Partnerships With K18, Amika, Moroccanoil, DoorDash, And Instacart Will Expand Customer Reach

Key Takeaways

• Strategic initiatives, including brand modernizing and growth in high-margin products, are boosting revenue, customer engagement, and improving net margins.
  
• E-commerce expansion and new partnerships are driving revenue increases, enhancing efficiency, and supporting product innovation, particularly in hair care and color.
  
• External factors and execution risks, including foreign exchange impacts and supply chain disruptions, threaten Sally Beauty's sales growth and profit margins.

Catalysts

Operates as a specialty retailer and distributor of professional beauty supplies.

• The company is advancing strategic pillars, including enhancing customer centricity, growing high-margin owned brands, and increasing operational efficiency, which are expected to drive future revenue growth and improve net margins.
  
• Sally Beauty is refreshing its brand to create a more modern and sophisticated customer experience, potentially boosting revenue by increasing customer engagement and attracting new customers.
  
• The Fuel for Growth program and strategic promotional activities are expected to achieve cumulative gross margin and SG&A benefits of approximately $70 million in fiscal 2025, enhancing profitability and operating margin.
  
• New product launches and expanded brand partnerships, such as with K18, Amika, and Moroccanoil, are expected to drive category growth, particularly in hair care and color, supporting revenue growth and product innovation.
  
• Sally Beauty's e-commerce growth and marketplace initiatives, including partnerships with DoorDash and Instacart, are contributing to significant year-over-year sales increases, supporting revenue growth and potentially improving net margins due to higher efficiency in direct sales channels.

Sally Beauty Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sally Beauty Holdings's revenue will grow by 1.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 5.8% in 3 years time.
• Analysts expect earnings to reach $224.0 million (and earnings per share of $2.21) by about May 2028, up from $176.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, up from 4.6x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to decline by 1.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Sally Beauty Holdings Future Earnings Per Share Growth

Risks

• Sally Beauty Holdings faces risks from unexpected foreign exchange rate impacts, which could negatively affect consolidated net sales and operating margins.
  
• The company is experiencing headwinds from external factors such as harsh flu seasons, weather disruptions, and macroeconomic uncertainties which may impact consumer behavior and traffic, potentially affecting sales growth.
  
• The operational challenges related to managing promotions and consumer demand amidst a choppy macro environment pose a risk to achieving sales targets and maintaining gross margins.
  
• With significant sales driven by innovative products and new brand launches, execution risk in product rollouts and potential supply chain disruptions could impact revenue and profitability.
  
• While Sally Beauty has a strategic plan to offset margin pressures through its Fuel for Growth program, any delays or underperformance in realizing these savings could impact operating profit growth and margins.

Valuation

• The analysts have a consensus price target of $13.2 for Sally Beauty Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $224.0 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 11.4%.
• Given the current share price of $8.01, the analyst price target of $13.2 is 39.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.