The past six months have been a windfall for Sally Beauty’s shareholders. The company’s stock price has jumped 48%, hitting $13.35 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Sally Beauty, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sally Beauty Will Underperform?
We’re happy investors have made money, but we're cautious about Sally Beauty. Here are three reasons why SBH doesn't excite us and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Sally Beauty’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
2. Fewer Distribution Channels Limit its Ceiling
With $3.69 billion in revenue over the past 12 months, Sally Beauty is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Sally Beauty, its EPS declined by 2.7% annually over the last six years. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS because it could imply changing secular trends and preferences. If the tide turns unexpectedly, Sally Beauty’s low margin of safety could leave its stock price susceptible to large downswings.
Final Judgment
Sally Beauty falls short of our quality standards. Following the recent rally, the stock trades at 7.1× forward P/E (or $13.35 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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