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Here's the Real Reason Sally Beauty Holdings Stock Dropped on Thursday

By Jon Quast – Updated Jul 30, 2020 at 3:44PM

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It was a rough quarter because of the coronavirus, but did investors have reason to believe it would be much better than this?

What happened

Shares of Sally Beauty Holdings (SBH -0.37%) fell on Thursday, after the company reported a steep drop in both revenue and earnings in the fiscal third quarter of 2020. However, because of the coronavirus, this shouldn't have caught anyone off guard. But it's possible management inadvertently set investors' expectations too high.

Sally Beauty Holdings stock finished the day down 12%. Shares are now 45% lower than 52-week highs.

A woman makes a shocked expression against a blue background.

Image source: Getty Images.

So what

Sally Beauty Holdings has over 5,000 stores, and those were closed for the COVID-19 pandemic. Second-quarter revenue and earnings were down as the company scrambled to deal with the situation. But it began launching ship-from-store options for e-commerce, and that helped mitigate the downside.

Management focused on e-commerce in its press releases. Not only did it highlight triple-digit e-commerce growth in the Q2 report, but showcased it in two subsequent business updates. Furthermore, it noted "strong" product demand at reopened stores. It all sounded very positive.

Today, Sally Beauty Holdings reported net sales of $705 million, down 28% year over year. The company also posted a net earnings per share (EPS) loss of $0.21 according to generally accepted accounting principles (GAAP) when Wall Street had expected a profit. Needless to say, this led to the stock falling today.

SBH Chart

SBH data by YCharts.

Now what

Earnings reports are funny things. How the stock market reacts in the short term has as much to do with relative expectations as the actual numbers. A stock can go up when the company reports bad numbers, so long as Wall Street expected worse.

Indeed, e-commerce sales for Sally Beauty Holdings were up a whopping 278% in Q3, coming in at $137 million. But this gaudy growth percentage is measured from a small starting point. Also, investors should note there is strong demand right now. Same-store sales in June were up 23% from June 2019. That's a fabulous recovery. It was just too late in the quarter to bounce back from the 82% drop in April.

This provides two lessons for investors. First, when a company provides bullet-point highlights, ask which metrics are missing. In this case, overall net sales and earnings weren't mentioned in either business update -- only e-commerce growth. That was a good indication that revenue and profits weren't worth highlighting.

Second, a one-day stock move is fickle. When investing in stocks, we should be focused on the long term. If I were a Sally Beauty Holdings shareholder, I'd be encouraged that demand in June was strong; what's already happened is in the past.

Going forward, shareholders should monitor whether the strong demand in June is sustainable or whether consumers are merely catching up with cosmetic purchases delayed earlier in the year. I'm inclined to think it's the latter.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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