1 Stunning Stock with Serious Potential

High inflation rates have caused many consumers to tighten their belts over the past few years. That, coupled with lingering supply chain snarls, has put a lot of retailers under pressure. Beauty companies have especially felt the crunch as customers held off on treating themselves but instead focused on essentials.

Sally Beauty Holdings (NYSE: SBH), a major beauty product retailer that operates through thousands of stores worldwide, is no exception to those recent hardships. SBH is down 51.5% over the past 5 years, including a 27% drop so for this year. The stock is trading well off its high-water mark of around $35, which was back in 2015.

But after the company’s 3rd quarter of 2023 earnings release, the stock jumped by as much as 11%. That may surprise some investors because the quarter’s results were solid but not spectacular. The optimism around the stock may be linked more to the news that inflation could be easing up.

If economic headwinds cool off, there’s certainly the chance that Sally Beauty turns around. The company appears to be carving out an e-commerce niche and, indeed, just announced the opening of a new discount chain of beauty retailers. Plus, it managed to hike profits in the face of a dismal consumer outlook.

So is Sally Beauty Holdings stock undervalued?

Why Did Sally Beauty Stock Go Down?

Sally Beauty shares fell because the company’s sales have been in a slump. In the 3rd quarter earnings report, Sally Beauty Holdings reported net sales of $931 million, a 3.2% decrease from last year. That was around 1% lower than analysts predicted.

The company was still able to increase GAAP gross margin to 51%. It did so by closing down unprofitable stores and increasing customer engagement with its most popular brands. In the third quarter, Sally Beauty was operating through 352 fewer locations than it was in the previous year.

Less brick-and-mortar locations, along with store optimizations and product overhauls, allowed Sally Beauty Holdings to increase net earnings by 9.1% to $50.8 million.

It also led to an increase in diluted earnings per share of 7% year-over-year. Still, 3rd quarter EPS lagged behind analysts’ estimates by 7.84%.

Another positive out of the quarter was an increase in consolidated comparable sales of 0.6%. That means Sally Beauty is keeping its customers coming back to the locations it still operates.

Meanwhile, e-commerce revenue rose by 3% and global e-commerce sales of $83 million now account for 8.9% of the company’s net sales.

What Do Analysts Say About Sally Beauty?

While the quarter had many positive indicators, analysts are still split on where the stock will go from here. Of the six analysts who have weighed in on Sally Beauty Holdings stock, there’s only one Buy rating. The most positive prediction for SBH has it jumping by 28.6% over the next 52 weeks to $12.

Half of the analysts assess Sally Beauty stock as a Hold at this price point, with the median forecast projecting the company’s shares will rise 17.9% to $11 over the next 12 months.

There are 2 Sell ratings, with the lowest of those estimates predicting SBH will drop 14.3% to $8 over the next year.

Is Sally Beauty Holdings Stock Undervalued?

While the analysts may be weighted more toward Sell ratings, a consensus does not exist. Given that SBH share price has consistently decline due, in part, to factors outside of the company’s control, there is good reason to suspect that SBH may be undervalued.

With a Price-to-Equity (P/E) ratio of 6.25x, Sally Beauty Holdings comes in lower than the retail industry as a whole, which is around 11x. It’s far lower than competitor Estee Lauder, which has a P/E value above 80x.

But despite undervaluation indicators, the main driver for any future stock gains will be sales growth. On that front there are some good omens on the horizon.

News out of the Bureau of Labor Statistics indicated that inflation dropped from 3.7% to 3.2% in October, and that was bolstered by a 5% drop in gas prices during the same month. These are positive developments for Sally Beauty if they result in consumers being more willing to fork over income.

Will Sally Beauty Stock Recover?

While the macroeconomic situation has definitely affected the company, Sally Beauty isn’t just waiting for the economy to turn around. Management has made a recent play to meet customers’ demands for lower-cost beauty products. Sally Beauty announced the launch of a new store concept called Happy Beauty Co.

These brick-and-mortar discount retail shops have opened in 10 locations so far in the Dallas and Phoenix metro areas. The store’s mission is to keep its products under the $10 mark. At this point, the brand’s products are exclusive to its retail stores and aren’t available online.

The company hopes the new focus on discount products, coupled with lower inflation and increasing e-commerce revenue will be enough to get sales back on track. If that happens, Sally Beauty stock could certainly recover.

Sally Beauty Holdings Stock, Buy or Sell?

The company’s leadership announced they would update full-year guidance to the higher end of their expectations. But overall, Sally Beauty expects 2023 revenue will be slightly lower than last year’s figures. While that won’t get many investors excited, it’s a step in the right direction given the challenges the company has faced.

There is also the fact that SBH share price has taken a substantial beating already, and it’s trading well below where it was a few years ago. The flip-side of that decline is company’s valuation appears cheap compared to the industry.

If inflation lightens up and Sally Beauty’s new store concept takes off, the stock could heat up over the next few years. But there are still too many questions looming for long-term investors to buy in.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.