Factors To Decide Sally Beauty's (SBH) Fate In Q4 Earnings

Sally Beauty Holdings, Inc. (NYSE:SBH) is scheduled to report fourth-quarter fiscal 2018 results on Nov 8, before the opening bell. The company witnessed an average four-quarter negative earnings surprise of 0.8%. In the second and third quarter, it reported a negative earnings surprise of 1.8% and 1.6%, respectively.

Currently, Sally Beauty is reeling under declining comparable sales and soft margins. Moreover, the company witnessed gross margin contraction for the past two quarters due to a negative revenue mix shift and rise in coupon redemption. Nevertheless, it is adopting several initiatives to stoke top-line growth. The company is on track with the transformation plan as well.

In the past three months, shares this Denton, TX-based company have rallied approximately 31%, outperforming the industry’s 10% growth.

Investors are keeping their fingers crossed and expecting Sally Beauty to post earnings beat in the quarter to be reported. Let’s see what’s in store for Sally Beauty this time around.

How are Estimates Faring?

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at 48 cents, reflecting a growth of 6.7% from the year-ago figure. Notably, the consensus mark has been stable over the past 30 days. For revenues, the consensus mark stands at $966.7 million, down 0.8% from $974.2 million registered in the year-ago period.

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

Factors Influencing Sally Beauty’s Performance

Sally Beauty is taking several initiatives to bring itself back on the growth trajectory. In April 2018, the company introduced a transformation plan to reduce costs and increase focus on its core products such as hair color and hair care. As part of this plan, the company also initiated solid strategies in the third quarter, including reviewing freight expenses to achieve significant cost savings in the future and launching two new color lines — Arctic Fox and Wella ColorCharm Paints — to strengthen its hair product offerings.

In the quarter to be reported, the company expects to undertake marketing and merchandising initiatives in its core products, and enhance digital capabilities and cost-cutting actions. For fiscal 2019, Sally Beauty is set to launch box color across SBS network. In the BSG division, the company enhanced its distribution rights of hair color and hair care brands such as Sebastian, Nioxin and Kadus, manufactured by Coty.

Notably, Sally Beauty is also implementing the first phase of a multi-year JDA supply-chain platform, which will help augment merchandising capabilities. In a bid to boost digitalization, Sally Beauty stores will pilot “endless aisle” during the fourth quarter of fiscal 2018. Management also plans to revamp Sally Beauty’s e-commerce site.

These apart, the company announced plans to decrease headcount in its corporate headquarters in Denton, TX, for reducing costs. Sally Beauty will gain $14-$15 million from these cost-reduction initiatives, with benefits in fiscal 2018 estimated between $6 million and $7 million.

However, the company is grappling with soft sales, attributable to dismal comps at the SBS and BSG segments in the quarter. For fiscal 2018, it expects same-store sales to decline in the range of 1.5-1.9%.

Gross margin is also expected to decline 50 bps in fiscal 2018 due to price investments made in Sally during the first quarter, enhanced promotional activity and a business segment mix shift. Management expects adjusted operating income to decline 8-10% in the same year on decrease in same-store sales and contraction in gross margin along with marginally higher adjusted SG&A expenses.

What the Zacks Model Unveils

Our proven model does not conclusively show that Sally Beauty is likely to beat earnings estimates fourth-quarter fiscal 2018. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Sally Beauty has a Zacks Rank #3 but an Earnings ESP of -1.86% makes surprise prediction difficult.

Stocks With Favorable Combination

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Nordstrom, Inc. (NYSE:JWN) has an Earnings ESP of +16.90% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kohl's Corporation (NYSE:KSS) has an Earnings ESP of +0.35% and a Zacks Rank #2.

KAR Auction Services, Inc. (NYSE:KAR) has an Earnings ESP of +3.44% and a Zacks Rank #2.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>