Beauty supply retailer Sally Beauty (NYSE:SBH) fell short of analysts' expectations in Q3 FY2023, with revenue down 3.17% year on year to $931 million. Sally Beauty made a GAAP profit of $50.8 million, improving from its profit of $46.6 million in the same quarter last year.

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“We are pleased to report another solid quarter with net sales of $931 million, Adjusted Gross Margin of 51%, Adjusted EBITDA of $119 million and free cash flow of $32 million. Three quarters into our fiscal year, we are on track with our operating initiatives and the financial guidance we originally laid out for fiscal 2023,” said Denise Paulonis, president and chief executive officer.

Catering to both everyday consumers as well as salon professionals, Sally Beauty (NYSE:SBH) is a retailer that sells salon-quality beauty products such as makeup and haircare products.

Beauty and cosmetics retailers understand that beauty is in the eye of the beholder, but a little lipstick, nail polish, and glowing skin also help the cause. These stores—which mostly cater to consumers but can also garner the attention of salon pros—aim to be a one-stop personal care and beauty products shop with many brands across many categories. E-commerce is changing how consumers buy cosmetics, so these retailers are constantly evolving to meet the customer where and how they want to shop.

Sales Growth

Sally Beauty is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex higher growth rates than its larger counterparts because it's growing off a smaller base.

As you can see below, the company's annualized revenue growth rate over the last four years (we compare to 2019 to normalize for COVID-19 impacts) has been flat, or negative 0.7%, as its store count has shrunk.

This quarter, Sally Beauty reported a rather uninspiring 3.17% year-on-year revenue decline, missing analysts' expectations.

Looking ahead, the Wall Street analysts covering the company expect revenue to remain relatively flat over the next 12 months.

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Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Sally Beauty is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Since last year, Sally Beauty's store count shrank by 352 locations, or by 7.29%, to 4,477 total retail locations in the most recently reported quarter.

Taking a step back, the company has generally closed its stores over the last two years, averaging a 4.57% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at remaining stores as well as e-commerce sales to fuel revenue growth.

Same-Store Sales

A company's same-store sales growth shows the year-on-year change in sales for its brick-and-mortar stores that have been open for at least a year, give or take, and e-commerce platform.

Sally Beauty's demand within its existing stores has been relatively stable over the last eight quarters but fallen behind the broader consumer retail sector. On average, the company's same-store sales have grown by 1.53% year on year. Given its declining store count over the same period, this performance could stem from higher e-commerce sales or increased foot traffic at existing stores, which is sometimes a side effect of reducing the total number of stores. Nevertheless, Sally Beauty is likely optimizing its operations for improved efficiency and profitability before expanding its physical footprint.

In the latest quarter, Sally Beauty's same-store sales rose 0.6% year on year. This growth was a well-appreciated turnaround from the 3.6% year-on-year decline it had posted 12 months ago, showing that the business is regaining momentum.

Key Takeaways from Sally Beauty's Q3 Results

Sporting a market capitalization of $1.27 billion, Sally Beauty is among smaller companies, but its more than $74.3 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate that its revenue missed analysts' expectations and it missed Wall Street's EPS expectations. Overall, this was a mediocre quarter for Sally Beauty. The stock is flat after reporting and currently trades at $11.84 per share.

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The author has no position in any of the stocks mentioned in this report.