I wrote about Sally Beauty Holdings Inc. (SBH, Financial) a couple of months ago. The stock was trading around $17 at the end of February. The company is a retailer and wholesaler of beauty products.
In my previous discussion, I wrote there was "huge pent-up demand waiting," estimating the stock would bounce back at least into the low to mid-$20 within the next six to 12 months. This has happened much faster than I expected, having achieved my target is under three months. The question now is whether or not there is more upside to the stock.
The company recently reported outstanding results and appears to be on a roll with same-store sales increasing by 6.5% and e-commerce sales increasing 56%.
The GAAP gross margin was 50.4%, up 110 basis points compared to the prior year. It also reported GAAP operating earnings of $76 million and a GAAP operating margin of 8.2%, adjusted operating earnings of $112 million and an adjusted operating margin of 12.1%, up 510 basis points compared to the prior year.
Sally Beauty also recorded GAAP diluted net earnings per share of 34 cents and adjusted diluted net earnings of 57 cents per share, up 183% and 148% compared to the prior year. It has a strong liquidity position, balance sheet cash and cash equivalents of $408 million and zero balance outstanding on $600 million in asset-based line of credit at quarter end.
In January, the company utilized excess cash to fully repay the outstanding balance of $213 million of its 4.5% fixed rate term loan. Additionally, it ended the quarter with a net debt leverage ratio of 2.34, reflecting its significant cash balance. The company also reported that subsequent to quarter end, on April 1, Sally Beauty utilized excess cash to fully repay the outstanding balance of $197 million of its 5.50% unsecured notes due 2023.
The company's operating and free cash flow per share has continued to surge and now the company is focusing on deleveraging instead of buying back shares.
I am revising my target 12-month target to $35. This is based on the GuruFocus discounted cash flow calculator. I used a discount rate of 8% and a starting free cash flow of $2.20 per share. Growth is assumed to be 7.1% for the first 10 years and 3% for the final 10 years (actual FCF per share growth has been 9.10% for the past decade).
Conclusion
The company has much further to go in its recovery and the momentum from the pent-up demand continues. Consumers are awash with liquidity pumped into the economy by the government and are itching to go out and party. About a third of Sally Beauty's stores are either still shut or operating at reduced capacity, mainly in Europe and Canada. As the pace of vaccinations increases and people begin to feel more confident, they will socialize more and sales of beauty products are bound to increase.
Disclosure: The author owns stock of Sally Beauty Holdings.
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