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Sally Beauty Grapples With Declining Comps & Margins

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Shares of Sally Beauty Holdings, Inc. (SBH - Free Report) have not only declined, but also underperformed the industry and the overall sector in the past three months. This Zacks Rank #4 (Sell) stock lost 1.1% against the industry’s growth of 13.7% and overall sector’s increase of 10.6%, courtesy of the decline in comps and contraction in margins. Apart from these, the trimmed guidance for fiscal 2018 also hurt investors’ sentiments.

How Have Comps Been Faring?

Consolidated comparable sales edged down 1.4% in fiscal second quarter 2018. This decline resulted from the decrease in comps in the Sally Beauty Supply (“SBS”) and the Beauty Systems Group (“BSG”) segments. Comparable sales shrunk 1.6% in the SBS segment and 1.2% in the BSG segment. Per management, the hurricanes in the fourth quarter of fiscal 2017 continued to negatively impact its business in Puerto Rico. This, in turn, dampened sales growth and same-store sales performance by approximately 10 basis points (bps) in the second quarter.

We note that in the fiscal first quarter, consolidated comparable sales had declined 2.2% and in the fourth quarter of fiscal 2017, the same dipped 1.4%. Meanwhile, for fiscal 2018, the company now expects comparable sales to be down almost 1% against earlier expectations of flat sales.

 

Margins Continue to Shrink

Gross margin, an important metric of a company’s financial health, contracted 60 bps to 49.9% in the fiscal second quarter. Per management, consolidated gross margin was impacted by a segment revenue mix shift toward the lower margin BSG segment. This follows the gross margin contraction of 30 bps in the preceding quarter. Furthermore, for fiscal 2018, gross margin is expected to decline slightly against the earlier expectations of flat margins.

Meanwhile, adjusted operating margin also shrunk 120 bps to 12.1% in the last reported quarter. In first-quarter fiscal 2018, adjusted operating margin had declined 20 bps. We note that management still expects adjusted operating income to be down slightly for this fiscal.

Will Initiatives Help Revive the Stock?

Sally Beauty has been undertaking several initiatives to stoke its top-line growth. It completed the distribution center investments to enable shipping of Sally e-commerce orders in two days or less in the United States. The company also completed the launch of two new color lines — Wella ColorCharm Paints and Arctic Fox — to further fortify hair color options.

These apart, last November, the company announced an international restructuring plan to improve profitability, specifically in European operations. Along with this, the company’s board of directors approved a cost-reduction plan subsequent to the conclusion of the second quarter, which will help it achieve long-term targets.

The company is also consistently striving to expand its business through acquisitions. Notably, it completed more than 35 acquisitions in the last 10 fiscals, the latest being the takeover of certain H. Chalut Ltée assets by the company’s BSG segment.

3 Retail Stocks Hogging the Limelight

Urban Outfitters (URBN - Free Report) delivered an average positive earnings surprise of 19.8% in the trailing four quarters. The stock has a long-term earnings growth rate of 12% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shoe Carnival (SCVL - Free Report) delivered an average positive earnings surprise of 21.3% in the last four quarters. This Zacks Rank #1 company has a long-term earnings growth rate of 12%.

Fossil Group (FOSL - Free Report) came up with an average positive earnings surprise of 54.1% in the preceding four quarters. The Zacks Rank #2 (Buy) company has a long-term earnings growth rate of 5%.

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