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When Amazon Attacks: Why Sally Beauty Stock Dropped 13.5%

By Rich Smith - Jun 24, 2019 at 1:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More's entry into the cosmetology market is some ugly news for this beauty company.

What happened

Shares of beauty products retailer and distributor Sally Beauty Holdings (SBH -3.24%) are down 13.5% as of 12:55 p.m. EDT. The reason:

This morning, (AMZN -1.98%) announced on its Amazon Business blog that it has just launched a specialized Amazon Professional Beauty Store catering to "professional stylists, barbers, and estheticians."

Woman applying red lipstick.

Image source: Getty Images.

So what

This is the latest example of "the Amazon effect," a phenomenon in which the mere suggestion by Amazon that it may intend to compete in a market can cause investors to flee, screaming, from the stocks of companies already competing in that market.

According to data from S&P Global Market Intelligence, sales to beauty industry professionals through its Beauty Systems Group account for 41% of Sally Beauty's business. These sales are now at risk.

Granted, it's not as if Amazon has never sold beauty products before now. In fact, I'd bet money that from time to time in the past, one cosmetology shop or another has placed bulk purchases at Amazon -- it's just that now, Amazon says it's looking more intently at this space and targeting it, which is why investors are scared.

Now what

That being said, even Amazon isn't entirely unstoppable. Nor do its ventures into new areas of business always work out. In 2015, for example, Amazon exited its Destinations online travel booking business. In April 2019, Amazon abandoned efforts to break into online shopping in China. And just earlier this month, Amazon ended its Amazon Restaurants experiment.

By which I mean to say, Sally Beauty may be down today, but at a valuation of just six times earnings, I wouldn't necessarily count Sally Beauty stock out quite yet.

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Stocks Mentioned

Sally Beauty Holdings, Inc. Stock Quote
Sally Beauty Holdings, Inc.
$14.64 (-3.24%) $0.49, Inc. Stock Quote, Inc.
$2,216.21 (-1.98%) $-44.89

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