I have a NEUTRAL rating on Sally Beauty Holdings, Inc. (NYSE: SBH) stock, meaning if you don't own it, throw back three fingers of Maker's and dance a little jig. If you do own it, buy some KY.
Based on a recent close of $26.42, the stock has a TTM PE of 12 versus a 5 year average TTM PE of 13. The company earned $2.24 in FY16 versus a 5 year average of $1.87, and pays no dividend. The company has a negative tangible book value as it has for the past 5 years, which explains why the average interest rate for FY16 was 8%. Shareholder equity fares no better, ending FY16 at ($1.92).
I also noticed that the company continues to maintain huge amounts of inventory, in excess of $900 million for FY16. Maybe it takes a very long time to receive factory inventory shipments? Scanning the 10-K there was quite a bit of discussion regarding automated inventory replenishment systems and percentages of what made up the inventory, but I found nothing to indicate how long it took to physically replenish inventory. With such a sizeable inventory it is impressive that the company is able to convert it into sales roughly 2 times a year while maintaining a cash conversion cycle of 125 days. I just wonder how much of an improvement could be garnered for the cash conversion cycle if inventory were more actively managed.
The other thing that got my attention was the company's debt, which increased by 5% year over year to roughly $1.7 billion. As I said I only scanned the latest 10-K and the answer may be in that filing. But I go back to inventory, and I wonder how much of this debt it used to support the company's inventory, which at current levels is worth $6 per share? Couple that with the company's debt repayment of $6 per share, interest payments of $1 per share, income taxes at $1 per share, share buybacks of $2 per share, and CAPEX of $1 per share, and it's no wonder the stock price has remained relatively flat for the past 5 years.
In the end, the stock is simply a value trap, and to me, it all goes back to what I currently think is very poor inventory management. So, with little change in the 5 year averages, including the price of the stock, and nothing on the horizon to indicate a change may be forthcoming, I can seen no reason to consider this company as a portfolio contender.
Wax