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Why Shares of Sally Beauty Holdings Inc. Tumbled Today

By Timothy Green – Updated May 3, 2018 at 5:32PM

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Slumping store traffic and eroding margins have investors worried.

What happened

Shares of Sally Beauty Holdings Inc. (SBH -3.60%) fell on Thursday following the company's fiscal second-quarter report. Results were mixed relative to analyst expectations, with a decline in same-store sales overshadowing earnings. The stock was down 10.7% at market close.

So what

Sally Beauty reported second-quarter revenue of $975.3 million, up 0.9% year over year and in line with analyst expectations. The top line benefited from foreign currency translation to the tune of 170 basis points, meaning that constant-currency revenue declined year over year. Same-store sales slumped 1.4% during the quarter.

A slumping stock chart.

Image source: Getty Images.

Non-GAAP earnings per share came in at $0.54, up from $0.44 in the prior-year period but $0.02 short of analyst expectations. The non-GAAP numbers exclude restructuring charges as well as costs related to debt financing activities.

While Sally Beauty's per-share earnings rose during the quarter, the main drivers were lower income tax expense due to U.S. tax reform, reduced share count from share buybacks, and lower interest from debt refinancing. Both gross and operating margins declined year over year, by 60 basis points and 90 basis points, respectively.

"Although we delivered sequential improvement in same store sales and sustained growth in our Sally e-commerce business, traffic trends in our Sally Beauty stores in the U.S. continued to be a challenge," said Sally Beauty CEO Chris Brickman.

Now what

Sally Beauty now expects same-store sales to decline by 1% in fiscal 2018. Adjusted operating income is expected to decline slightly, but the company expects double-digit growth in adjusted earnings per share thanks to a lower tax rate, reduced interest costs, and a lower share count.

Along with its second-quarter results, Sally Beauty announced an expansion of its 2018 restructuring plan. The company expects to realize between $14 million and $15 million of additional annualized cost savings, with the majority being invested in key strategic initiatives.

While Sally Beauty managed to grow earnings during the quarter, it was mostly due to a one-time boost from tax reform. With same-store sales slumping, investors ignored the earnings growth and pushed down the stock.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool is short shares of Sally Beauty Holdings. The Motley Fool has a disclosure policy.

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