RayJay Stays Bearish On Sally Beauty After Q1 EPS Beat

Sally Beauty Holdings, Inc. (NYSE: SBH) looked pretty after its first-quarter earnings report Tuesday: a 57-cent bottom line beat a 53-cent estimate, same-store sales rose marginally and the stock closed up 3.7 percent.

But the salon supplier couldn’t sway the Street's bears.

The Analyst

Raymond James analyst Joseph Altobello maintained an Underperform rating on Sally Beauty.

The Thesis

Altobello conceded progress in key areas, including Sally’s first positive comps in over two years. But the comparison period was unimpressive, and domestic margin improvements were offset by weakness in Europe, the analyst said in a Tuesday note. 

Additionally, a sales decline prompted a miss of top-line estimates, and inventory investments led to a 50-percent decline in operating cash flow and two-thirds decline in free cash flow. The beauty systems group segment also suffered gross margin erosion due to category mix shift, the vendor funding schedule and boosts in promotional activity.

“While we recognize management’s ongoing efforts to accelerate growth and improve profitability by redeploying its ample cash flow back into the business after years of underinvestment, we remain concerned with the company’s ability to drive traffic within its Sally segment in a challenging retail environment,” Altobello said. 

While firmly bearish on the stock, the analyst said he's watching the expanding membership base for Sally’s loyalty program and a recently initiated supply chain modernization strategy.

Price Action

Sally Beauty shares were down 4.36 percent at $18 at the time of publication Wednesday. 

Related Links:

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4 Reasons Why Sally Beauty Was Hit With A BofA Downgrade

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