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Sally Beauty's (SBH) Transformation Plan Solid, Costs High

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Strength in the Transformation Plan and prudent acquisition strategy has been working favorably for Sally Beauty Holdings, Inc. (SBH - Free Report) .  The company’s growing online business is also yielding. However, high costs are a challenge for Sally Beauty.

Let’s delve deeper.

Transformation Plan on Track

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 its last earnings call, management highlighted that it is making significant progress against three major priorities. These include 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 the multi-year transformation program.

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What Else is Working in Sally Beauty’s Favor?

Sally Beauty intends to strengthen its business on the back of strategic acquisitions. In September 2020, Sally Beauty’s subsidiary, Beauty Systems Group (“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, BSG had acquired certain H. ChalutLtee assets, enabling it to expand its business for the first time in Quebec province and establish a footprint in Canada.

Apart from this, 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 the 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 BSG segment.

Hurdles on the Way

Sally Beauty witnessed capacity restrictions and store closures in parts of Canada and Latin America during the third quarter of fiscal 2021. Management, in its last earnings call, stated that a small number of stores were operating under restricted capacity in Europe. Sally Beauty also experienced some supply chain disruptions during this time.

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

That being said, focus on the aforementioned upsides is likely to help this Zacks Rank #3 (Hold) company to stay afloat amid such hurdles. Sally Beauty’s shares have rallied 30.6% so far this year compared with the industry’s 1.2% growth.

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