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Sally Beauty (SBH) Down 14.6% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Sally Beauty (SBH - Free Report) . Shares have lost about 14.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sally Beauty due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Sally Beauty Q4 Earnings Beat, Sales Lag Estimates

Despite a top line miss, Sally Beauty’s bottom line not only exceeded the Zacks Consensus Estimate but also grew year over year. Bottom line results were backed by fall in interest expenses, reduced tax rate owing to U.S. tax reform, and lower share count. Moreover, the company’s fiscal 2019 view hints at growth in the bottom line and improvement in sales trend. Management also highlighted that Sally Beauty Supply attained flat same-store sales for the first time in the last seven quarters.

Q4 in Detail

Sally Beauty reported fourth-quarter adjusted earnings of 51 cents, exceeding the Zacks Consensus Estimate of 48 cents and increasing 13.3% year over year.

Net sales decreased marginally by 0.8% to $966 million and fell short of the Zacks Consensus Estimate of $968 million. Unfavorable currency translation impacted sales by 50 basis points (bps) in the reported quarter.

Consolidated same-store sales edged down 0.2% in the fiscal fourth quarter, which showed a significant improvement from a decline of 2% in the preceding quarter. Additionally, global e-commerce sales increased 30.1% compared with the year-ago quarter.

During the quarter, gross profit decreased roughly 0.9% to $478.1 million, while gross margin remained almost flat at 49.5%. Adjusted operating earnings were down 6.7% to $112.2 million, while adjusted operating margin shrunk 70 bps to 11.6% for the quarter under review.

Selling, general & administrative (SG&A) expenses increased 1% to $365.9 million due to investments in marketing, wages and technology. This was partly mitigated by cost-containment endeavors.   

Segment Details

Sally Beauty Supply (“SBS”): The net sales for SBS segment declined 1.3% to $576.6 million, while same-store sales remained flat. Foreign currency translation had an unfavorable impact on revenue growth in the quarter by 50 bps.

The net store count at the end of the quarter was 3,761 compared with 3,782 in the year-ago period. Gross margin in this segment expanded 80 bps to 55.9% on account of increased prices in core categories and promotional activity in the United States along with retail mix and rise in price of owned brands in Europe.

Beauty Systems Group (“BSG”): The net sales for BSG segment fell 0.1% to $389.4 million, while same-store sales declined 0.8%. Foreign currency translation showed a negative impact on revenues 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 buyout of H. ChalutLtée. Gross margin declined 120 bps to 40%.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $77.3 million, long-term debt of $1,768.8 million and shareholders’ deficit of $268.6 million. Management incurred capital expenditures of $24 million during the quarter.

In the quarter, the company bought back about 10 million shares for $165.9 million. The company’s operating free cash flow was down 31.4% to approximately $66.8 million.

FY19 Outlook

The company issued fiscal 2019 guidance, wherein it anticipates consolidated same-store sales and gross margin to remain flat. In fiscal 2018, the company witnessed same-store sales decline of 1.5%.

Adjusted SG&A expenses are expected to increase from the prior-year guidance. The company projects effective tax rate for fiscal 2019 to be roughly 27%.

In fiscal 2019, adjusted operating earnings and operating margin are anticipated to fall marginally, owing to increase in adjusted SG&A expenses, partly offset by same-store sales improvement. Further, the company expects capital expenditure to be nearly $120 million with free cash flow projected to be approximately $220 million.

Management expects mid-single digit increase in adjusted diluted earnings per share on account of reduced shares outstanding and fall in interest expenses.

Transformation Plan

As part of the transformation plan, the company has launched box colors and a new Sally Beauty Loyalty Program in all its Sally Beauty Supply stores. Also, it launched “ion” – a private label electrical appliance brand across the Beauty Systems Group network. Further, the company is all set to offer Pravana brand to customers in the United States via its Beauty Systems Group stores.

Keeping in these lines, Sally Beauty’s Beauty System Group segment has recently inked a deal with Swedish vegan hair care brand, Maria Nila. Additionally, the company is making efforts to enhance its digital platform by updating its e-commerce and mobile commerce capabilities to improve customer’s shopping experience.

For first-quarter fiscal 2019, the company is on track with redesigning its e-commerce sites for both segments. Also, it is focused on training store associates and creating brand awareness among them. Sally Beauty is also looking forward to product innovation in core categories, creating and marketing new brands and products along with marketing of the Sally Beauty Loyalty Program.

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months. The consensus estimate has shifted 6.89% due to these changes.

VGM Scores

Currently, Sally Beauty has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sally Beauty has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.




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