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Sally Beauty (SBH) Q2 Earnings & Sales Miss, Stock Down 10%

Zacks Equity Research

Sally Beauty Holdings, Inc. SBH reported dismal second-quarter fiscal 2019 results, wherein earnings and revenues missed estimates. Also, the top line and the bottom line declined year over year. Management reaffirmed its view for the fiscal year.

Following the dismal results, shares of Sally Beauty lost as much as 10% during the trading session on May 1. In the past six months, shares of this Denton, TX-based company have decreased approximately 14%, underperforming the industry’s 9.2% growth.

Q2 in Detail

Sally Beauty reported second-quarter adjusted earnings of 51 cents per share, which lagged the Zacks Consensus Estimate of 54 cents and decreased 5.6% year over year.

Consolidated net sales dipped 3% to $945.9 million and fell short of the Zacks Consensus Estimate of $965.2 million. Unfavourable foreign currency translation impacted sales by roughly 110 basis points (bps) in the reported quarter.

Sally Beauty Holdings, Inc. Price, Consensus and EPS Surprise

Sally Beauty Holdings, Inc. Price, Consensus and EPS Surprise | Sally Beauty Holdings, Inc. Quote

Consolidated same-store sales dipped 0.5%. Nevertheless, global e-commerce sales increased 30.3% compared with the year-ago quarter.

Moving on, gross profit decreased 3.7% to $468.3 million, while the gross margin fell 40 bps to 49.5%. Adjusted operating earnings declined 9.5% to $106.7 million, while adjusted operating margin shrunk 80 bps to 11.3%. Also, selling, general & administrative (SG&A) expenses dropped 1.9% to $361.6 million.

Segment Details

Sally Beauty Supply (“SBS”): Net sales of the SBS segment dipped 2.5% to $565.5 million due to less stores compared with previous year, Easter shift into the third quarter, and concerns related to Brexit as well as civil protests in continental Europe.  Also, deferred tax refunds and store closures from extreme weather impacted North American retail business. Foreign currency translation adversely impacted sales by around 150 bps. Moreover, same-store sales slipped 0.3%.

The net store count at the end of the quarter was 3,718, reflecting a decrease of 64 from the year-ago period.

Beauty Systems Group (“BSG”): Net sales of the BSG segment fell 3.8% to $380.2 million, with same-store sales decreasing 0.9%. Foreign currency translation hurt sales by roughly 40 bps. Moreover, the net store count at the end of the quarter was 1,388, mirroring a decrease of 5 from the year-ago period. Total distributor sales consultants at the end of the quarter were 798 versus 859 in the year-ago period.

Other Financial Aspects

Sally Beauty ended the reported quarter with cash and cash equivalents of $89.8 million, long-term debt including capital leases of $1,708.4 million and total stockholders’ deficit of $145.1 million. Further, the adjusted operating free cash flow plunged 16.7% to $49.2 million in the second quarter.

Management incurred capital expenditures of $22.7 million during the second quarter. At the end of the quarter, the outstanding balance on the company’s asset base revolving line of credit came in at zero.

Further, the company repurchased $60 million of senior notes in the quarter under review.

FY19 Outlook

Following the quarterly results, management reiterated its guidance for fiscal 2019. It continues to expect 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 anticipated to fall marginally due to increase in adjusted SG&A expenses, partly offset by same-store sales growth.

Furthermore, this Zacks Rank #2 (Buy) 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. Cash flow from operations is anticipated to come in at roughly $340 million with free cash flow of $220 million.

Transformation Plan

Management remains on track with its Transformation Plan. Till now in fiscal 2019, the company has deployed the new sallybeauty.com mobile-first e-commerce platform. Also, it completed the testing of the Oracle based point-of-sale systems at both its segments. The company launched first four modules with respect to the JDA merchandising and supply chain. It bought back senior notes worth $60 million via its debt tender offer. To this end, the company sold its second Denton, TX headquarters and fulfillment center, thereby utilizing the proceeds to sponsor a part of the debt repurchase.

The company improved collection with the launch of exclusive brands like Maria Nila and established additional influencer-partner brands like MoKnowsHair. Furthermore, it finished the build-out of its ‘new concept stores’ in Las Vegas and started the build-out for CosmoProf.

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