Sally Beauty Holdings, Inc. SBH is sailing on rough seas, thanks to sluggish units and strained margins. The stock has lost nearly 31.8% in the past three months compared with the industry’s decline of 10%. Let’s discuss the aspects that are hurting the Zacks Rank #4 (Sell) stock and measures undertaken to counter the same.
Headwinds Impacting Performance
Sales across the company’s segments — Sally Beauty Supply and Beauty Systems Group — have declined in the past three quarters. During the second quarter of fiscal 2019, sales in Sally Beauty Supply fell 2.5% due to fewer stores compared with previous year, Easter shift into the third quarter, concerns related to Brexit and civil protests in continental Europe. Meanwhile, sales in the Beauty Systems Group fell 3.8% due to 0.9% decline in same-store sales and unfavorable impact of foreign currency translation of nearly 40 basis points (bps).
In the first quarter, sales in Sally Beauty Supply dipped 0.8% and the same at Beauty Systems Group inched down 0.6%. Prior to this, SBS segment sales declined 1.3% and 0.6% in the fourth and the third quarter of fiscal 2018, respectively. Also, sales in the BGS segment inched down 0.1% and 0.4% in the fourth and the third quarter, respectively.
Further, the company’s adjusted operating margin shrank 80 bps to 11.3% in fiscal second quarter. In fiscal first quarter, adjusted operating margin dropped 10 bps. Earlier, adjusted operating margin dropped 70, 130 and 120 bps in the fourth, the third and the second quarter of fiscal 2018, respectively. We note that in fiscal 2019, adjusted operating earnings and operating margin are anticipated to fall marginally, thanks to increase in adjusted SG&A expenses.
Can Efforts Pare Woes?
Sally Beauty has announced modernization plans across its supply chain to optimize inventory levels, minimize costs as well as introduce latest replenishment and fulfillment centers. Further, the company is progressing well with efforts to boost e-commerce operations. In the second half of fiscal 2019, the company plans to launch the Sally Beauty integrated app countrywide. Moreover, to strengthen brands, the company is undertaking prudent acquisitions and partnerships. In this context, it recently partnered with The Procter & Gamble Company PG to launch the new line of hair products — My Black is Beautiful. In prior developments, the company acquired certain assets of H. Chalut Ltee as well as the distribution rights for Joico in the Boston area and Paul Mitchell in the Hawaiian market.
We expect that such endeavors will boost the company’s performance in the forthcoming periods and enable it to make a comeback in investors’ good books.
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