Sally Beauty: This Undervalued Stock Could Surprise To The Upside (NYSE:SBH)

Sally Beauty Holdings, Inc. (NYSE:SBH) is a leading cosmetics and beauty care company. It sells to consumers through its “Sally Beauty” chain of stores, and it sells to professionals through its “Beauty Systems Group” division. It has over 4,500 stores globally, and sells online as well and through direct sales consultants. The Sally Beauty division accounts for about 57% of revenues, and the Beauty Systems Group generates around 43% of total sales, each year. This company has successfully developed many of its own brands which offer high margins and it has exclusive distribution agreements with many leading brands as well. As shown below, it also has 16 million loyalty members which account for about 77% of sales in the U.S. and Canada.

The Chart

As the chart below shows, this stock was trading around $14 per share in February, but since then it has declined to less than $11. This decline seems to have been mostly prompted by a competitor warning of a slowdown in beauty sales. At the beginning of 2024, a bullish “Golden Cross” formed since the 50-day moving average which is $12.10, crossed over the 200-day moving average which is about $10.91. The Golden Cross is still showing on the chart but it is now at risk, since this stock is now trading for about $10.60 per share.

Strategic Goals Could Significantly Benefit The Bottom Line In 2025 and 2026

Sally Beauty has a few strategic goals it has set that could lead to improved financial results over the next couple of years. The fourth goal shown below could lead to $50 million in beneficial cost savings in fiscal year 2025, and even greater benefits of $120 million in 2026. This company has nearly 105 million shares outstanding, so cost savings of $50 million could potentially bring nearly $0.50 per share to the bottom line and $120 million in cost savings could potentially impact the bottom line in a positive way, by over $1 per share.

Some Positives To Consider

In the past few years, it seems like people are more focused on their appearance, whether it is for a video call, or for pics that they want to post on social media sites. The huge increase in selfies, videos and video calls, should continue to benefit the beauty industry.

In March, 2024, DoorDash (DASH) announced a new partnership with Sally Beauty, and said that all these stores would now be available for delivery on DashPass. This is an ideal way to greatly expand delivery options and enable same-day delivery, making Sally Beauty able to compete with online giants like Amazon (AMZN) which offer rapid delivery.

Some analysts and investors believe that Sally Beauty could be an attractive takeover target. This could make sense for a few reasons, but the low valuation of this stock could be the biggest reason. This Seeking Alpha article puts forth a few potential suitors, including Amazon (as part of Amazon Beauty).

The Warnings From Ulta

On April 3, 2024, SA News Editor Clark Schultz gave details on a big drop in Ulta Beauty (ULTA) shares which occurred after the company presented at the J.P.Morgan (JPM) Retail Round Up Conference. Ulta Beauty warned that they saw some pressure on consumers because of high levels of credit card debt and interest rates. The guidance was not too bad in my opinion because the company was still guiding for low single-digit growth. That is not good enough if your stock has a high price to earnings ratio, but it still represents growth. It’s worth noting that Ulta Beauty trades for about 16 times earnings. By contrast, Sally Beauty trades for just about 6 times earnings. A sales slowdown is going to impact a stock with a much higher price to earnings ratio a lot more than a stock that trades for about 6 times earnings. Sally Beauty shares have dropped by about 20% since this warning came from Ulta Beauty. I think that is an overreaction and a buying opportunity.

Earnings Estimates And The Balance Sheet

Analysts expect this company to earn $1.87 per share in 2024, with revenues coming in at $3.72 billion. Earnings estimates for 2025, are at $1.98 per share, on revenues of $3.76 billion. Earnings are seen as rising to $2.33 per share in 2026, and revenues are expected to rise to $3.87 billion. These estimates suggest that Sally Beauty shares are trading for just about 6 times earnings. That is extremely undervalued when compared to other stocks in this sector, or to the market in general. The S&P 500 Index (SPY) currently trades for about 21 times earnings. On the balance sheet, Sally Beauty Holdings has $121 million in cash and about $1.66 billion in debt.

Potential Downside Risks

A slowdown could be in the works for the U.S. economy, but this stock already appears to be priced for a mild slowdown at just around 6 times earnings. But, if the Federal Reserve fails to cut rates before long, we could easily see the hard landing scenario play out. This could impact retail stocks significantly and possibly send Sally Beauty shares into the single digits. Competitive threats from large companies is another potential downside risk.

In Summary

This is not a stock or a sector that I would invest a lot of money in, but I think a small investment in this company makes sense after the pullback we have seen. Sally Beauty trades for just around 6 times earnings, which is deeply undervalued when compared to some competitors and to the stock market in general. With the potential for earnings to grow in the coming years thanks to the strategic cost savings plans, this stock could surprise to the upside.

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