What's Ahead for Sally Beauty?

Beauty company Sally Beauty Holdings (NYSE: SBH  ) reported its fourth-quarter and full-year results last week. The quarter missed analyst estimates but the year came closer to meeting expectations. The earnings call explained what Sally has planned to improve business in the near future and how they're positioned against competitors, such as Ulta Salon, Cosmetics & Fragrance (NASDAQ: ULTA  )

Analysts had predicted quarterly revenue of $910 million and $3.6 billion for the year. Sally reported $906 million for the quarter but still met the estimate for the year. Earnings per share estimates were $0.39 for the quarter and $1.50 for the year. Sally came in shy with diluted EPS of $0.38 for the fourth quarter and $1.48 for the year. 

Sally Beauty's target audience is small to mid-size beauty businesses that lack the size required to make deals directly with manufacturers. The specialty items Sally stocks tend to carry higher price points than the more consumer-driven products at beauty megastore Ulta Sally posted a strong performance last year -- and that made this year's weakness look even worse. That weakness continued into the fourth quarter. 

However, Sally has plans in place to deliver a better year in 2014. Here are a few of the company's tactics. 

Comps suffered under marketing change
Sally Beauty's third quarter report had showed weak comps due to a drop in non-Beauty Club member shoppers. Management blamed the change on a switch from targeted marketing mailers to a more general audience approach. The company has since switched back to the old marketing model in July, but says that it tends to take three to four mailers before a particular customer will come and shop. 

So Sally wasn't expecting any comp improvement in the fourth quarter and same-store sales ended up at 0.4% for the fourth quarter and 0.8% for the year. However, the company's forecasting 2014 comps between 1% and 3%.  

New products launching
Sally Beauty started selling the TIGI Pro hair care product in September and the CHI Elite range of electrical hair tools in the following month. A full rollout of OPI nail polish is happening now.

Ulta carries some TIGI and CHI products but not the same lines as what Sally will stock. The OPI products are easier to find at both Ulta and other large beauty retailers, but Sally Beauty will presumably have a better and more consistent inventory so as to appeal to beauty professionals as well as general shoppers..

Sally has also began stocking the Curl Genius, a $100 automatic curling device previously only available in Europe. The original device earned a lot of positive attention from beauty bloggers and has gained a bit of a following. Sally expects the Curl Genius to sell well during the holiday season. 

Ulta's competition 
Ulta reported second quarter results in September and beat analyst estimates with $601 million in revenue and EPS of $0.70. Comps for the quarter were up over 8%.

Why did Ulta outperform while Sally slipped? Ulta has a better mix of well-known brand name products across a variety of price points and it has the ability to offer a wider range of promotions to get customers through the door. Sally is set up more as a wholesaler to beauty professionals and the more utilitarian storefronts might not appeal to customers accustomed to the attractive floor-plan of Ulta locations. Before this year, Sally lacked a strong footing in quickly recognized brand names.  

Foolish final thoughts
Sally Beauty's hoping the marketing turnaround will help comps recover in 2014. The launch of several new big-name brands could help steer customers away from Ulta long enough to pick up some of Sally's private label products. 


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