarter, Sally Beauty saw earnings of 60 cents per share, missing the Zacks Consensus Estimate by a penny. Top-line results were essentially flat from the year-ago period, with total revenue of $996.3 million meeting estimates. However, consolidated same-store sales declined 2% in the quarter.

This sluggish performance caused SBH’s full-year outlook to appear similarly downtrodden. The company now anticipates consolidated same-store sales to decline in the range of 1.5-1.9% on a full-year basis, while adjusted operating earnings are anticipated to decline 8% to 10%.

Adjusted diluted earnings per share are expected to see double-digit growth, but that is primarily due to U.S. tax reform, lower share outstanding, and benefits from debt refinancing—not an improvement to current market conditions.

In the wake of the report, SBH has witnessed a number of downward earnings estimate revisions which have taken a solid chunk out of the company’s forward-looking outlook:

Earnings estimate revisions make up the foundation of the Zacks Rank, so this negative trend explains why Sally Beauty is sporting a Zacks Rank #5 (Strong Sell).

But there are likely at least a few other reasons to stay away from SBH right now. Notably, the stock has been seemingly allergic to long periods of positive momentum over the past five years, with most short-lived surges looking more like dead cat bounces than sustained rebounds. This implies that even the most bullish investors have been unable to pull this stock off its lows.

Moreover, Sally Beauty’s extended woes speak to a larger and potentially disastrous situation in the retail business: consumer dissonance. Consumer-driven industries like cosmetics and apparel are dependent on cyclical trends, and companies need leadership that can identify and cash in on those trends. The fact that Sally Beauty has been trending downward for many years says that the company does not have this type of leadership.

What’s worse, Sally Beauty faces an extremely competitive cosmetics industry right now. With other specialty retailers like Ulta Beauty (ULTA - Free Report) attracting loyal customers and affordable options becoming more available at places like CVS (CVS - Free Report) and Walgreens (WBA - Free Report) , there simply is not much room for Sally Beauty to improve right now.

That being said, Sally Beauty has announced a transformation plan that includes a number of cost-saving initiatives and long-term recovery strategies, and at just 6.7x forward earnings, the stock may have slipped into value territory.

Nevertheless, with a number of great value opportunities present in retail, investors need to ask: is a sluggish company with a history of underperformance and no competitive moat worth it? I think the answer is no at the moment.

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