Sally Beauty Holdings Inc. continued to post gains in the third fiscal quarter, growing net sales 3.1 percent.
The business posted a consolidated gross profit of $499 million, up 3.7 percent from the prior-year period. Net sales totaled $998.2 million, up 3.1 percent year-over-year. Sally had $67.9 million in earnings, with diluted earnings per share of 46 cents – a 17.9 percent increase over the prior-year period, but 1 cent below analyst consensus of 47 cents. Sally Beauty shares dipped more than 9 percent in midday trading, to $26.96.
Sally Beauty Supply brought in sales of $597.1 million, up 1.4 percent from $588.6 million year-over-year, with same-store sales growth of 1.3 percent, compared with 2 percent for the prior year period. Sally Beauty Supply’s gross margin expanded 40 basis points to 55.3 percent. Earnings for the unit totaled $104.8 million, down 2.3 percent from $107.3 million from the prior-year period. The company said the decline was in part because of expenses related to store openings and remodeling. Net store count increased by 95 since the prior-year quarter, bringing the total store count to 3,750.
Sally Beauty recently introduced cosmetics brand The Balm in stores, and chief executive officer Chris Brickman said the business is in talks to bring in other lines but nothing has been finalized.
The company’s Beauty Systems Group, made up of stores branded as CosmoProf or Armstrong McCall plus direct sales consultants, had sales of $401.1 million, a 5.7 percent increase from $379.3 million in the prior-year period. That growth came from same-store sales increases of 5.4 percent, growth in the sales consultants business and new store openings, the company said. The segment earned $65.3 million, up 6.9 percent from $61.1 million in the prior-year period. Net store count increased by 36, to 1,322.
“In the fiscal 2016 third quarter we delivered solid consolidated results including gross margin expansion and mid-teens earnings per share growth,” said Brickman. “At a segment level, BSG had another terrific quarter with same-store sales growth of 5.4 percent. However, our Sally North American business did not meet our expectations. Sally’s retail traffic is clearly taking longer to return to historical levels than we anticipated. We do believe there were a couple of tactical marketing changes in the quarter that negatively impacted traffic growth and we have moved quickly to address these issues. Going forward, we remain optimistic that Sally can get back to steady, sequential sales improvement.
On the company’s earnings call, Brickman elaborating, saying that Sally had gradually been reducing the number of direct mailers it sends out over the past year and a half, using the leftover money to invest in other forms of marketing. “We believe we cut back too far,” Brickman said.
The business also changed its CRM vendor and upgraded its loyalty database, which caused disruption, according to Brickman.
“We took a lot of medicine in nine to 12 months, there’s no doubt there’s some disruptive impact,” Brickman said on the call, adding that now the business is at a point where it can pivot and focus on sales driving efforts.
“During the quarter, we also completed several of our Sally initiatives such as the brush category reset, the color education center rollout and the completion of owned-brand repackaging,” Brickman said. “We are now ready to slow down the pace of in-store change at Sally and focus our team on marketing, product merchandising and sales initiatives designed to leverage the improvements we’ve made to transform the customer experience.”
“Part of the slower growth is down to the fact the company has made a number of step changes to product, marketing and stores over the past year which, when taken in concert, have caused some confusion among core or regular customers,” said Conlumino retail analyst Hakon Helgesen in a note. “That said, given that many of the changes are designed to make the shopping experience easier, it is concerning that this disruption appears to be lingering rather than dissipating.”
Going forward, the chain intends to focus on leveraging its new CRM capabilities to deliver more relevant offers to its customers, introduce a few new brands into stores that have a strong following and could drive foot traffic.