Elevator Pitch
I continue to rate Sally Beauty Holdings, Inc. (NYSE:SBH) shares as a Buy based on my view of the company for the near term and long term. In the short term, SBH’s Q2 FY 2023 (YE September) sales beat expectations, and the company’s FY 2023 guidance is too conservative in my opinion. For the long run, I expect the increase in the number of Sally Beauty Holdings’ loyalty members to be a substantial growth driver for the company.
SBH’s Unchanged Guidance Reflects A High Degree Of Conservatism
I previously initiated on SBH with a Buy rating in my April 18, 2023, initiation article. Sally Beauty Holdings’ stock price declined by -11.0% (source: Seeking Alpha price data) in the two and a half months period following the publication of my earlier write-up. As a comparison, the S&P 500, a proxy for the broader market, went up by +6.9%.
Sally Beauty Holdings made the decision to stick with its initial full-year guidance of a “low single digit” increase in comparable sales and a “low single digit” decrease in net sales for FY 2023. The market was disappointed with SBH’s unchanged guidance, given the fact that the company’s Q2 FY 2023 performance was above expectations.
For the first time in five quarters, SBH registered a positive YoY net sales growth of +0.8% in Q2 FY 2023 as disclosed in its most recent quarterly earnings release. In contrast, Sally Beauty Holdings’ top line contracted by -1.6%, -6.0%, -2.8%, and -2.4% for Q2 FY 2022, Q3 FY 2022, Q4 FY 2022, and Q1 FY 2023, respectively on a YoY basis. Furthermore, SBH’s Q2 FY 2023 top line of $918.7 million turned out to be +3.3% better than the sell-side’s consensus forecast of $889.0 million.
Also, Sally Beauty Holdings’ comparable sales growth improved substantially from a mere +0.2% YoY for the second quarter of the prior fiscal year to +5.7% in Q2 FY 2023.
With my prior mid-April article, I had highlighted that “Sally Beauty Supply business’ ‘same-for-less proposition'” and “Beauty Systems Group’s partnerships” could potentially allow the company to report higher than expected top line in the current fiscal year. As such, SBH’s above-expectations net sales and comparable sales in Q2 FY 2023 provide support for my bullish view of the company’s full-year performance.
In my opinion, Sally Beauty Holdings was too cautious with its unchanged sales guidance, and SBH’s shares have been unfairly penalized. At its Q2 FY 2023 results call, SBH noted that there was “some softening in transactions and ticket at the end of March that continued in April”, but it stressed that “the cadence in the quarters of the year is playing out largely as we expected.” It is noteworthy that the current market consensus FY 2023 top-line growth projection for Sally Beauty Holdings is -1.1%, which can be interpreted to be better than the company’s guidance for a “low single digit” decline in its revenue for this year.
In a nutshell, SBH is overly conservative, as it relates to the company’s financial guidance judging by management commentary and the sell-side’s consensus estimates. In that respect, I believe that Sally Beauty Holdings’ actual FY 2023 sales can surpass the company’s current guidance.
Long-Term Growth Opportunity Relating To Loyalty Member Conversion
Looking beyond the company’s short-term guidance as discussed in the previous section, I think that converting more of its customers to loyalty members is the biggest growth driver for SBH in the long run.
Sally Beauty Holdings shared at the company’s Q2 FY 2023 results call about the key characteristics of its loyalty members. SBH specifically mentioned that “more frequent transactions, higher basket (volume), typically higher cross-category penetration” are what separates loyalty members from non-members. The company also highlighted that its “top-tier” loyalty members usually visit its stores “two or three more frequently than the average customer.”
Therefore, it is easy to appreciate why a significant growth in the number of loyalty members will be a major boost for SBH’s future sales and earnings. Both Sally Beauty Holdings’ Sally Beauty Supply and Beauty Systems Group business segments hold great promise for further loyalty membership penetration.
As disclosed in its investor presentation slides, the Sally Beauty Supply segment derives around 78% of its revenue in the US and Canada from loyalty members. But the loyalty members’ sales contribution for Sally Beauty Supply in foreign markets isn’t disclosed, and it is reasonable to assume that the number could be lower than 78%. Sally Beauty Supply had 2,322 and 821 stores located in the US and non-US markets, respectively, as of the end of the most recent quarter. These figures suggest that there is significant potential for Sally Beauty Supply to increase its loyalty membership penetration rate in foreign markets.
Separately, SBH’s Beauty Systems Group business only had loyalty members accounting for just 9% of its Q2 FY 2023 segment sales. It isn’t a big surprise that the Beauty Systems Group segment’s loyalty member penetration is low. The company’s Beauty Systems Group business had only initiated its loyalty program a few years back in 2020, so it will naturally take time for this segment’s loyalty member sales contribution to rise to a similar level as that of Sally Beauty Supply.
Closing Thoughts
I continue to have a positive view of Sally Beauty Holdings’ outlook, taking into account its recent quarterly performance and its loyalty membership program metrics. As such, my Buy rating for SBH stays unchanged.
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