Beauty supply retailer Sally Beauty (NYSE:SBH) missed analysts' expectations in Q4 FY2023, with revenue down 4.3% year on year to $921.4 million. Turning to EPS, Sally Beauty made a non-GAAP profit of $0.42 per share, improving from its profit of $0.20 per share in the same quarter last year.
Sally Beauty (SBH) Q4 FY2023 Highlights:
- Revenue: $921.4 million vs analyst estimates of $931.2 million (1.1% miss)
- EPS (non-GAAP): $0.42 vs analyst expectations of $0.46 (7.8% miss)
- Guidance for flat same-store sales next year in FY24 (miss vs. expectations of up 2%)
- Free Cash Flow of $89.59 million, up 19.1% from the same quarter last year
- Gross Margin (GAAP): 50.6%, up from 50.1% in the same quarter last year
- Same-Store Sales were down 1.6% year on year (miss vs. estimates of flat)
- Store Locations: 4,486 at quarter end, decreasing by 308 over the last 12 months
Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE:SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.
With regards to the merchandise selection, the company has a strong focus on hair color, hair care, skin care, and nail products. Brands such as Wella, Clairol Professional, and Conair can be found in stores. A Sally Beauty store tends to be small, roughly 2,500 square feet, and located in urban and suburban shopping centers. The company also has an e-commerce platform, launched in 1999, that supplements its brick and mortar operations.
The company operates two banners: Sally Beauty Supply and Beauty Systems Group. Sally Beauty Supply serves the everyday consumer while Beauty Systems serves the salon professional and requires certain credentials and identification to enter. Beauty Systems burnishes the company’s reputation, showing the everyday consumer that Sally Beauty products are used in salons, while Sally Beauty Supply addresses the much larger market of consumer beauty aficionados.
The core customer of Sally Beauty Supply is typically a woman between 18 and 35 years old who considers herself a beauty enthusiast. She has specific preferences with regards to her beauty products and desires more professional-grade offerings which may not be available in the average department store or general merchandise retailer.
Beauty and Cosmetics Retailer
Beauty and cosmetics retailers understand that beauty is in the eye of the beholder, but a little lipstick, nail polish, and glowing skin also help the cause. These stores—which mostly cater to consumers but can also garner the attention of salon pros—aim to be a one-stop personal care and beauty products shop with many brands across many categories. E-commerce is changing how consumers buy cosmetics, so these retailers are constantly evolving to meet the customer where and how they want to shop.
Retailers specializing in beauty products include Ulta Beauty (NASDAQ:ULTA) and Bath & Body Works while department stores such as Kohl’s (NYSE:KSS) and Macy’s (NYSE:M) typically feature large cosmetics and fragrance sections.
Sales Growth
Sally Beauty is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.
As you can see below, the company's annualized revenue growth rate over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was flat, or negative 1%, as its store count shrunk.
This quarter, Sally Beauty reported a rather uninspiring 4.3% year-on-year revenue decline, missing Wall Street's expectations. Looking ahead, analysts expect sales to grow 1.5% over the next 12 months.
Number of Stores
A retailer's store count often determines on how much revenue it can generate.
When a retailer like Sally Beauty is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Sally Beauty's store count shrank by 308 locations, or 6.4%, over the last 12 months to 4,486 total retail locations in the most recently reported quarter.
Taking a step back, the company has generally closed its stores over the last two years, averaging a 5.1% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.
Same-Store Sales
A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform. This is a key performance indicator for retailers because it measures organic growth and demand.
Sally Beauty's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 1.1% year on year. Given its declining store count over the same period, this performance stems from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores.
In the latest quarter, Sally Beauty's same-store sales fell 1.6% year on year.
Gross Margin & Pricing Power
Sally Beauty has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see below, it's averaged an exceptional 50.8% gross margin over the last two years. This means the company makes $0.51 for every $1 in revenue before accounting for its operating expenses.
Sally Beauty's gross profit margin came in at 50.6% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).
Operating Margin
Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
In Q4, Sally Beauty generated an operating profit margin of 8.3%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.
Zooming out, Sally Beauty has done a decent job managing its expenses over the last eight quarters. It's produced an average operating margin of 9.6%, higher than the broader consumer retail sector. However, Sally Beauty's margin has slightly declined by 1.2 percentage points year on year (on average). This shows that despite its success, the company has faced some small speed bumps.
EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q4, Sally Beauty reported EPS at $0.42, up from $0.20 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2020 and FY2023, Sally Beauty's adjusted diluted EPS grew 44%, translating into a solid 14.7% average annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 10.7% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Sally Beauty's free cash flow came in at $89.59 million in Q4, up 19.1% year on year. This result represents a 9.7% margin.
Over the last two years, Sally Beauty has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 2.9%, slightly better than the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 2.8 percentage points. This likely pleases the company's investors.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Sally Beauty has a decent track record of investing in profitable projects and has the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average ROIC is 17.5%, slightly better than the broader sector.
Key Takeaways from Sally Beauty's Q4 Results
With a market capitalization of $876.2 million, Sally Beauty is among smaller companies, but its $123 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We struggled to find many strong positives in these results. Its same-store sales and revenue unfortunately missed analysts' expectations, leading to an EPS miss. Next year, guidance calls for flat same-store sales, meaning no growth in sales at existing stores. Overall, the results could have been better. The company is down 1.6% on the results and currently trades at $8 per share.
Is Now The Time?
Sally Beauty may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of Sally Beauty, we'll be cheering from the sidelines. Its revenue growth has been weak over the last four years, but at least growth is expected to increase in the short term. And while its impressive gross margins are a wonderful starting point for the overall profitability of the business, the downside is that its decline in physical locations suggests its demand is shrinking. On top of that, its mediocre same-store sales performance has been a headwind.
Sally Beauty's price-to-earnings ratio based on the next 12 months is 4.0x. While we think the price is reasonable and there are some things to like about Sally Beauty, we think there are better opportunities elsewhere in the market right now.
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