Sally Beauty Supply Holds More Risk Than Reward, Jefferies Says In Downgrade

Sally Beauty Holdings, Inc. SBH’s execution, leverage, cost inflation and profit pressure have made Jefferies skeptical of the stock. 

The Analyst

Jefferies' Stephanie Wissink downgraded Sally Beauty Holdings from Hold to Underperform and lowered the price target from $14 to $13.50.

The Thesis

Sally Beauty has greater downside risk than upside potential at its present valuation, Wissink said in the Wednesday downgrade note. (See her track record here.) 

“Expectations for durable improvement in comp sales seem misplaced, especially as comparisons from hurricanes in [the] prior year become less of a benefit, competition intensifies and ongoing traffic and trip consolidation risks pressure rebound assumptions," the analyst said. 

The boxed color market structure drives less potential than originally anticipated, and Wissink said she now anticipates the market generating $20 million to $30 million per year versus initial estimates of $200 million.

“Store traffic continues to decay, and although we do think SBH can enhance spend per customer, we don't see enough ATV growth to drive the 2-percent-plus comps necessary to support operating and financing costs and labor inflation,” the analyst said.

Cost restructuring is a crucial aspect of Sally Beauty's business plan, but is unlikely to result in substantial net benefits, according to Jefferies.

The retailer has demonstrated insignificant income growth, which will likely cause buybacks to cease, Wissink said.

“Valuation looks cheap, but estimates look too high." 

Price Action

Sally Beauty shares were down 6.37 percent at $16.90 at the time of publication Wednesday.

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