Things Are Getting Ugly at Sally Beauty Holdings

Source: Wikimedia Commons.

Another week, another top executive is jumping off the Sally Beauty Holdings (NYSE: SBH  ) C-suite carousel. Following the announcement earlier this month that Gary Winterhalter was stepping down next year as company chairman, CEO, and president to assume the role of executive chairman, the president of its consumer-facing Sally Beauty Supply division also abruptly resigned last week, and did so without explanation. 

As Sally Beauty struggles to compete in the cutthroat beauty products market, second-quarter revenue rose over 2% to $919.5 million, but came in short of analysts' expectation of $932.8 million. Per-share profits also came in light at $0.36, versus the $0.39 that Wall Street anticipated.

As with many retailers, harsh winter conditions affected store traffic and sales. In warmer climes, customer traffic improved, boding well for the future, particularly as Sally managed to post a 1% increase in same-store sales overall.

According to industry watcher Lucintel, the global beauty market will hit $265 billion by 2017, growing at a compounded annual rate of 3.4%. The personal care products market is expected to reach $630 billion by 2017.

Sally, then, is experiencing growth below what the industry is achieving. Sales in 2013 were similarly anemic at 2.8%, considering that the year before it posted a revenue gain of nearly 8%. The company is also falling further behind rivals like L'Oreal, which saw a near-7% sales gain last year, and Revlon, which was up by a like amount.

ULTA Salon, the biggest beauty retailer in the U.S., has been tearing up the market, experiencing better than 14% revenue growth and 10% profit expansion in the first quarter. Those numbers were up 20% and 17%, respectively, for full-year 2013.

Still, Sally's performance has been better than peers such as Coty, which experienced flat sales in 2013, and Avon Products, where revenue is now well below where it was even five years ago.

Among Sally's problems was the late February data breach that affected some 25,000 credit card account holders. The incident forced the company to take a $1.1 million pre-tax charge in the second quarter. The risk, of course, is not the initial outlay but, as Target has shown, the expenses that build up over time. Analysts estimate the big-box retailer's much larger data breach in late 2013 will cost it more than $1 billion when all is said and done.

Target also saw top executives pushed out after its security mishap, including its CEO earlier this month. While Sally Beauty characterized its CEO change as mere succession planning -- Winterhalter is staying on as CEO till 2015 and then as executive chairman till 2018 -- the announcement's arrival so soon after the data breach indicates the incident was on everyone's mind. Target witnessed lower sales and profit in the aftermath of its security breakdown as a result of having lost consumer confidence; we'll see how much a similar occurrence affects the beauty queen.

Considering the terseness and suddenness that accompanied the division executive's exit, it may mean the issue hit closer to home, or that there's worse in store. Companies don't like to surprise markets with sudden changes like this, and now Christian Brickman, who was just appointed president and COO to take over for Winterhalter, will have to wear Anderson's cap as well.

When executive offices begin a mad scramble to fill top seats, investors may want to make a mad dash for the exits in case there are further ugly surprises about to be announced.

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  • Report this Comment On May 27, 2014, at 1:06 PM, Timbo628 wrote:

    It amazes me how articles like this miss the mark. I can tell you that Mr. Winterhalter is not being pushed out. He has been looking forward to the time where he can retire and enjoy the fruits of his success.

    You show an absolute ignorance of the business at Sally. Coty and Avon are in no ways peers of Sally. They are manufacturers and Sally is a distributor. There is a huge difference between them.

    Ulta is a more apt comparison, but Ulta is much newer and their growth is bound to be more dramatic because of that. Ulta has a number of warts that are being glossed over by their expansion, one of which is their decrease in gross profit. They do their best to camouflage the issue and analysts should demand a better accounting of just what their cost of goods really is. Listening to their new CEO on her recent earnings call, it has been "eCommerce, blah, blah, blah, eCommerce, blah, blah blah and eCommerce blah, blah, blah." While eCommerce has a place, it will always be limited in the consumer beauty business. Just go to the nail polish section in a Walmart or an Ulta and see how customers have painted the display to see what the color actually looked like. This in spite of holding the bottle in their hand. How much more removed a picture on a Website is. Just sayin'.

  • Report this Comment On May 28, 2014, at 3:04 PM, TMFSpiffyPop wrote:

    Timbo628, I know very little about this business and so can't back up or challenge your comments about Rich's article, but let me ask you this: Do you think Sally Beauty as a stock will beat the market over 1+ years going forward? If so, you can add that intelligence to our CAPS database, hold yourself accountable, and build up a ranking by clicking over to caps.fool.com and taking a stand on SBH. By the way, I'm not implying that you must do so -- you may not actually have a lot of confidence in that -- but if you do, an even stronger way to reply to any Fool article is to back up your opinion on our CAPS platform. Fool on! --David G.

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