What happened

Shares of Sally Beauty Holdings (NYSE:SBH) sank on Thursday after the company's results for its fiscal fourth quarter of 2020 disappointed investors. Earnings per share (EPS) were up and ahead of expectations, but revenue left Wall Street wanting more. As a result, the stock was down 8% as of 2:30 p.m. EST.

So what

For its Q4, Sally Beauty generated net sales of $958 million, which was down less than 1% year over year. Investors had expected sales to be a little bit better, but this was still a stark improvement from the third quarter, when net sales were down 28% from the prior-year period. For the fiscal year, the company generated net sales of $3.5 billion. This 9% drop from fiscal 2019 was mostly due to salons being closed because of the COVID-19 pandemic.

A frustrated man puts his hands on his face with a down stock chart in the background.

Image source: Getty Images.

With sales back, Sally Beauty delivered on profitability. The company reported diluted EPS of $0.62 for Q4, up 7% year over year. Give credit to management for controlling costs to deliver that earnings growth. Even with the struggles the company had with closed salons earlier this year, it was still able to deliver $113 million in net income for the year, which equates to diluted EPS of $0.99. 

Now what

Without a doubt, Sally Beauty Holdings trades in deep value-stock territory. Its current valuation is about 10 times trailing earnings, and that could look better next year if salons can start functioning normally again. Furthermore, the company generated $131 million of free cash flow during Q4 alone, which is a ton for a small-cap stock in a single quarter. The question investors should be asking, though, is not whether the stock is cheap -- it is. The better question is whether Sally Beauty has any sustainable advantages over its competitors moving forward. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.