Strategic Growth Pillars Aid Sally Beauty, High Costs Ail

Sally Beauty Holdings, Inc. SBH is capitalizing on the strength of its strategic growth initiatives. The beauty products provider is reaping benefits from a focus on customer-centric approaches. The introduction of Happy Beauty Co. represents a promising addition. However, Sally Beauty faces ongoing macroeconomic challenges that are impacting consumer spending.
Let's discuss this in detail.

Strategic Growth Pillars Solid

The Zacks Rank #3 (Hold) company is focused on its three key strategic initiatives, which include enhancing customer centricity, growing high-margin-owned brands and carrying out innovations while increasing the efficiency of operations and optimizing its capabilities. Talking about innovation, management recently achieved significant territory expansion for two key brands in the Beauty Systems Group (BSG) segment. In the latter part of the year, Sally Beauty anticipates introducing innovation in skincare and men's grooming at Sally Beauty Supply. The company's broad-based store optimization program helped increase productivity and profitability by delivering an engaging omnichannel experience for customers.
The Fuel for Growth initiative keeps the company well-positioned to capture gross margin and SG&A gains while undertaking growth and returning shareholders' value. Sally Beauty is on track to capture pre-tax benefits of $20 million in the fiscal 2024. It has identified an additional potential pre-tax benefit of approximately $50 million in fiscal 2025, leading to cumulative benefits in the fiscal 2026 nearing $120 million.
With regard to customer-centric efforts, management is focused on acquiring new customers via marketing programs, differentiated product offerings and strategic initiatives. In its last earnings call, management highlighted that its Licensed Colorist OnDemand service is accessible nationwide online and is integrated with all Sally U.S. stores. Throughout the second quarter of fiscal 2024, the company experienced more than 3,000 consultations per week, with month-over-month growth sustained throughout the quarter.

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Happy Beauty Shows Potential

Sally Beauty is progressing with Happy Beauty Co., a unique new retail store concept that brings an engaging beauty experience to market with a value price point offering. Happy Beauty offers quality beauty at great prices in an accessible, fun and expressive environment. With a strong record of product and brand development, the company is exercising this muscle to bring compelling value alternatives to well-known premium-priced products to customers.
Management is impressed with the performance of its initial 10 pilot stores as traffic continues to build. Building on the success of the initial Happy Beauty launch, management intends to open up to 10 more pilot stores in the Dallas and Phoenix markets before Thanksgiving to further evaluate promising demographic and co-tenancy profiles. The company recently started testing a luxury closeout section on items above $10.

Challenging Market Conditions Hurt

SBH continues to battle tough macroeconomic challenges that are exerting pressure on consumer spending. Management is battling soft customer traffic and inflationary pressures. Unfavorable impact owing to store closures from the Store Optimization Program has also been hurting the company for a while. These challenges hurt Sally Beauty's second-quarter fiscal 2024 results, with the top and the bottom lines missing the Zacks Consensus Estimate and declining year over year.
Consolidated net sales of $908.4 million dropped 1.1% in the fiscal second quarter. Quarterly consolidated comparable sales dropped 1.5%, mainly due to sluggish traffic and consumer spending trends at Sally Beauty, influenced by the inflationary landscape. Sally Beauty's quarterly adjusted earnings were 35 cents per share, down from 41 cents reported in the year-ago quarter.

High-Cost Environment

Sally Beauty has been grappling with higher SG&A expenses for a while now. In the second quarter of fiscal 2024, Sally Beauty's adjusted SG&A expenses were $394.5 million, up $4.8 million year over year. Elevated labor costs and rent expenses primarily fueled the increase. In its last earnings call, management highlighted that it expects fiscal 2024 SG&A dollars to be up modestly year over year. The projection indicates increased labor costs and investments in upper funnel marketing as well as other expenses associated with strategic growth initiatives.
These negative trends indicate significant challenges and difficulties faced by the company, which require strategic adjustments and efforts to turn the situation around. SBH's shares have declined 14.8% in the past three months compared with the industry's 9.4% decline.

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