4 Reasons Why Sally Beauty Was Hit With A BofA Downgrade

Shares of Sally Beauty Holdings, Inc. SBH continue to trade near multiyear lows. and investors expecting a notable turnaround in the near-term have four reasons to reconsider, according to Bank of America Merrill Lynch. 

The Analyst

BofA's Olivia Tong downgraded Sally Beauty from Neutral to Underperform with a price target lowered from $17 to $15.

The Thesis

Sally Beauty's valuation — and likelihood of a turnaround — are both low, and there are four reasons why a favorable shift in sentiment is unlikely, Tong said in the downgrade note. (See the analyst's track record here.) 

• The retailer has set multiple initiatives in motion in recent years, including a system-wide store refresh. At the same time, the company is showing signs of foot traffic pressure. Looking forward, it's difficult to imagine the company will reverse the trend and re-engage consumers at brick-and-mortar stores. 
• Credit and debit card data reviewed by the analyst shows an acceleration in beauty spend among U.S. consumers with an annual income above $50,000 over the past 10 months. Yet over the same time period, Sally Beauty's same-store sales pressure remained in place, which likely implies a loss of market share to both mass retail and drug store competitors.
• While the company is seeing double-digit growth in its online business, Sally Beauty still has a lot of catching up to do. The company's e-commerce business accounted for 1.5 percent of total sales in the third quarter of 2017 and was growing in the 20-percent range. In comparison, rival Ulta Beauty Inc ULTA showed 10 percent of its sales came from the online channel in the same quarter and was growing by over 50 percent.
• Sally Beauty's balance sheet shows a 3.1 times debt-to-EBITDA ratio in a trailing 12-month period, which implies it is has less flexibility compared to its peers to use its balance sheet as a lever to drive earnings.

Price Action

Sally Beauty shares were slipping 6.17 percent to $15.36 at the time of publication late Monday afternoon. 

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Photo by Sally Beauty via Wikimedia.