Shares of Sally Beauty Holdings, Inc. (SBH Quick QuoteSBH - Free Report) increased roughly 3.7% on Feb 5, following its mixed first-quarter fiscal 2019 results. While the company surpassed earnings estimates for the second straight time, it delivered second consecutive negative sales surprise. Further, management reaffirmed its view for the fiscal year.

Shares of this Zacks Rank #3 (Hold) company have surged 32.3% in the past six months, outperforming the industry’s 6.8% growth.

Q1 in Detail

Sally Beauty reported first-quarter adjusted earnings of 57 cents per share, which exceeded the Zacks Consensus Estimate of 52 cents and increased 11.8% year over year.

Consolidated net sales dipped 0.6% to $989.5 million and marginally fell short of the Zacks Consensus Estimate of $992 million. Unfavourable foreign currency translation impacted sales by roughly 70 basis points (bps) in the reported quarter.

Consolidated same-store sales edged up 0.3% in the fiscal first quarter. Additionally, global e-commerce sales increased 34.4% compared with the year-ago quarter.

During the quarter, gross profit decreased 1.2% to $480.7 million, while gross margin fell 30 bps to 48.6%. Adjusted operating earnings declined 1.4% to $113.7 million, while adjusted operating margin shrunk 10 bps to 11.5%. Also, selling, general & administrative (SG&A) expenses dropped 1.2% to $367 million.

Segment Details

Sally Beauty Supply (“SBS”): Net sales at the SBS segment dipped 0.8% to $580.6 million as higher sales in the North American retail business was compensated with decline in Europe on account of Brexit as well as civil protests in continental Europe. Foreign currency translation adversely impacted sales by 90 bps. However, same-store sales grew 0.7% in the quarter.

Further, the net store count at the end of the quarter was 3,739, reflecting a decrease of 48 from the year-ago period. Gross margin for this segment remained flat at 54.6%

Beauty Systems Group (“BSG”): Net sales at the BSG segment fell 0.1% to $408.8 million, with same-store sales decreasing 0.6%. Foreign currency translation hurt sales by roughly 40 bps. However, the net store count at the end of the quarter remained flat at 1,390. Gross margin contracted 80 bps to 40%. Moreover, total distributor sales consultants at quarter-end were 822 versus 875 in the year-ago period.

Other Financial Aspects

Sally Beauty ended the reported quarter with cash and cash equivalents of $102.8 million, long-term debt including capital leases of $1,768.3 million and total stockholders’ deficit of $214.7 million. Further, the adjusted operating free cash flow plunged 67.5% to $26.5 million.

Management incurred capital expenditures of $23.7 million during the quarter. At the quarter-end, the outstanding balance on the company’s asset base revolving line of credit came in at zero.

Further, the company did not make any share repurchases in the quarter under review. 

FY19 Outlook

Following the quarterly results, management reiterated its guidance for fiscal 2019. It expects consolidated same-store sales and gross margin to remain flat year over year. In fiscal 2018, the company witnessed same-store sales decline of 1.5%.

Adjusted SG&A expenses, as a percentage of sales, are still projected to increase marginally from the prior-year period. The company projects consolidated effective tax rate for the fiscal year to be roughly 27%.

For fiscal 2019, adjusted operating earnings and operating margin are still anticipated to fall marginally due to increase in adjusted SG&A expenses, partly offset by same-store sales growth.

Furthermore, the company expects mid-single digit increase in adjusted earnings per share on account of reduced average share count and fall in interest expenses. Management continues to estimate capital expenditures of roughly $120 million for the fiscal year. Further, cash flow from operations is anticipated to come in at roughly $340 million with free cash flow of $220 million.

Strategic Endeavors

In a bid to optimize inventory levels and minimize costs as well as bring latest replenishment and fulfillment centers, Sally Beauty has announced modernization plans across its supply chain. Firstly, the company is expected to shut down the distribution centers in Denton, TX, and Anchorage, AK, by the end of the fiscal second quarter besides closing distribution facility in Lincoln, NE, by the end of the third quarter.

Further, it will upgrade its e-commerce capabilities at the distribution facility in Columbus, OH. Management also announced the search for a 500,000 square foot location in Texas for building the latest automated and concentrated distribution facility. This center is likely to serve Sally Beauty Supply stores and e-commerce sales apart from Beauty Systems Group stores, full service and e-commerce sales.

In addition, management issued updates on its Transformation Plan. With respect to its transformational efforts, the company’s Rewards Loyalty Program remains impressive. Further, owned and exclusive brand penetration came in at nearly 46% of total sales at Sally Beauty Supply and 53% at Beauty Systems Group in the reported quarter. Moreover, the company continues to innovate and expand products, with the launch of Pravana hair color and re-formulated Wella Koleston Perfect hair color in Beauty Systems Group. It also launched Good Dye Young on sallybeauty.com and in select stores.

Going into the remainder of the fiscal second quarter and third quarter, the company is anticipated to deploy its e-commerce and mobile capabilities for Sally Beauty Supply, pilot additional modules with respect to the JDA merchandising and supply chain, complete testing of the Oracle based point-of-sale systems, make acquisitions to enhance the territorial scope of Beauty Systems Group’s brand distribution rights, roll out exclusive brands such as Maria Nila, and modernize merchandising execution.

Moving ahead in fiscal 2019, Sally Beauty remains on track with its transformation endeavors and expects to start rolling out of the Oracle in both its segments, and go live with the added modules of JDA. Furthermore, it expects to launch updated e-commerce and mobile capabilities for Beauty Systems Group and create awareness in relation to product launches. Also, the company is likely to enhance the distribution rights for present and new brands in the Beauty Systems Group. It aims to achieve further selling, general and administrative expense savings in a bid to make investments.

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