Shares of Sally Beauty Holdings (NYSE:SBH) are quickly falling back to the levels at which Alberto-Culver (NYSE:ACV) spun it off last November. Does this mean the market expects Sally to fail as an independent retailer and distributor of beauty supplies?
Alberto-Culver didn't make life easy for Sally Beauty, saddling it with $1.85 billion in debt when it spun it off to shareholders. Sally Beauty paid down $22 million during its fiscal third quarter, and plans on paying down more debt as time goes on.
The company plans on staying profitable despite the hefty debt load, and is growing the top line. For the quarter, company sales grew 6% as total sales at the flagship Sally Beauty Supply stores advanced 12.9% and same-store sales increased 3.4%. The Beauty Systems Group, which sells to salon professionals and accounted for about 37% of total quarterly sales, saw a drop, since L'Oreal is no longer selling its products through BSG.
Third-quarter developments led to a fall in earnings, and 2007 looks to be a challenging year as management offsets the L'Oreal loss. But overall, the company has a track record of solid operating cash flow generation. This should allow it to continue opening new stores and pursue smaller acquisitions in the highly fragmented domestic salon market.
Based on store count, Sally Beauty bills itself as the largest distributor of beauty supplies. As such, it believes it has certain advantages in negotiating with suppliers and has the clout to act as an industry consolidator. Its stores are also quite profitable, selling products from Clairol, Revlon (NYSE:REV), and Conair. And with 3,300 existing locations, there should be plenty of room to open new stores.
Given Sally Beauty's very limited history as a standalone entity, the recent loss of L'Oreal, and the high debt levels, I'd rather stay on the sidelines, observing how management works through the smudges holding it back from realizing the full potential of an appealing business model. For another beauty-related play with potential, Fools can check out the recent developments at Avon Products (NYSE:AVP)
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
