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Why Is Sally Beauty (SBH) Down 0.9% Since Last Earnings Report?

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A month has gone by since the last earnings report for Sally Beauty (SBH - Free Report) . Shares have lost about 0.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sally Beauty due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Sally Beauty Q3 Loss Wider Than Estimates, Sales Down

Sally Beauty reported dismal third-quarter fiscal 2020 results, with the top and the bottom line deteriorating year over year. Also, the bottom line missed the Zacks Consensus Estimate. Given uncertainties related to the coronavirus outbreak, management refrained from providing any update on guidance for fiscal 2020.

Q3 in Detail

Sally Beauty reported adjusted loss of 11 cents per share, wider than the Zacks Consensus Estimate of a loss of 4 cents. The company had posted an adjusted earnings of 60 cents per share in the year-ago quarter. The downside was caused by adverse impacts of the coronavirus outbreak and strategic inventory clearance efforts.

Consolidated net sales of $705.3 million were almost in line with the Zacks Consensus Estimate of $705.1million. The metric declined 27.7% year over year. The top line was majorly affected by temporary store closures amid the pandemic coupled with lower store count compared with the year-ago quarter’s numbers. Also, unfavorable foreign-currency translations negatively impacted sales by roughly 30 basis points (bps).

Consolidated same-store sales declined 26.6%. E-commerce sales increased significantly from the year-ago quarter. The uptick can be attributed to increased consumer demand on digital platforms which provides it a cushion amid coronavirus-led store closures.

Gross profit fell 33.3% to $321.8 million due to lower sales volume amid the pandemic as well as reduced gross margin. Notably, gross margin contracted 390 bps to 45.6%. The downside can be attributed to aggressive on-shelf inventory clearance efforts as well as non-cash write downs of inventory. Also, lower allowances from vendors were a drag.

SG&A expenses fell $45.6 million in the quarter on the back of cost-saving efforts and store closures amid COVID-19. SG&A, as a percentage of sales, expanded 770 bps to 44.6%.

Adjusted operating earnings decreased 86.9% to $16 million and adjusted operating margin contracted significantly to 2.3%.

Segment Details

Sally Beauty Supply: Net sales in the segment declined 27.7% to $415.5 million in the quarter due to lesser stores than the prior-year quarter’s levels along with adverse impacts of COVID-19 outbreak. Foreign-currency translations adversely impacted sales by almost 40 bps. Further, segmental same-store sales declined 25.9%.

Net store count at the end of the quarter was 3,691, down 14 from the year-ago quarter’s level.

Beauty Systems Group: Net sales in the segment fell 27.6% to $289.8 million. Foreign-currency translation had nearly 20 bps impact on the results. Moreover, net store count at the end of the quarter was 1,371, down 13 from the year-ago quarter’s level. Same-store sales fell 27.9%. Total distributor sales consultants at the end of the quarter were 651 compared with 791 in the year-ago quarter.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $838.8 million, long-term debt, including capital leases of $1,845.6 million, and total stockholders’ deficit of $0.7 million.

In the quarter, cash flow from operations was $198.3 million, while capital expenditure amounted to $17.7 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 12.6% due to these changes.

VGM Scores

At this time, Sally Beauty has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Sally Beauty has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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