Sally Beauty (SBH) Earnings & Sales Surpass Q4 Estimates

Shares of Sally Beauty Holdings, Inc. (NYSE:SBH) gained more than 20% yesterday, owing to better-than-expected results in fourth-quarter fiscal 2019. Its results gained from improved product assortment, enhanced technology and supply-chain initiatives. Also, the company generated robust cash flow, reduced debt and made share repurchases.

Further, management has stated that it is well on track with its Transformation Plan and has issued a positive fiscal 2020 view.

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

Q4 in Detail

Sally Beauty reported adjusted earnings of 58 cents per share, which beat the Zacks Consensus Estimate of 53 cents and advanced 13.7% year over year. Including one-time items, earnings increased 26.1% to 58 cents per share, courtesy of lower SG&A costs, reduced restructuring charges and a decline in interest expense.

Consolidated net sales of $965.9 million beat the Zacks Consensus Estimate of $957 million and remained flat year over year. The top line was majorly affected by reduced store count than the year-ago period. Also, unfavorable foreign-currency translations negatively impacted sales by roughly 70 basis points (bps). However, rise in same-store sales aided the top line to some extent.

Consolidated same-store sales grew 1.1%. Further, e-commerce sales increased 27.4% from the year-ago quarter.

The gross margin expanded 10 bps to 49.6% as improvements of Sally Beauty Supply (“SBS”) and Beauty System Group (“BSG”) segments in the United States and Canada more than offset continued difficulties in Europe. Also, cost-cutting efforts contributed to margin expansion in the quarter under review.

SG&A expenses declined $1.9 million in the quarter. Meanwhile, SG&A as a percentage of sales decreased 20 bps to 37.7%.

Adjusted operating earnings grew 2.8% to $115.3 million and adjusted operating margin expanded 30 bps to 11.9%.

Segment Details

SBS: Net sales of the segment dipped 0.8% to $571.9 million in the quarter, thanks to lesser stores than the prior-year quarter, continued hurdles in Europe and foreign-currency headwinds. Foreign-currency translations adversely impacted sales by almost 110 bps. However, global segmental same-store sales rose 1.3%, whereas the same in Canada and the United States increased 2%.

Net store count at the end of the quarter was 3,695, reflecting a decrease of 66 from the year-ago period.

BSG: Net sales of the segment improved 1.2% to $394.1 million. Also, foreign-currency translation hurt sales by roughly 10 bps. Moreover, the net store count at the end of the quarter was 1,366, representing a decrease of 29 from the year-ago period. Same-store sales rose 0.8%. Total distributor sales consultants at the end of the quarter were 748 compared with 820 in the year-ago period.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $71.5 million, long-term debt — including capital leases of $1,594.5 million, and total stockholders’ deficit of $60.3 million.

In the quarter, cash flow from operations was $116.6 million, while capital expenditure amounted to $37.7 million. The company’s operating free cash flow totaled $78.9 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 additional brands and introduced exclusive product lines within the SBS segment and the BSG segments. Moving on, Sally Beauty is focused on brand awareness in both segments.

As of the end of the fiscal fourth quarter, the company boasts 16 million active members in the Sally Beauty Rewards program. Further, it rolled out Oracle-based point-of-sale (POS) systems to nearly 2000 stores. It is on track to complete the rollout of POS systems at 4,200 stores in the United States and Canada by March 2020.

Further, Sally Beauty inked a deal with Alliance Data’s card services business to launch a private-label credit card program for both its segments.

In relation to digital strategies, the company revamped the e-commerce site of the BSG segment and launched “ColorView/Color Before You Commit” hair color technology at kiosks in roughly 500 Sally Beauty stores and the mobile app.

Going into fiscal 2020, management remains on track to expand its brand assortment by adding new and third-party brands to the product portfolio along with increasing awareness of its previously launched brands. It also intends to launch a Sally Beauty brand campaign in the fiscal year.

Moreover, the company anticipates launching concept stores for both SBS and BSG in certain areas by the fiscal year. Additionally, it is focused on optimizing the supply-chain network as well as testing and expanding buy online/same-day delivery.

Outlook

Management issued fiscal 2020 guidance, wherein sales are anticipated to increase 1-2%. This is encouraging as the metric has been witnessing a downward trend since 2016. Same-store sales are expected to grow 0.5-1.5%.

Further, the company expects adjusted earnings growth of low-to-mid single digits. It anticipates adjusted operating earnings growth of low-single digits. It expects gross margin expansion for both segments, driven by cost-saving endeavors. Meanwhile, The company anticipates rise in SG&A expenses, owing to increase in wages in key markets, and higher investment in marketing and technology.

Additionally, the company anticipates the store fleet to increase 30 to 50.

It expects cash flow from operations of $340-$360 million. It projects free cash flow of $220-$240 million. For fiscal 2020, the company anticipates capital expenditure of $120 million.

Price Performance

Shares of the Zacks Rank #4 (Sell) company have dipped 8.1% in a year compared with the industry’s decline of 17.6%.

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