2023-04-18 07:02:18 ET
Summary
- Sally Beauty Holdings' actual 2023 sales might exceed expectations, considering potential upside surprises associated with the Beauty Systems Group's partnerships.
- SBH is also an attractive pick in a recessionary scenario, because of the Sally Beauty Supply business' "same-for-less proposition" and its successful loyalty program.
- I view SBH's stock as mispriced and deserving of a Buy rating, considering its 2023 revenue outlook, its defensive qualities, and its current valuations.
Elevator Pitch
My investment rating for Sally Beauty Holdings, Inc.'s ( SBH ) stock is a Buy. The market has not given SBH sufficient credit for specific revenue growth drivers such as partnerships and the company's revenue resilience supported by its substantial loyalty membership base. In my view, Sally Beauty Holdings' shares are mispriced and the stock warrants a positive re-rating, which explains my Buy rating for SBH.
Business Overview
In its FY 2022 (YE September 30) 10-K filing , SBH refers to itself as "a leading international specialty retailer and distributor of professional beauty supplies." The company earned 57% and 43% of its revenue for the most recent fiscal year from the Sally Beauty Supply (consumer-focused) and Beauty Systems Group (targeted at professionals) business segments, respectively.
A Comparison Of SBH's Sally Beauty Supply And Beauty Systems Group Business Segments
SBH's December 2022 Investor Presentation
Revenue Split For SBH's Two Business Segments By Product
SBH's December 2022 Investor Presentation
In terms of geographic sales mix, Sally Beauty Holdings' home market, the US, contributed the vast majority or 82% of the company's FY 2022 revenue as indicated in its 10-K filing. The other foreign markets accounted for the remaining 18% of SBH's top line in the prior fiscal year.
Above Expectations Top Line Expansion In 2023 Could Be A Short-Term Catalyst
Sally Beauty Holdings kept the company's fiscal 2023 guidance unchanged, when SBH announced its most recent Q1 FY 2023 financial results in early February this year. As indicated in its first quarter earnings release, SBH expects a "low-single digits" percentage contraction in its top line for full-year FY 2023 taking into account "store closures" and "foreign exchange headwinds."
In November last year, Sally Beauty Holdings had revealed that it will shut down 350 stores, a move which is expected to reduce the company's FY 2023 costs by $50 million at the expense of lower revenue. Also, SBH derives close to a fifth of its sales from international markets as highlighted in the prior section, which exposes the company to unfavorable foreign exchange fluctuations such as the appreciation of the US dollar versus other foreign currencies (lower international sales denominated in USD).
I think that SBH's Beauty Systems Group segment could potentially register higher than expected revenue in the current fiscal year, thanks to its key partnerships.
At its Q1 FY 2023 earnings briefing on February 2, Sally Beauty Holdings highlighted that "the integration of our expanded Regis ( RGS ) partnership is complete" which puts it "on track to double our sales volume (from this alliance) in fiscal 2023." Regis "owns, operates, and franchises hairstyling and hair care salons" as per the stock's Seeking Alpha profile page . In FY 2022, RGS had both SBH's Beauty Systems Group business and L'Oréal S.A. ( LRLCF ) ( LRLCY ) providing beauty supplies to the company's salons. For FY 2023, Sally Beauty Holdings' Beauty Systems Group had become the sole supplier for Regis' salons, which will boost SBH's FY 2023 top line.
The Beauty Systems Group's Partnership With SalonHQ
SBH's December 2022 Investor Presentation
Another partnership worth noting is Beauty Systems Group's alliance with SalonHQ. SalonHQ calls itself "an ecommerce-as-a-service platform" which offers "stylists with their own/unique digital storefront" on its website . As mentioned by management at the company's Q4 FY 2022 results call , the SalonHQ partnership helps the Beauty System Group's stylists to "increase retail sales through strategic customer engagement while carrying less inventory." Sally Beauty Group guided at the recent Q1 FY 2023 earnings briefing that it expects the SalonHQ platform to "start to ramp" in the third or fourth quarter of 2023. Beauty Systems Group has plans in place to accelerate the roll out of the SalonHQ digital sales platform this year, and this should translate into higher retail sales contribution from stylists going forward.
Notably, there are signs that the sell-side analysts are starting to see the possibility of Sally Beauty Holdings' actual FY 2023 revenue surprising on the upside judging by the market's consensus financial figures. The current Wall Street consensus FY 2023 revenue decline for SBH is -1.5% , which is slightly more optimistic than the management's guidance of a "low-single digits" (assumed to be in the 2%-3% range) percentage drop in top line. Furthermore, all six of the sell-side analysts covering Sally Beauty Holdings' shares have raised their respective FY 2023 sales projections for the company in the last three months.
Same-For-Less Value Proposition And Loyalty Program Should Mitigate Downside Revenue Risks
The chances of a recession materializing in the near future are getting higher. Seeking Alpha News recently cited Bloomberg's economist poll with its March 28, 2023 article highlighting that "the probability of a downturn within the next year" went up from 60% in February to 65% for March. Another recent Seeking Alpha News article published on April 10, 2023 indicated that recent bond market data is pointing to signs of a "deep recession looming."
Assuming that a recession does happen, Sally Beauty Holdings could gain favor among investors as a defensive pick, especially when one considers the characteristics of the company's Sally Beauty Supply business segment.
The tagline for Sally Beauty Supply as per the company's website is "Pro Quality For Less." Sally Beauty Supply has had success in offering consumers products which are of similar quality to that used by professionals. In particular, Sally Beauty Supply generated 34% of its segment sales from own brands in Q1 FY 2023, and the growing mix of own brands within its product portfolio will enable Sally Beauty Supply to continue products of reasonable quality at attractive prices (as opposed to sourcing from external brands). A recent teen spending survey conducted by Piper Sandler found that Sally Beauty had become "a prominent destination for teens", which serves a validation of its "value-for-money" positioning that should gain traction in a recession.
Separately, Sally Beauty Supply's loyalty program is expected to be a key factor in stabilizing the company's revenue when the economy turns for the worse. As disclosed in its December 2022 investor presentation , Sally Beauty Supply's loyalty membership was as large as 17 million at the end of 2022, which contributed approximately 77% of its revenue generated from North America. SBH also revealed at the company's recent Q1 FY 2023 earnings call that the Net Promoter Score or NPS for Sally Beauty Supply was pretty good in the "low 80s" which suggests that the business has reasonably satisfied customers and members.
Bottom Line
Sally Beauty Holdings' shares are currently valued by the market at 7.2 times consensus forward next twelve months' normalized P/E as per S&P Capital IQ's valuation data. As a comparison, SBH's 10-year and 15-year mean forward P/E multiples were relatively higher at 11.2 times and 12.1 times, respectively. Sally Beauty Holdings' actual 2023 sales could surprise the market in a positive manner, while the company's defensive qualities in a recessionary scenario aren't fully appreciated by the market. In my opinion, SBH's shares are mispriced and the stock should command a higher P/E multiple in the high single digit to low teens range. As such, I have awarded a Buy rating to SBH.
For further details see:
Sally Beauty's Shares Are Mispriced