Bear of the Day: Sally Beauty

| About: Sally Beauty (SBH)

The U.S. consumer is becoming stingy on where she shops as Sally Beauty Holdings, Inc. (NYSE:SBH) became the latest retailer to warn that traffic wasn't as strong as anticipated over the summer. Full year estimates are falling on this Zacks Rank No. 5 (Strong Sell).

Sally Beauty sells beauty supplies at 4,500 stores around the world. It offers 6,000 products for hair, skin and nails. It also sells 9,800 professionally branded beauty products through its Beauty Systems Group stores, targeted at professional beauticians and salons.

Missed Estimate on Fiscal Q3

On Aug. 1, Sally Beauty reported its fiscal third-quarter results and missed the Zacks Consensus by a penny. Earnings were $0.42 compared to the Zacks Consensus Estimate of $0.43. It was the third consecutive earnings miss. Net sales rose 2.8% but that was on strength in the international division. Same-store sales growth was just 0.7% compared to growth of 5.2% in the year ago quarter.

Traffic at BSG and Sally International was healthy, but store traffic from non-Beauty Club Card customers in the U.S. was "soft." The company was specifically going to target these non-Beauty Club Card customers and was "optimistic" that traffic would recover over the next few months.

Estimates Decline for 2013 and 2014

Analysts aren't as optimistic as the company. Even though it missed the third quarter by just one cent, the Zacks Consensus Estimate for 2013 fell by 3 cents during that time to $1.50 from $1.53. This is just 5.7% earnings growth for the year. Six estimates were lowered for 2014 as well in the last two months, as the Zacks Consensus fell to $1.75 from $1.84.

Shares Rallied in 2013

Shares hit a 52-week high earlier in the summer but sold off on the earnings miss.

Even with the sell-off, they're not that cheap. Sally Beauty has a forward P/E of 17.7, which is above the average of the S&P 500 of 15.8. Given the slowdown in store traffic, investors might want to stay away from Sally Beauty in the short term. However, over the long term, the beauty products business has been solid.

For investors wanting to get into that segment right now, you might want to consider Ulta Salon (ULTA), which is a Zacks Rank No. 2 (Buy). It recently beat the Zacks Consensus Estimate and is expected to grow earnings 24% this year.

Disclosure: The author of this article owns shares of ULTA.

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