Why Is Sally Beauty (SBH) Down 6.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Sally Beauty (SBH). Shares have lost about 6.1% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.

Sally Beauty Misses on Q1 Earnings & Sales

Sally Beauty reported adjusted earnings of 47 cents per share, which lagged the Zacks Consensus Estimate of 56 cents and declined 17.5% year over year. Including one-time items, earnings decreased 16.7% to 45 cents per share, on account of lower sales, contraction in gross margin, higher wage and marketing expenses, partly offset by decline in interest expense.

Consolidated net sales of $980.2 million missed the Zacks Consensus Estimate of $994 million and dipped 0.9% year over year. The top line was majorly affected by reduced same-store sales, issues related to technology implementation and lower store count than the year-ago period. Also, unfavorable foreign-currency translations negatively impacted sales by roughly 10 basis points (bps).Consolidated same-store sales dipped 0.3%. However, e-commerce sales increased 27.6% from the year-ago quarter.

Gross profit decreased 1.2% to $474.8 million. Gross margin contracted 20 bps to 48.4% due to decline in the United States and Canada businesses of Sally Beauty Supply (“SBS”) segment partly offset by growth in Beauty System Group (“BSG”) segment.

SG&A expenses increased $10.9 million in the quarter due to investments in store personnel and marketing. Meanwhile, SG&A as a percentage of sales decreased 150 bps to 38.6%.Adjusted operating earnings decreased 14.8% to $96.9 million and adjusted operating margin contracted 160 bps to 9.9%.

Segment Details

SBS: Net sales of the segment decreased 2% to $569.1 million in the quarter, due to lesser stores than the prior-year quarter, shortened holiday period in the United States and Canada, and foreign-currency headwinds. Foreign-currency translations adversely impacted sales by almost 20 bps. However, global segmental same-store sales declined 1.1%, whereas the same in Canada and the United States decreased 1.4%. Net store count at the end of the quarter was 3,703, reflecting a decrease of 36 from the year-ago period.

BSG: Net sales at the segment improved 0.5% to $411.1 million. Foreign-currency translation had no impact on the results. Moreover, the net store count at the end of the quarter was 1,369, representing a decrease of 21 from the year-ago period. Same-store sales rose 1.2%. Total distributor sales consultants at the end of the quarter were 740 compared with 822 in the year-ago period.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $67.3 million, long-term debt, including capital leases of $1,578.4 million, and total stockholders’ equity of $2.2 million.In the quarter, cash flow from operations was $62.3 million, while capital expenditure amounted to $40.9 million. The company’s operating free cash flow totaled $21.4 million, which was utilized to reduce debt load.

Transformation Plan

Management is on track with its Transformation Plan. As part of the plan, it launched new Sally Beauty brand campaign "Unleash your PROtential" nationally. The company also launched CHI color and innovative CHI appliances at Sally Beauty outlets. Further, it launched professional brand hair care products at Sally Beauty in the United States and new brands like Olaplex in Europe.

The company is focused on enhancing areas such as merchandising, BSG store operations, marketing, e-commerce, digital product and planning & allocation by adding new management and talent.As of the end of the fiscal first quarter, the company boasts 16.1 million active members in the Sally Beauty Rewards program. Further, it had rolled out Oracle-based point-of-sale (POS) systems to nearly 2500 stores.

In relation to digital strategies, the company implemented Order Management System across its network. It is reducing ‘order to customer’ timing and improving flexibility of shopping option. The company reached the final development stages for the impending launch of sallybeauty.ca. Further, it continued to drive the Sally Beauty integrated mobile app.

For fiscal 2020, management is on track to rollout the new POS systems, at BSG and SBS. Also, it intends to rollout sallybeauty.ca and advance merchandising transformation efforts. Moreover, the company anticipates to improve digital capabilities, which include Order Management System skills, increasing Same-Day Delivery test and introducing fulfillment options.Additionally, the company plans to continue the testing of its JDA merchandising and supply-chain platform. Also, it intends to expand concept stores for SBS and BSG in other territories. Further, the company expects to improve supply chain network.

Outlook

For fiscal 2020, management still anticipates sales to increase 1-2%. Same-store sales are still expected to grow 0.5-1.5%.The company revised its adjusted operating earnings guidance due to implementation challenges faced in the first quarter, along with steps taken to recover and investments required to complete in Transformation Plan. Taking these into account, it now anticipates adjusted operating earnings to remain flat year over year compared with previous view of low single-digit growth.However, thanks to gains from debt reduction and share buybacks, the company still expects adjusted earnings growth of low-to-mid single digits, though at the lower end of the guided range.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months.

VGM Scores

At this time, Sally Beauty has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sally Beauty has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.