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Will Transformation Plan Aid Sally Beauty Amid Soft Sales?

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Sally Beauty Holdings (SBH - Free Report) is witnessing soft top-line performance. The company’s net sales missed estimates for the second time, when it reported first-quarter fiscal 2019 results. Sluggishness in Sally Beauty Supply and Beauty Systems Group segments for the past two quarters can be held responsible for the dismal top-line performance.

Keeping in these lines, the Sally Beauty Supply segment was adversely impacted by Brexit as well as civil protests in continental Europe that led to sales decline of 0.8% during the fiscal first quarter. Meanwhile, Beauty Systems Group decreased 0.6% on sluggish same-store sales and headwinds related to unfavorable foreign-currency translation.

Apart from this, the company is witnessing dwindling operating margins for a while now. Sally Beauty’s adjusted operating margin shrunk 10 basis points (bps) in the first quarter of fiscal 2019, following a decline of 70 bps, 130 bps and 120 bps in the fourth, third and second quarters of fiscal 2018, respectively. We note that in fiscal 2019, adjusted operating earnings and operating margin are anticipated to fall marginally, owing to increase in adjusted SG&A expenses.

These downsides might have hurt investor’s sentiments. We note that shares of this company have gained 10.7% in a year’s time, underperforming the industry’s growth of 19.6%.

Efforts to Counter Hurdles

Sally Beauty is making efforts to get back on growth trajectory. In this regard, the company updated its Transformation Plan that was launched in April 2018 to curtail costs and increase focus on core products, like hair color and hair care. As part of its transformational efforts, the company continues to innovate products and expand portfolio, with the launch of Pravana hair care, Guy Tang's #mydentity hair care products and re-formulated Wella Koleston Perfect hair color in Beauty Systems Group. Moving on, the company anticipates to make products from Swedish vegan hair care brand, Maria Nila available for its customers. It also launched Good Dye Young on and in select stores, and plans to launch the same in all Sally Beauty stores by the end of the third quarter of fiscal 2019.

Moreover, the company’s Sally Beauty Rewards Loyalty Program looks impressive, with 14 million members at the end of fiscal fourth quarter. The program now generates 70% of total sales in the U.S. and Canadian stores. This might help improve the top line in the near term.

In a bid to enhance customer’s shopping experience, the company has started testing the new Oracle-based point-of-sale systems and intends to install the same in at least 1,400 stores within the fiscal year. Additionally, the company is upgrading its websites along with e-commerce and mobile capabilities for both the segments and remains on track to launch apps for the same. Further, Sally Beauty is likely to enhance the distribution rights for present and new brands in the Beauty Systems Group.

Sally Beauty has announced modernization plans across its supply chain to optimize inventory levels and minimize costs as well as bring latest replenishment and fulfillment centers. As part of its supply-chain efforts, 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 the 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.

All said, we expect these growth drivers to provide cushion to Sally Beauty and help this Zacks Rank #3 (Hold) stock revive in the long run.

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