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Sally Beauty (SBH) Up More Than 45% YTD: Will Momentum Stay?

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Sally Beauty Holdings, Inc. (SBH - Free Report) looks solid on growing online business and strength in its Transformation Plan. The company is undertaking prudent buyouts to enhance growth. Owing to these upsides, shares of Sally Beauty have surged 46.3% so far this year against the industry’s 2.2% decline. The stock has comfortably outpaced the Zacks Retail and Wholesale sector’s decline of 4.1%.

Online Business: Key Growth Driver

Sally Beauty has been undertaking efforts to augment online business amid the coronavirus outbreak. Robust investments to enhance the digital space have been yielding. In third-quarter fiscal 2021, global e-commerce sales contributed nearly 7% to the company’s total net sales. Online business reflected gains from focus on digital capabilities as well as implementation of strategic initiatives around fulfillment and customer engagement. The company’s Buy Online, Pick Up In-Store (BOPIS) service continues to drive growth. The company is on track to test rapid delivery at Sally U.S. and Canada. Sally beauty also completed the replatforming of its website in the Beauty Systems Group (BSG) segment.

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What Else is Driving Growth?

Sally Beauty is on track with efforts to get back on growth trajectory. Management is focused on its Transformation Plan, as part of which, it is progressing well with its four key goals — improving customers’ experience, strengthening e-commerce capacities, curtailing costs and enhancing retail fundamentals. In spite of disruptions caused by the coronavirus outbreak, Sally Beauty completed key objectives of its Transformation Plan during fiscal 2020.

In its last earnings call, management highlighted that it is making significant progress against three major priorities including considerably completing the remaining elements of the transformation plan, leveraging new capabilities as well as tools in service to recruit and retain color customers along with maintaining debt leverage ratio close to its target of 2.5 times. Sally Beauty is on track with its JDA implementation as part of its multi-year transformation program.

Sally Beauty intends to strengthen its business on the back of strategic acquisitions. In September 2020, Sally Beauty’s subsidiary BSG acquired La Maison Ami-Co Inc. — a professional beauty products distributor in the Canadian province of Quebec. Sally Beauty expects the deal to augment its business in Quebec along with increasing the reach of BSG’s professional beauty products in its Chalut store network as well as full-service business. In December 2017, Sally Beauty’s BSG had acquired certain H. ChalutLtee assets, enabling it to expand its business for the first time in Quebec province, giving BSG a footprint in Canada.

Is all Rosy for Sally Beauty?

Sally Beauty has been grappling with escalated selling, general and administrative (SG&A) expenses for a while. During third-quarter fiscal 2021, the company reported SG&A expenses of $386.5 million, up $71.9 million. In its last earnings call, management highlighted that it expects to see SG&A dollars to rise on a sequential as well as year-over-year basis in fiscal fourth quarter. This can mainly be attributed to incremental operating expenses incurred across international territories, which have reopened as well as higher investments.

Apart from these, Sally Beauty witnessed capacity restrictions and store closures in parts of Canada and Latin America during the quarter. Management, in its call, highlighted that a small number of stores were operating under restricted capacity in Europe. Sally Beauty also experienced some supply chain disruptions during this time.

Nevertheless, we believe that the aforementioned upsides are likely to help this Zacks Rank #3 (Hold) company stay afloat.

Some Solid Retail Picks

Ulta Beauty Inc. (ULTA - Free Report) , which carries a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 16.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Tractor Supply Company (TSCO - Free Report) , which carries a Zacks Rank #2, has a long-term earnings growth rate of 9.7%.

DICK’S Sporting Goods, Inc. (DKS - Free Report) , which carries a Zacks Rank #2, has a long-term earnings growth rate of 7.1%.