Why Is Sally Beauty (SBH) Down 6% Since Last Earnings Report?
A month has gone by since the last earnings report for Sally Beauty (SBH). Shares have lost about 6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Sally Beauty due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Sally Beauty Q2 Earnings & Sales Miss Estimates
Sally Beauty Holdings, Inc. 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.
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. Unfavorable foreign currency translation impacted sales by roughly 110 basis points (bps) in the reported quarter.
Consolidated same-store sales dipped 0.5%. Nevertheless, global e-commerce sales increased 30.3% compared with the year-ago quarter.
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 due to 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, the 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 its collection with the launch of exclusive brands like Maria Nila and established additional influencer-partner brands like MoKnowsHair. It also finished the build-out of its ‘new concept stores’ in Las Vegas and started the build-out for CosmoProf.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
VGM Scores
Currently, Sally Beauty has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Sally Beauty has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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