Sally Beauty Holdings Inc. SBH could deliver a share price turnaround after its 4% decline in the last year.
The beauty products retailer is investing in improved technology, new products and a loyalty program that are expected to boost its financial performance.
Its low valuation suggests the stock currently offers good value.
Innovative growth strategy
The company’s ongoing investment in its product pipeline could strengthen its competitive advantage. For example, in its fiscal fourth quarter, the business launched the Swedish vegan brand Maria Nila to remain on-trend with its potential customers at a time when many consumers are becoming increasingly environmentally conscious. It also expanded its men’s barbering range with its fourth-quarter launch of the Elegance line of products. This could broaden its appeal to a wider range of consumers.
Sally Beauty debuted its new loyalty program at the start of fiscal 2019. It provides free membership to existing customers that enables them to earn rewards based on the dollar amount of products that they purchase. The program has recorded a fast pace of growth since its inception, and now has 16 million active members. It provides the company with extensive data on its customers that can be used to improve the relevancy of its product recommendations. This may increase its sales per customer, as well as improve the level of customer loyalty that it enjoys.
Investing in technology
Sally Beauty rolled out its new checkout system across 1,500 of its stores in the fiscal fourth quarter. It plans to complete the rollout across all of its stores in the U.S. and Canada by March 2020. Its revised checkout system provides customers with a faster shopping experience. It also integrates the company’s loyalty program and its website to improve its efficiency.
It also launched a new mobile app in the fourth quarter, which has been downloaded 550,000 times, being particularly popular among the company’s younger customers. This could improve its financial prospects since generation Z consumers currently spend $143 billion per annum in the U.S. and are forecasted to contribute a rising proportion of total retail spending in the future.
Its mobile app includes innovative features such as "Colorview," which makes it easier for the company’s customers to decide which hair color products to purchase. This could increase Sally Beauty’s sales per customer, as well as differentiate its shopping experience from that of sector peers.
Potential threats
The company’s performance in Europe was disappointing in its fiscal fourth quarter. In 2019, its European operations contributed just $32 million to group profit of $575 million despite representing around 20% of the overall business. Sally Beauty’s European business has experienced difficulties following recent changes in the suppliers that it uses, as well as its increasing use of a one-size-fits-all strategy that has failed to take into account different consumer tastes across a diverse continent.
In response, the company is seeking to take the successful parts of its North American strategy and use them to boost its performance in Europe. For example, it will aim to bring increasingly innovative products that appeal to local markets within Europe. In addition, it plans to upgrade its supply chain to include new technology, which could reduce costs and boost its profitability. It also plans to rely to a greater extent on customer data to provide more relevant recommendations that could enhance its long-term financial performance in the region.
Outlook
Market analysts forecast the company will report a 5% increase in its earnings per share in the next fiscal year. Its price-earnings ratio of 9 suggests it offers a margin of safety.
Disclosure: The author has no positions in any stocks mentioned.
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