Why Sally Beauty Shares Looked Ugly on Thursday

The beauty products retailer whiffed on earnings. But is a turnaround approaching?

Brian D. Pacampara, CFA
Brian D. Pacampara, CFA
Aug 6, 2015 at 1:37PM
Consumer Goods

What: Shares of beauty products retailer Sally Beauty Holdings (NYSE:SBH) were down 13% at 1:30 p.m. Thursday after its quarterly results disappointed Wall Street.

So what: Sally Beauty shares have slumped recently on worries that a May security data breach would ultimately weigh on demand, and today's wide Q3 miss -- adjusted EPS of $0.41 on revenue of $967.9 million vs. the consensus of $0.46 and $969 million -- only reinforce those concerns. Additionally, gross margin slipped 50 basis points over the year-ago period to 54.9%, suggesting that the company continues to struggle with rising costs as well. 

Now what: Management remains optimistic that same-store sales will get back to historical trend levels of 3% to 4% over the next several quarters. "We are disappointed in the Q3 results for our Sally business, but not discouraged," said CEO Christian Brickman. "It is taking longer than we expected for traffic from the non-Beauty Club Card customer to recover, but we still have great confidence that we are moving in the right direction." Given Sally's worrisome top- and bottom-line trends, hefty debt load, and intense competitive environment, however, I'd hold out for a much wider margin safety before betting on that sentiment.