Sally Beauty Slides After Downgrade As KeyBanc Sees ‘Hairy’ Retail Story

Shares of Sally Beauty Holdings (SBH), a provider of beauty supplies, dropped in morning trading after the stock was downgraded by an analyst at KeyBanc, who has concerns over management’s operational plans.

ANALYST DOWNGRADE: KeyBanc analyst Jason Gere cut his rating on Sally Beauty to Sector Weight from Overweight, calling the company’s retail story “hairy” despite its efforts. In a note to clients, Gere said he has lower confidence in the company’s top-line outlook amid difficulties in the retail environment as well as slower growth on the professional side of the business. Gere said that Sally Beauty’s elevated margins and “sizable” store base of abut 3,000 U.S. stores represent potential risks should conditions deteriorate further. Gere, who said he has “lower confidence” that same-store sales can improve in the near-term, said the performance of BSG may be harder to rely on over time, and said the company is lacking operating margin expansion as a result of cost cutting. Gere said Sally Beauty needs to decide if it’s a growth or margin/cash flow story as he does not “see an environment in which it can be both.” The analyst also noted that while Sally Beauty’s management has insisted that all of its stores are profitable, he wonders whether closing some of the worst performing stores would make sense.

WHAT’S NOTABLE: Gere’s comments follow others from Oppenheimer analyst Rupesh Parik in February, when he said that with the challenging retail backdrop and intensified efforts by others in the beauty category, he is less confident in Sally Beauty’s ability to drive traffic back to stores in the near-term.

EXECUTIVE CHANGE: Sally Beauty on Friday said it has appointed Brent Baxter as vice president, controller and principal accounting officer, effective May 4. Baxter, who will replace Janna Minton, who said in January that she intends to retire from her position, joins from Stein Mart (SMRT), where he served as senior vice president, controller and chief accounting officer, according to a regulatory filing. In November, Sally Beauty named Donald Grimes, the Chief Financial Officer and Chief Operating Officer of Neiman Marcus, its as CFO and COO.