Things Are Getting Ugly at Sally Beauty Holdings

The revolving door in the beauty queen's executive suite is spinning wildly these days.

May 22, 2014 at 9:11AM

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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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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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