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Sell Sally Beauty Amid Tougher Competition From Target, Ulta, Analyst Says

Shares of Sally Beauty Holdings (SBH) dropped in morning trading after an analyst downgraded the stock to the firm's equivalent of a sell rating, saying its retail segment is facing tougher competition while its professional segment is decelerating.

TOUGHER COMPETITION: Morgan Stanley analyst Simeon Gutman this morning downgraded Sally Beauty to Underweight, the firm's equivalent to a sell rating, and lowered his price target on shares to $15 from $22. In a note to clients, Gutman said the retail segment is facing tougher competition, which is leading to margin erosion and negative comps as well as intensifying EBIT pressure. Gutman, like several other analysts, noted the "more crowded" beauty landscape, and said competitive pressures from Target (TGT), Wal-Mart (WMT) and Ulta (ULTA) appear to be "catching up" with Sally, adding that Sally's value offering is relatively less compelling in the current highly promotional environment. Looking ahead, Gutman expects retail segment comps will be modestly negative for the foreseeable future and believes margins will also continue to erode. Sally's professional segment typically offsets weakness in the retail segment, but it is also decelerating, the analyst noted.

WHAT'S NOTABLE: In October, Piper Jaffray analyst Erinn Murphy downgraded Ulta following a survey showing a slowdown in beauty spending by teenagers. At the time, Murphy said her firm's Fall 2017 Teen Survey results indicated spending declines of 13% in color cosmetics among all female teenagers. While skincare declines were "less bad," down 7% year-over-year, overall beauty wallet was down low-double digits. Sally Beauty and Ulta also face competition from department stores like Macy's (M), which are discounting high-end cosmetics and offering rewards, and Amazon (AMZN). DA Davidson analyst Linda Bolton Weiser has speculated whether Sally Beauty will be, or should be, an acquisition target for Amazon, as beauty "has been a hard category to crack" for Amazon. The analyst previously said Sally is more Amazon-proof than many retailers.


UPCOMING EARNINGS: Sally Beauty is expected to report fourth quarter earnings on November 21. Analysts currently expect the company to report EPS of 48c on revenue of $991.17M. After reporting third quarter EPS that beat expectations, Sally backed its view of approximately flat full year consolidated same store sales growth, and expects full year net new store growth of approximately 1.5%.

PRICE ACTION: In morning trading, shares of Sally Beauty are down 8% to $15.68. Shares are down over 40% year-to-date. Peer Ulta Beauty is also lower by 1.2% this morning.


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