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Sally Beauty (SBH) Hurt by High Costs, Down More Than 24% YTD

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Sally Beauty Holdings, Inc. (SBH - Free Report) is facing escalated cost inflation, which has been marring its margin performance for a while. The company is battling supply chain-related issues. Escalated selling, general and administration (SG&A) expenses are a hurdle for this beauty products provider.

The abovementioned factors hurt SBH’s third-quarter fiscal 2022 results, with the top and the bottom line declining year over year. Management lowered its fiscal 2022 sales guidance.

Shares of the Zacks Rank #4 (Sell) company have declined 24.1% year to date compared with the industry’s 21.8% fall.

Let’s discuss.

Dismal Q3 Numbers, View

In the third quarter of fiscal 2022, Sally Beauty reported adjusted earnings of 55 cents per share which declined from 68 cents reported in the year-ago quarter. Consolidated net sales of $961.5 million dropped 6%, with an impact of unfavorable foreign currency translation of 130 basis points (bps) on consolidated net sales.

Comparable sales fell 3.6% owing to persistent inflationary pressures, supply chain challenges and tough year-over-year comparison. The company operated 149 fewer stores compared with the year-ago quarter’s levels. Net sales in the Sally Beauty Supply segment fell 8.5% to $551.7 million, with comparable sales down 5%. In the Beauty Systems Group unit, net sales decreased 2.4% to $409.7 million, while comparable sales moved down 1.6%.

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Taking into account the impact of continued inflationary pressures and unfavorable foreign currency translations, management revised its fiscal 2022 guidance. For fiscal 2022, net sales are anticipated to decline by almost 2% year over year, including an unfavorable impact from foreign currency exchange rates of roughly 70 bps. The metric was expected to be flat to drop 2% year over year in fiscal 2022. The adjusted operating margin is envisioned to come in at approximately 10.5% in fiscal 2022. Earlier, management envisioned the adjusted operating margin to be approximately 11%.

High SG&A Costs a Concern

Sally Beauty has been grappling with escalated selling, general and administrative (SG&A) expenses for a while. During the third quarter of fiscal 2022, the company reported adjusted SG&A expenses, excluding COVID-19-related net expenses of $389.7 million, up $4 million from the year-ago quarter’s figure, led by higher labor costs. These were somewhat offset by reduced accrued bonus, variable and advertising costs. As a percentage of sales, adjusted SG&A expenses stood at 40.5%, up from 37.7% reported in the year-ago quarter.

Wrapping Up

Sally Beauty is focused on its four strategic growth pillars, including leveraging the digital platform, driving loyalty and personalization, undertaking product innovation and enhancing the supply chain. The company has an impressive pipeline of innovation, which is expected to drive long-term growth. Sally Beauty intends to strengthen its business on the back of strategic acquisitions.

All said, let’s see if these upsides can help Sally Beauty counter the aforementioned hurdles.

Retail Stocks to Consider

Some better-ranked stocks are Ulta Beauty (ULTA - Free Report) , Dillard's (DDS - Free Report) and DICK'S Sporting Goods (DKS - Free Report) .

Ulta Beauty, which operates as a retailer of beauty products, sports a Zacks Rank #1 (Strong Buy). Ulta Beauty has a trailing four-quarter earnings surprise of 32.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

ULTA has an expected EPS growth rate of 11.9% for three to five years.  The Zacks Consensus Estimate for Ulta Beauty’s current financial year sales suggests growth of 13.7% from the year-ago reported number.

Dillard's, which operates retail department stores, sports a Zacks Rank #1. DDS has a trailing four-quarter earnings surprise of nearly 215%, on average.

The Zacks Consensus Estimate for Dillard's current financial year sales suggests growth of 4.8% from the year-ago period.

DICK'S Sporting Goods, which operates as a sporting goods retailer, has a Zacks Rank #2 (Buy) at present. DKS has a trailing four-quarter earnings surprise of 21.4%, on average.

The Zacks Consensus Estimate for DICK'S Sporting Goods’ current financial year sales suggests decline of 3.2% from the year-ago period’s reported numbers. DKS has an expected EPS growth rate of 5% for three-five years.

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