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Sally Beauty Focuses on Transformation, Weak Segments Hurt

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Strained segments and dismal operating margin have been tarnishing Sally Beauty Holdings (SBH - Free Report) for a while. Nevertheless, this specialty retailer of beauty products focuses on maintaining market share through prudent transformation initiatives and efforts to augment supply chain. Let’s delve deeper.

Transformation Plans On-Track

With respect to its transformational efforts, the Sally Beauty Rewards Loyalty Program looks impressive. The program accounted for nearly 14 million members at the end of first quarter fiscal 2019 and contributed 70% to total sales in stores across the United States and Canada. Moreover, 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 said quarter. Further, the company continues to innovate and expand products under this initiative. Some of the popular launches include Pravana hair care, re-formulated Wella Koleston Perfect hair color and Guy Tang's #mydentity hair care products.

Supply Chain Efforts

Sally Beauty has announced modernization plans across its supply chain to optimize inventory levels and minimize costs. As part of its initiatives, the company is expected to shut some of its distribution centers to concentrate on other lucrative areas. Accordingly, 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 automated and concentrated distribution facility.

Additionally, the company has successfully implemented the first phase of a multi-year JDA supply-chain platform in first-quarter fiscal 2019. Further, it has started conducting tests of the new Oracle based point-of-sale systems and intends to install the same in at least 1,400 stores within the fiscal. Additionally, the company is upgrading it websites along with e-commerce and mobile capabilities.

Will Efforts Counter Headwinds?

Sally Beauty’s top line is being weighed upon by persistent softness across its segments — Sally Beauty Supply and Beauty Systems Group. During the first quarter of fiscal 2019, sales in Sally Beauty Supply dipped 0.8% due to decline in Europe sales on account of Brexit as well as civil protests in continental Europe.  Meanwhile, Beauty Systems Group fell 0.6%, thanks to 0.6% decline in same-store sales and unfavorable impact of foreign currency translation of nearly 40 basis points (bps).

Additionally, the company’s adjusted operating margin has been dismal for a while. The metric fell 10 bps to 11.5% in the fiscal first quarter. Earlier, adjusted operating margin dropped 70, 130 and 120 bps in the fourth, the third and the second quarter of fiscal 2018, respectively. Management expects operating margin to remain under pressure in fiscal 2019, due to increase in adjusted SG&A expenses.

Nonetheless, we expect that Sally Beauty’s growth initiatives will provide cushion from these hurdles.

Notably, this Zacks Rank #3 (Hold) company has gained 5.3% in the past three months compared with the industry’s rise of 14.5%.

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