Sally Beauty (SBH) Q4 Earnings Beat, Sales Lag Estimates

Shares of Sally Beauty Holdings, Inc. (NYSE:SBH) increased roughly 20.2%, following its fourth quarter fiscal 2018 results on Nov 8. Despite a top line miss, the company’s bottom line not only exceeded the Zacks Consensus Estimate but also grew year over year.

Bottom line results were backed by fall in interest expenses, reduced tax rate owing to U.S. tax reform, and lower share count. Moreover, the company’s fiscal 2019 view hints at growth in the bottom line and improvement in salestrend. Management also highlighted that Sally Beauty Supply attained flat same-store sales for the first time in the last seven quarters.

Meanwhile, shares of this Zacks Rank #3 (Hold) company have surged 57.4% in the past three months compared with the industry’s growth of 9.8%.

Q4 in Detail

Sally Beauty reported fourth-quarter adjusted earnings of 51 cents, exceeding the Zacks Consensus Estimate of 48 cents and increasing 13.3% year over year.

Net sales decreased marginally by 0.8% to $966 million and fell short of the Zacks Consensus Estimate of $968 million. Unfavourable currency translation impacted sales by 50 basis points (bps) in the reported quarter.

Consolidated same-store sales edged down 0.2% in the fiscal fourth quarter, which showed a significant improvement from a decline of 2% in the preceding quarter. Additionally, global e-commerce sales increased 30.1% compared with the year-ago quarter.

During the quarter, gross profit decreased roughly 0.9% to $478.1 million, while gross margin remained almost flat at 49.5%. Adjusted operating earnings were down 6.7% to $112.2 million, while adjusted operating margin shrunk 70 bps to 11.6% for the quarter under review.

Selling, general & administrative (SG&A) expenses increased 1% to $365.9 million due to investments in marketing, wages and technology. This was partly mitigated by cost-containment endeavors.

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

Segment Details

Sally Beauty Supply (“SBS”): The net sales for SBS segment declined 1.3% to $576.6 million, while same-store sales remained flat. Foreign currency translation had an unfavourable impact on revenue growth in the quarter by 50 bps.

The net store count at the end of the quarter was 3,761 compared with 3,782 in the year-ago period. Gross margin in this segment expanded 80 bps to 55.9% on account of increased prices in core categories and promotional activity in the United States along with retail mix and rise in price of owned brands in Europe.

Beauty Systems Group (“BSG”): The net sales for BSG segment fell 0.1% to $389.4 million, while same-store sales declined 0.8%. Foreign currency translation showed a negative impact on revenues for this segment as well by approximately 40 bps. The net store count at the end of the quarter rose to 1,395 due to net increase in CosmoProf stores and the buyout of H. ChalutLtée. Gross margin declined 120 bps to 40%.

Other Financial Aspects

The company ended the reported quarter with cash and cash equivalents of $77.3 million, long-term debt of $1,768.8 million and shareholders’ deficit of $268.6 million. Management incurred capital expenditures of $24 million during the quarter.

In the quarter, the company bought back about 10 million shares for $165.9 million. The company’s operating free cash flow was down 31.4% to approximately $66.8 million.

FY19 Outlook

The company issued fiscal 2019 guidance, wherein it anticipates consolidated same-store sales and gross margin to remain flat. In fiscal 2018, the company witnessed same-store sales decline of 1.5%.

Adjusted SG&A expenses are expected to increase from the prior-year guidance.The company projects effective tax rate for fiscal 2019 to be roughly 27%.

In fiscal 2019, adjusted operating earnings and operating margin are anticipated to fall marginally, owing to increase in adjusted SG&A expenses, partly offset by same-store sales improvement. Further, the company expects capital expenditure to be nearly $120 million with free cash flow projected to be approximately $220 million.

Management expects mid-single digit increase in adjusted diluted earnings per share on account of reduced shares outstanding and fall in interest expenses.

Transformation Plan

As part of the transformation plan, the company has launched box colours and a new Sally Beauty Loyalty Program in all its Sally Beauty Supply stores. Also, it launched “ion” – a private label electrical appliance brand across the Beauty Systems Group network. Further, the company is all set to offer Pravana brand to customers in the United States via its Beauty Systems Group stores.

Keeping in these lines, Sally Beauty’s Beauty System Group segment has recently inked a deal with Swedish vegan hair care brand, Maria Nila. Additionally, the company is making efforts to enhance its digital platform by updating its e-commerce and mobile commerce capabilities to improve customer’s shopping experience.

For first-quarter fiscal 2019, the company is on track with redesigning its e-commerce sites for both segments. Also, it is focused on training store associates and creating brand awareness among them. Sally Beauty is also looking forward to product innovation in core categories, creating and marketing new brands and products along with marketing of the Sally Beauty Loyalty Program.

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