Sally Beauty (SBH)

Beauty supply retailer Sally Beauty (NYSE:SBH) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 2.8% year on year to $883.1 million. On the other hand, the company expects next quarter’s revenue to be around $942.3 million, close to analysts’ estimates. Its non-GAAP profit of $0.42 per share was 6.6% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $3.70 billion in revenue over the past 12 months, Sally Beauty is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

As you can see below, Sally Beauty struggled to increase demand as its $3.70 billion of sales for the trailing 12 months was close to its revenue six years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because it closed stores.

This quarter, Sally Beauty missed Wall Street’s estimates and reported a rather uninspiring 2.8% year-on-year revenue decline, generating $883.1 million of revenue. Company management is currently guiding for flat sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months. While this projection implies its newer products will fuel better top-line performance, it is still below the sector average.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Sally Beauty listed 4,446 locations in the latest quarter and has generally closed its stores over the last two years, averaging 2.1% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Sally Beauty’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat. This performance isn’t ideal, and Sally Beauty is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Sally Beauty’s same-store sales fell by 1.3% year on year. This decline was a reversal from its historical levels.

Sally Beauty has best-in-class unit economics for a retailer, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 51% gross margin over the last two years. That means Sally Beauty only paid its suppliers $49.04 for every $100 in revenue.

In Q1, Sally Beauty produced a 52% gross profit margin, in line with the same quarter last year and exceeding analysts’ estimates by 1.5%. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Sally Beauty has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 8.4%, higher than the broader consumer retail sector.

Analyzing the trend in its profitability, Sally Beauty’s operating margin might fluctuated slightly but has generally stayed the same over the last year. Shareholders will want to see Sally Beauty grow its margin in the future.

This quarter, Sally Beauty generated an operating profit margin of 7.9%, up 1.3 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Sally Beauty has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 4.8% over the last two years, better than the broader consumer retail sector.

Taking a step back, we can see that Sally Beauty’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

Sally Beauty’s free cash flow clocked in at $32.17 million in Q1, equivalent to a 3.6% margin. This result was good as its margin was 1.1 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Sally Beauty historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 12.7%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Sally Beauty reported $92.17 million of cash and $1.52 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $449.8 million of EBITDA over the last 12 months, we view Sally Beauty’s 3.2× net-debt-to-EBITDA ratio as safe. We also see its $39.72 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Sally Beauty narrowly top analysts’ gross margin expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. On the other hand, its revenue missed. Zooming out, we think this was a mixed quarter. The stock remained flat at $8.20 immediately following the results.

Updated: June 12, 2025 at 10:38 PM EDT

Are you wondering whether to buy Sally Beauty or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Sally Beauty doesn’t pass our quality test. To kick things off, its revenue has declined over the last six years, and analysts don’t see anything changing over the next 12 months. And while its admirable gross margins are a wonderful starting point for the overall profitability of the business, the downside is its declining physical locations suggests its demand is falling. On top of that, its poor same-store sales performance has been a headwind.

Sally Beauty’s P/E ratio based on the next 12 months is 4.6x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $12 on the company (compared to the current share price of $8.95).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.