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Sally Beauty (SBH) Hurt by Inflation & Supply Chain Issues

Rising cost inflation has been hurting Sally Beauty Holdings, Inc. SBH for a while now. The beauty products provider is also battling supply chain-related issues. Escalated selling, general and administration (SG&A) expenses are a hurdle for the company. These factors hurt its fourth-quarter fiscal 2022 results, with the top and the bottom line declining year over year. Management offered a drab view for fiscal 2023.

Let’s delve deeper.

Disappointing Q4 Numbers & View

In the fourth quarter of fiscal 2022, Sally Beauty reported adjusted earnings of 50 cents per share, down from 64 cents in the year-ago quarter. Consolidated net sales of $962.5 million dropped 2.8%. Comparable sales were in line with the year-ago quarter’s levels. The adverse impact of inflationary pressures influencing consumer behavior and supply chain challenges at Beauty Systems Group was a deterrent. The company operated 117 fewer stores compared with the year-ago quarter’s levels.

Sally Beauty’s quarterly gross profit came in at $463.5 million, down 7.5% year over year. Adjusted gross margin contracted 60 basis points (bps) to 50.1% due to the sales mix shift between Sally Beauty and Beauty Systems Group and increased distribution and freight costs in both units.

For fiscal 2023, Sally Beauty’s net sales are anticipated to decline by low-single digits, reflecting 150-200 bps of net unfavorable impact owing to store closures and expected sales recapture rates from optimization efforts. Net sales guidance also reflects nearly 150 bps anticipated impact from unfavorable currency rates. Management highlighted that it expects the external environment to remain challenging in the future. Rising inflationary pressure has been altering consumer spending and increasing labor costs.

Zacks Investment Research
Zacks Investment Research


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Rising SG&A Expenses Hurt

Sally Beauty has been grappling with escalated SG&A expenses for a while. During the fourth quarter of fiscal 2022, the company’s SG&A expenses came in at $397.9 million, up $11.3 million, thanks to higher labor costs somewhat offset by reduced lower bonus expenses. As a percentage of sales, SG&A expenses stood at 41.3%, up from 39% reported in the year-ago quarter.

Currency Headwinds

Sally Beauty’s international presence exposes it to the risk of adverse currency fluctuations. Unfavorable currency rates may adversely impact the company’s net revenues, operating income and earnings. During the fourth quarter of fiscal 2022, unfavorable foreign currency translation hurt consolidated net sales by 170 bps. Thus, volatility in exchange rates remains a concern.

Final Thoughts

Sally Beauty intends to strengthen its business on the back of strategic acquisitions. The company is focused on its four strategic growth pillars to boost the top line, including leveraging the digital platform, driving loyalty and personalization, undertaking product innovation and enhancing the supply chain. It is undertaking several efforts to augment its robust omnichannel platform. However, let’s see if these upsides can help SBH counter the hurdles mentioned above.

Shares of the Zacks Rank #4 (Sell) company have declined 17.7% in the past year against the industry’s 1.6% growth.

3 Solid Retail Bets

We have highlighted three better-ranked stocks, including Ulta Beauty ULTA, DICK’S Sporting Goods DKS and Five Below FIVE

Ulta Beauty currently carries a Zacks Rank #2 (Buy). The expected EPS growth rate for three to five years is 13.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 15.7% from the year-ago period. This beauty retailer and the premier beauty destination for cosmetics, fragrance, skincare products, hair care products and salon services has a trailing four-quarter earnings surprise of 26.2%, on average.

DICK'S Sporting, which operates as a sporting goods retailer, carries a Zacks Rank #2 at present. The company has a trailing four-quarter earnings surprise of nearly 10.1%, on average.

The Zacks Consensus Estimate for DICK'S Sporting’s current financial year’s revenues and EPS suggests declines of almost 1% and 23.9%, respectively, from the year-ago reported figures. DKS has an expected EPS growth rate of 5% for three to five years.

Five Below, an extreme-value retailer for tweens, teens and beyond, carries a Zacks Rank #2. FIVE has an expected EPS growth rate of almost 19% for three to five years.

The Zacks Consensus Estimate for Five Below’s current financial-year sales suggests growth of 7.4%, respectively, from the year-ago period. Five Below has a trailing four-quarter earnings surprise of 26.3%, on average.

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DICK'S Sporting Goods, Inc. (DKS) : Free Stock Analysis Report

Ulta Beauty Inc. (ULTA) : Free Stock Analysis Report

Sally Beauty Holdings, Inc. (SBH) : Free Stock Analysis Report

Five Below, Inc. (FIVE) : Free Stock Analysis Report

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