Sally Beauty Holdings

Ticker
$SBH
Industry
Distributor
Type
Cheap
Rating
Covered
Category
General
Target Price
$23.50
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Sally Beauty is a distributor and retailer of haircare products and supplies to salons/stylists and consumers.

Notes

Segment overview — Consumer segment (59% of FY21 sales) and B2B segment (41%)
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Free cash flow — SBH is a consistent generator of FCF and converts a high % of EBITDA to FCF
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Historic valuation multiples — Typically traded around 9-10x EBITDA when this was a growth business; more recently it has been near 7x EBITDA and sometimes as low as 6x
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Financials & Valuation

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Capitalization (2Q22) — There are 107m shares outstanding x $15.70/sh = $1.68bn market cap. Net debt is $1.15bn for a $2.83bn EV. Estimates for 2022 are $500m EBITDA and $2.14 in EPS. Valuation is 7.3x PE and 5.7x EV/EBITDA with 2.3x leverage.

Resources

August 2022 — 2Q22; cash flow down on WC build

Sales down 6% YoY (same store sales down 3.6%) and EPS (adjusted) down 19% YoY to $0.55/sh. SBH closed 149 stores over the last year and 90 are expected to close in 2022.

Cash flow will be down in 2022 compared to 2021. Inventory is rebuilding while working capital unwound post-COVID. SBH started repurchasing shares for the first time in 7 quarters in CQ4 and CQ1 with $131m in total repurchases, good for 7-8% of the current market cap. Cash flow should start to turn the corner once working capital build is over. At that point, there should be a good balance of capital returns and debt paydown given leverage is already at a reasonable 2.2x level.

A 7x multiple on 2022 EBITDA estimates of $500m = $3.5bn EV less $1bn in net debt (assuming another $150m repayment next 12 months) = $2.5bn market cap or $23.50 per share.

January 2021 — VDL: Initiation report