Sally Beauty No Longer In The Eye Of This Beholder, D.A. Davidson Downgrades

A windblown Sally Beauty Holdings, Inc. SBH is brushing out kinks. Citing hurricane impact, the company reported a 1.4-percent decline in same-store sales last quarter against Street expectations for a 1.1-percent rise.

The comps underperformance compounded top- and bottom-line misses and disappointing guidance, ultimately drawing out the cosmetics bears.

The Rating

D.A. Davidson analyst Linda Bolton Weiser downgraded Sally from Buy to Neutral and lowered her price target from $21 to $16.

The Thesis

With Sally reporting "disappointing" below-anticipated guidance for comps, gross margin expansion and SG&A expenses, Bolton Weiser said she doesn’t expect immediate improvement.

A forecast of net store closures coupled with enduring hurricane impacts in Puerto Rico justified decreases in 2018 estimates for:

• same store sales from flat-to-up to flat-to-down;
• operating profit from positive 2 percent to negative 4 percent;
• earnings before interest, taxes, depreciation and amortization from $648 million to $609 million;
• and earnings per share from $2.01 to $1.90.

“We project stability over the next few years, but we are concerned that slightly declining EBITDA could put downward pressure on share repurchase at some point,” Bolton Weiser said. “SBH has debt covenants that restrict repurchase at debt-to-EBITDA of 3.25x (currently 2.9x).”

Price Change

Sally shares plunged 3 percent on Davidson's report before rebounding to trade up on the day at $15.29.

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