Sally Beauty (SBH) Q3 Earnings Beat Estimates, Sales Soft

Shares of Sally Beauty Holdings, Inc. (NYSE:SBH) increased 11.3% yesterday, owing to its better-than-expected earnings in third-quarter fiscal 2019. Also, management stated that it is well on track with its Transformation Plan.

However, sales disappointed due to reduced store count and currency headwinds. Notably, this Zacks Rank #4 (Sell) company recorded its fourth straight sales miss in the reported quarter. Shares of this Denton, TX-based company have lost 19.4% year to date against the industry’s growth of 11%.

Q3 in Detail

Sally Beauty reported adjusted earnings of 60 cents per share, which beat the Zacks Consensus Estimate of 58 cents and remained flat year over year. Including one-time items, earnings increased 22.9% to 59 cents per share, courtesy of lower SG&A costs and reduced restructuring charges.

Consolidated net sales dipped 2.1% to $975.2 million and fell short of the Zacks Consensus Estimate of $984 million. The top line was majorly affected by reduced store count compared to the year-ago period. Also, unfavorable foreign-currency translation negatively impacted sales by roughly 80 basis points (bps) in the reported quarter.

Consolidated same-store sales improved marginally by 0.1%. Nevertheless, e-commerce sales increased 25.9% from the figure reported in the year-ago quarter.

The gross margin remained nearly flat at 49.5% as improvements in the North American business of Sally Beauty Supply segment was negated by continued difficulties in Beauty System Group’s European business.

Adjusted SG&A expenses declined $10.5 million in the quarter. Adjusted operating earnings declined 0.6% to $122 million, while adjusted operating margin expanded 20 bps to 12.5%.

Segment Details

Sally Beauty Supply (“SBS”): Net sales of the SBS segment dipped 2.8% to $575 million in the quarter due to lesser stores than the prior-year quarter, continued hurdles in Europe and foreign-currency headwinds. Foreign-currency translation adversely impacted sales by almost 120 bps. Global segment same-store sales slipped roughly 0.6%, whereas the same in Canada and the United States inched down 0.2%.

Net store count at the end of the quarter was 3,705, reflecting a decrease of 70 from the year-ago period.

Beauty Systems Group (“BSG”): Net sales of the BSG segment fell 1.1% to $400.1 million due to weakness in the full-service business. Also, foreign-currency translation hurt sales by roughly 30 bps. Moreover, the net store count at the end of the quarter was 1,384, representing a decrease of 11 from the year-ago period. Same-store sales rose 1.4%. Total distributor sales consultants at the end of the quarter were 791 compared with 837 in the year-ago period.

Other Financial Aspects

Sally Beauty ended the reported quarter with cash and cash equivalents of $57.9 million, long-term debt including capital leases of $1,589.7 million and total stockholders’ deficit of $70.5 million.

During the quarter, cash flow from operations was $93.7 million, while capital expenditures amounted to $20.4 million. The company’s operating free cash flow totaled $73.4 million, which was utilized to reduce debt load.

Transformation Plan & Outlook

Management is on track with its Transformation Plan, as part of which it is progressing well with its four key goals — improving customers’ experience, strengthening e-commerce capacities, curtailing costs and enhancing retail fundamentals.

Salle Beauty intends to be committed toward its transformation endeavors. To this end, it is preparing for the country-wide launch of Sally Beauty brand campaign, building on the successful launches of core brands like Pravana, My Black is Beautiful and more; continuing with its efforts to modernize supply chain, speeding up the rollout of its new Oracle-based point-of-sale systems and revitalizing BSG’s e-commerce site, among other efforts.

All said, management reiterated its guidance for fiscal 2019.

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