2023-11-15 16:52:45 ET
Summary
- Sally Beauty Holdings, Inc. stock is setting up for a potential trade opportunity.
- Target entry points for the trade range from $9 to $8, with crystal clear stop loss and target exit guidance.
- The market reacted well to relatively bad news, signs of a bottom.
- Effective uses of cash are bullish.
Sally Beauty Holdings, Inc. ( SBH ) is a stock we have traded a number of times, with our last trade one year ago in November that was closed in January for about 33% gains. We are looking to trade this stock again following the just-reported fiscal Q4 earnings . While the inflation issues are easing and the supply chain issues from the past have subsided largely, the biggest prevalent risk is management's anticipation of a weakening consumer, which has resulted in a cautious forward look.
Despite this bad news, SBH shares are holding up here and we think this stock is setting up for a swing off of its rock-bottom valuations. We think the stock is setting up for a nice trade, and think you can scale in once again. Of course, the stock is not without risk, and the concerns over the health of the consumer come with a mild recession perhaps around the corner, as is the debt load of the company in a higher rate environment.
Still, we think this is set up for a swing. Here is how we would play this, with the type of trade we would outline for members at our investing service.
The play
Target entry 1: $8.95-$9.05 (30% of position)
Target entry 2: $8.35-$8.45 (33% of position)
Target entry 3: $7.90-$8.05 (37% of position)
Stop loss: $6.75
Target exit: $11+ if one leg, 10+ if 2-3 legs
Options considerations are not shared on public articles and are reserved for members of our investing group
Discussion
The market saw a massive pull back for three months, with a sharp rally in the last two weeks. We expect some mean reversion that should set SBH stock up for entry as outlined above. However, the one question we receive is "what happens if we don't get all 3 legs of the trade?" The answer is always simply that "it is a high quality problem, but we made money."
We much prefer to scale in for a swing rather than buy all at once and need a rally just to get back to even. We keep the stop relatively tight for small position trades, with the goal of hitting on these trades with 80% success. Over time the math plays out. So, we think following this earnings, where the outlook was questionable, and that the stock did not react overly negative, it is a good time to leg in on future market weakness. That said, the top line was a bit weaker than expected versus consensus in the fiscal Q4 report. Now, there is concern over the consumer, but we see the company as performing well into the holiday fiscal first quarter. Beauty sales remain strong as we emerge from the lingering impacts of COVID. People want to go out, and be seen, and even if working from home, they are on camera. We like this space, and with the supply chain issues resolved that were a huge issue in late 2021 and 2022, it comes down to the consumer. Sure, there is some softening, but we think the concern of significant pressure on retailers is overblown, and largely priced in.
The company is bringing in solid revenues, demonstrating demand for the products it carries, though there was some comp weakness. The sales came in at $921 million and missed estimates by $9.8 million. That was surprising, as we were expecting sales down 1-2%. Instead, sales were down 4.3% from a year ago, which isn't terrible, all things considered the way this market has gone and concerns over the consumer. Of course, the student loan repayment issue is a risk that we have not yet seen play into sales, so that is a possible risk to our trade. Overall, we think the sales figure was fine.
The one critical metric we really focus on with retailers is comparable sales, and they dipped. We thought we would see the stock get nailed on this, but it did not. It has rallied, and that is usually a sign of a bottom in sight. Consolidated comparable sales declined 1.6%, a bit more than the flat to down 1% we thought we might see. However, the overall sales decline is muted when we consider that the company was operating 308 fewer stores at the end of the quarter compared to the prior year, and that hits overall sales. E-commerce sales were about the same as a year ago. Where we saw strength was in margins.
Consolidated gross profit for Q4 was $466.6 million, an increase of $3.1 million from the prior year, impressive with less stores open and lower sales. Consolidated gross margin was 50.6%, a nice increase of 240 basis points compared to the prior year's 48.2%. Adjusted margin was 50.6% up from 50.1% last year. Selling and administrative expenses also fell $7.3 million from a year ago.
Adjusted operating earnings and operating margin were $79.3 million, down from $83.9 million as higher labor costs offset lower advertising costs and other operating expenses. Finally, net income was $45.7 million, a decrease of $9 million from last year. On a per share basis we saw $0.42 of earnings, which beat consensus by $0.04.
Looking ahead
Sally Beauty ended the year with $123 million of cash and cash equivalents and now outstanding under its asset-based revolving line of credit. The net debt leverage ratio stood at 2.1 times. A few years ago, leverage was nearly 3X and it is down from 2.2X a year ago. So progress has been made here. The company used its strong cash flow to acquire assets from Goldwell of New York for $9 million, repay the remaining $16 million outstanding balance under its asset-revolving line of credit, and management also repurchased 1.5 million shares under its share repurchase program.
Finally, valuation -wise, Sally Beauty Holdings, Inc. shares are on sale. With $1.83 in EPS, shares at $9. are 4.9 trailing earnings. As we look ahead, management sees margins above 50%, operating margin over 9%, flat sales, and operating cash flow of $260 million. Assuming these metrics come in, we should see earnings of $1.90 to $2.30. That puts shares at just over 4.3X FWD EPS at the midpoint end of this range. Basement bargain prices in our opinion. We think you scale in on any weakness after buying the first lot here, and there is a high likelihood of a trade succeeding here.
For further details see:
Swing-Trading Sally Beauty Holdings Q3 Earnings