Sally Beauty Holdings Receives A Downgrade From DA Davidson

Sally Beauty Holdings, Inc. SBH has received a downgrade on Thursday.

The Analyst

DA Davidson analyst Linda Bolton Weiser downgraded the company from Neutral to Underperform but raised her price target from $12.50 to $15.

The Thesis

Bolton Weiser says she is cautious of Sally Beauty’s fundamentals and outlined several reasons for downgrading the company:

The analyst argues that Sally Beauty continues to struggles for store traffic within an industry shift to e-commerce sales and saw a 14% operating cash flow decline in 2019. Amid a struggle for capturing store traffic, the company is doubling down on store growth in the upcoming year, expecting a net increase of 30-50 stores. Issues in the European business is also a cocern for the analyst.

DA Davidson also says the possibility of disappointing same-store sales is greater than the company’s upside surprise potential.

“After posting negative same-store sales in FY17 and FY18, Sally Beauty Holdings reported +0.3% in FY19, and ended the year with a strong 1.1% increase in F4Q19, the highest since F4Q16,” said Bolton Weiser.

“Along with the stock price, we think investor expectations have taken a step up, and that same-store sales below +1.0% could be viewed as disappointing.”

Sally Beauty Holdings reported a fourth quarter earnings and sales beat last Thursday, but the analyst believes the company could be challenged to meet expectations in the fourth-quarter of 2020, when the company faces a tougher compare, with the Street projecting same-store sales of +1.0%.