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Sally Beauty (SBH) Q3 Earnings: Factors Influencing Results

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Sally Beauty Holdings, Inc. (SBH - Free Report) is slated to report third-quarter fiscal 2018 results on Aug 2. The company has surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the average beat being 1.1%. In the last reported quarter, this Denton, TX-based company delivered a negative earnings surprise of 1.8%. Consequently, investors are keeping their fingers crossed, hoping that the company surpasses earnings estimate this time as well.

How Are Estimates Shaping Up?

After registering a bottom-line increase of 22.7% in the second quarter, Sally Beauty is likely to record year-over-year growth of 17.3% in the third quarter as well.  This is quite evident from the Zacks Consensus Estimate for the quarter under review, which is pegged at 61 cents compared with 52 cents reported in the year-ago quarter. We note that the Zacks Consensus Estimate has remained stable in the last 30 days.

The Zacks Consensus Estimate for revenues of $996.6 million indicates a decline of roughly 0.2% from the year-ago quarter. We note that Sally Beauty’s total revenues increased 0.9% in the last reported quarter.

Let’s delve deeper and find out the factors impacting the results.

Sally Beauty Holdings, Inc. Price and EPS Surprise

 

Factors Hurting the Stock

Sally Beauty witnessed a dip of 1.4% in consolidated same-store sales during the fiscal second quarter. This decline was due to lower comps at the Sally Beauty Supply (“SBS”) and Beauty Systems Group (“BSG”) segments. Same-store sales contracted 1.6% at the SBS segment and 1.2% at the BSG unit. Per management, hurricanes in the fourth quarter of fiscal 2017 affected its business in Puerto Rico. This, in turn, dampened sales growth and same-store sales performance by approximately 10 basis points (bps). Notably, consolidated same-store sales declined 2.2% in first-quarter fiscal 2018 and 1.4% in fourth-quarter fiscal 2017. Meanwhile, for fiscal 2018, the company expects same-store sales decline of almost 1% against the earlier expectations of flat sales.

Also, the company is exposed to headwinds resulting from strained margin. Gross margin 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 first quarter. Furthermore, for fiscal 2018, gross margin is expected to decline slightly compared with the prior guidance of flat margins. Meanwhile, the adjusted operating margin shrunk 120 bps to 12.1% in the fiscal second quarter. In first-quarter fiscal 2018, adjusted operating margin dropped 20 bps. We note that management still expects adjusted operating income to decline slightly in this fiscal.

Strategies That Will Aid the Stock

In a bid to revive its top line, Sally Beauty completed the launch of two color lines — Wella ColorCharm Paints and Arctic Fox — to offer more hair color options. It also completed the distribution center investments to enable shipping of e-commerce orders in maximum two days in the United States. Additionally, the company plans to launch its latest Sally loyalty program nation-wide, before the end of the fiscal. The company expects the program to drive traffic.

Apart from these, last November, the company announced an international restructuring plan to improve profitability, specifically in European operations. The company expects to generate annual benefits of $8 million in fiscal 2018. 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.

What Does the Zacks Model Say?

Our proven model does not conclusively show that Sally Beauty is likely to beat estimates this quarter. A stock needs to have both — a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Sally Beauty has an Earnings ESP of +2.86%, a Zacks Rank #4 (Sell) makes surprise prediction difficult.

Stocks with Favorable Combination

Here are companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Groupon (GRPN - Free Report) has an Earnings ESP of +59.68% and a Zacks Rank of #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CarMax (KMX - Free Report) has an Earnings ESP of +1.77% and a Zacks Rank #1.

Carlos Restaurant Group (TAST - Free Report) has an Earnings ESP of +10.53% and a Zacks Rank #1.

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