>
  1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Praveen Chawla
Praveen Chawla
Articles (84) 

Why Sally Beauty Has Strong Upside Potential

It is poised to benefit as the economy reopens after the pandemic

February 28, 2021 | About:

As the economy reopens from the Covid-19 pandemic, I expect strong pent-up demand for many things, one of which is beauty products. I last wrote about Sally Beauty Holdings Inc. (NYSE:SBH), a retailer and wholesaler of cosmetics, hair and beauty products, in my 2019 article, "No Need to Panic: Sally Beauty Can Coexist With Amazon."

Like many retailers that rely mainly on brick and mortar locations, revenue and net income have suffered since the beginning of 2020, though cash flow remains good for Sally, helped by inventory reduction. Same store sales have decreased 3.7%, primarily reflecting temporary store closures at the beginning of the pandemic.

The company is in recovery mode now. It has strengthened its e-commerce offering with e-commerce growing by 48%, and has launched an order online, pick-up in store option for customers who want to save on shipping costs. What is really encouraging to me is that the company's profit margins have now bounced back.

a373cbff68b720c763aa91d5d97f2c8f.png

Chart 1.

A snapshot of the company's balance sheet is given below. The company has maintained a strong liquidity position with cash of $538 million and zero balance outstanding on its $600 million asset-based line of credit at quarter's end.

Chart 2. (Click for larger image)

The company ended the most recent quarter with a leverage ratio of 2.78, taking into account cash. It had levered up deal with the Covid-19 crisis and is now beginning to lever down. After the recent quarter's end, the company utilized excess cash to repay the remaining $213 million on its 4.5% fixed-rate term loan.

Chart 3. (Click for larger image)

The following diagram breaks down the company's operating cash flow (by quarter). Earnings from contiuned operations (the green bar) and core free cash flow (the orange line) have bounced back to normalized levels already.

Chart 4 (Click for larger image)

Valuation

I used Gurufocus' Discounted Cash Flow (DCF) calculator to estimate the value of the company's shares. I used $2 in earnings per share as normalized earnings (the company earned $2.27 in 2019 and $0.99 in 2020). With this and the other assumptions shown below, I came up with a value of ~$25.

Chart 5.

However, Gurufocus rates the "business predictability" of the company as low at only 1 out of 5 stars. Thus, the Gurufocus "Projected FCF" method may be a better estimate. This calcualtion shows a value of $20.92. Between both methods, we have a decent undervaluation of 20% to 40%.

Conclusion

I believe Sally Beauty is a strong candidate for a bounce back as "Main Street" in North America re-opens. The CEO has recently bought shares. Currently almost 40% of the float has been sold short and there is potential for a short squeeze. There is huge pent up demand waiting, so I estimate the stock will bounce back at least into the low to mid-$20 within the next 6 to 12 months.

Disclosure: The author owns shares in Sally Beauty Holdings Inc.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author:

Praveen Chawla
I am a full-time investor now, investing my own money. I spent most of my working life in the pharmaceutical industry.

Rating: 4.0/5 (1 vote)

Voters:

Comments

megabaloneysandwitch
Megabaloneysandwitch - 1 month ago    Report SPAM

Looks like a short squeeze is going on. Stock is up 25% in a week.

Please leave your comment:



Performances of the stocks mentioned by Praveen Chawla


User Generated Screeners


pjmason14Momentum
wigbertHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)