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Sally Beauty (SBH) Crashes on Q3 Earnings Miss & Soft View

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Shares of Sally Beauty Holdings, Inc. (SBH - Free Report) plunged more than 13% during the trading session on Aug 2. The bearish run of the stock can be attributed to lower-than-expected bottom-line results along with waning same-store sales performance and soft view. Cumulatively, this led the shares of this Denton, TX-based company to decline 4.7% in the past three months against the industry’s growth of 5.8%.



This Zacks Rank #4 (Sell) company reported third-quarter earnings of 60 cents, missing the Zacks Consensus estimate by a penny. However, the figure fared better than comparable year-ago period. Adjusted earnings per share went up by 15.4% in the third quarter compared with 52 cents in the prior-year quarter driven primarily by reduced tax rate, lower share count on account of share repurchases and reduced interest expense.

While the top line decreased by 0.2% to $996.3 million compared with the prior-year quarter, it almost came in line with the Zacks Consensus Estimate of $996.6 million. Favorable currency translation impacted sales by 90 basis points (bps) in the reported quarter.

Consolidated same-store sales declined 2% in the fiscal third quarter. Additionally, global e-commerce sales increased by 30.8% compared with year-ago quarter.

During the quarter, gross profit decreased 1.8% to $493.8 million, while gross margin contracted 90 bps to 49.5%. Adjusted operating earnings were down 9.4% to $122.7 million, while adjusted operating margin shrunk 130 bps to 12.3% for the quarter under review. Selling, general & administrative (SG&A) expenses increased 3.1% to $378.6 million.

Sally Beauty Holdings, Inc. Price, Consensus and EPS Surprise

Segment Details

Sally Beauty Supply (“SBS”): The net sales for SBS segment declined 0.6% to $591.6 million, while same store sales decreased 1.6%. Foreign currency translation had a favorable impact on revenue growth in the quarter by 130 bps. The net store count at the end of the quarter was 3,775 compared with 3,826 in the year-ago period. Gross margin in this segment slumped 60 bps to 55.4% on account of increased coupon redemptions and a geographic revenue mix shift toward the lower margin international business.

Beauty Systems Group (“BSG”): The net sales for BSG segment increased 0.4% to $404.7 million, while same store sales declined 2.9%. Foreign currency translation showed a positive impact on revenue for this segment as well by approximately 40 bps. The net store count at the end of the quarter rose to 1,395 due to net increase in CosmoProf stores and the H. Chalut Ltée acquisition. Gross margin declined 110 bps to 40.9% due to increased promotional activity and previous year’s opportunistic purchases.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $76.9 million, long-term debt $1,769.3 million and shareholders’ deficit of $326.2 million. Management incurred capital expenditures of $23.5 million during the quarter.

During the quarter, the company bought back about 3.2 million shares for $50.1 million. The company’s operating free cash flow was up 70.9% to approximately $79 million.

FY18 Outlook

The company issued 2018 guidance wherein it anticipates consolidated same store sales to decline in the range of 1.5-1.9%. Gross margin is projected to decline by approximately 50 bps, mainly owing to price investments made in Sally during the first quarter, enhanced promotional activity and a business segment mix shift. This was partially mitigated by recent price increases on exclusive brands.

Adjusted SG&A expenses is expected to be approximately 37.7% of sales, slightly up from the prior-year guidance of 37.2%. The company projects effective tax rate for fiscal year 2018 to be in the range of 22-23%.

In fiscal 2018, adjusted operating earnings are anticipated to decline 8-10% owing to decrease in same store sales and contraction in gross margin along with marginally higher adjusted SG&A expenses. Further, the company expects capital expenditure to be in the range of $95-$100 million.

Management expects double-digit growth in adjusted diluted earnings per share on account of U.S. tax reform, lower shares outstanding and benefits from debt refinancing.

Transformation Plan

The company is focusing on its core business — hair color and hair care which includes launching box color across SBS network. In BSG division, the company enhanced its distribution rights of hair color and hair care brands such as Sebastian, Nioxin and Kadus, manufactured by Coty.

The company has launched new Sally Beauty Loyalty Program and a new point-of-sale system for both the segments. Notably, Sally Beauty is also implementing the first phase of a multi-year JDA supply-chain platform, which will help augment merchandising capabilities.

Additionally, to boost digitalization, Sally stores will pilot “endless aisle” during the final quarter of fiscal 2018. Under this, a store will be able to order out-of-stock product via a store iPad and get it delivered at the customers door step. Management also plans to revamp Sally e-commerce site. Both the segments will work in tandem to improve customer shopping experience through ease of “click and collect at store” and “click and delivery.” As part of its transformation strategy, the company intends to shutter about 1-2% of its stores in the United States and abroad.

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