Filed Under: ,
Tickers in this Article: SBH, ACV, EBHI, PETM, BBBY
Sally Beauty Holdings (NYSE:SBH) announced beautiful second-quarter earnings April 30, doubling EPS year-over-year to $0.13 from $0.07. Suggesting it is "recession resistant," the all-important same store sales were up 2.1% in the quarter, despite overall revenues being down slightly from $643.3 million a year ago to $641.5 million in the latest quarter. It seems that the beauty supply chain spun off from Alberto-Culver (NYSE:ACV) in November 2006, is doing just fine thank-you-very-much, appearing ready to continue producing excellent results. Given its current stock price of $5.25, down 33% since becoming its own publicly traded company, I'd take a serious look.

IN PICTURES: 8 Tips For Starting Your Own Business

On Its Own
How has Sally done as an independent company? Well, its stock is off about a third since the spin-off while former parent Alberto-Culver in the same period is up 20% compared to negative 36% for the S&P 500. If you are a glass half-full type of person, you'll find it encouraging that it at least beat the index, even if it was by only 270 basis points. A win is a win.

What's interesting about its stock performance is that its financial results since going on its own are actually quite good. Analysts estimate fiscal 2009 earnings per share of $0.52, up 17.4% from $0.44 in 2008. Most importantly, in those three years, earnings have increased 112.5%; more than double what they were after its first year of independence. Yet its stock sits stuck in the mud.

Debt Is The Enemy
In my opinion, debt, personal or corporate has little use. So, Sally's $1.73 billion in long-term debt on its balance sheet, causes worry. How in the world does it expect to thrive when it has this lead weight tied around its neck? Evidently, by increasing sales in good times and bad, while keeping a lid on expenses.

In its last three fiscal years, it's increased operating margins from 7.6% in 2006 to 10.7% in 2008, a 310 basis point gain. Long-term, it definitely needs to speed up the rate at which it pays down debt, but right now, it is adding stores (134 in the last 12 months) and capturing market share.

There's nothing wrong with this approach. Management realizes Alberto-Culver saddled it with a huge burden, but rather than complaining about it, it's continuing to grow the business. Compare this to Eddie Bauer (Nasdaq:EBHI), who went into bankruptcy protection June 17, claiming " is a good company with a great brand and a bad balance sheet."

Sally's total liabilities-to-revenue are far higher than the Seattle retailer's (79.2% to 44.0%) yet it chooses success over excuses. That's good management in my eyes. (To learn more, see Breaking Down The Balance Sheet.)

The Bottom Line
Up until its fiscal year end last September, Sally was crushing the competition, which includes heavyweights Petsmart (Nasdaq:PETM) and Bed Bath & Beyond (Nasdaq:BBBY). From November 2006 until September 30, 2008, a $100 investment in Sally was worth $109.41 versus $75.66 for the Dow Jones U.S. Specialty Retailers index.

Since September 30, it's been a completely different story hitting glorious highs in October, followed by disheartening lows in December. Since the turn of the year, it's up slightly, just like the index. While it's not trading at the bargain basement prices available in January, the upside here is greater than the downside. Hopefully, once this recession recedes, management will go to work on a permanent solution for its excessive debt. If it does, there's no telling where it will end up two or three years down the road. (For more, read Analyzing Retail Stocks.)

comments powered by Disqus

Trading Center