Sally Beauty (SBH) Is a Clear Sell Except for One Small Detail

By most measures, beauty care specialist Sally Beauty (SBH) stands as a clear equity unit to sell. Both from a broader market perspective down to the complex granularities of options trading, few players want to roll the dice on SBH stock to the long side of the equation. Nevertheless, those folks that happen to have some funds lying around for speculation may want to entertain the idea of Sally Beauty.

To be fair, the narrative will be incredibly contested. For instance, while Sally Beauty managed to bring some positives for its latest fiscal fourth-quarter earnings report, it also raised concerns. According to Zacks Equity Research, the company “reported adjusted earnings of 50 cents per share, which surpassed the Zacks Consensus Estimate of 48 cents. The metric declined from 64 cents reported in the year-ago quarter.”

“Consolidated net sales of $962.5 million beat the Zacks Consensus Estimate of $943.9 million. However, the metric dropped 2.8% year over year. Comparable sales were in line with the year-ago quarter.”

Per the usual standard for the broader retail segment, escalating consumer prices dampened the mood for SBH stock. “The adverse impact of inflationary pressures influencing consumer behavior and supply chain challenges at Beauty Systems Group was a deterrent. The company operated 117 fewer stores compared with the year-ago quarter’s levels. Unfavorable foreign currency translation hurt consolidated net sales by 170 basis points.”

Despite the macroeconomic pressures impacting SBH stock, investors should also look to social normalization trends, especially in the workforce. According to a Resume Builder survey, 90% of companies will require some form of in-office work beginning next year. Notably, the resource wrote that “21% of companies will fire workers who do not return to the office.”

In other words, people might not be able to hide behind their Slack messages. It’s time to go back to work, which in turn may lift demand for beauty care products.

SBH Stock Attracts Unusual Options Activity

Following the close of the Dec. 13 session, SBH stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This metric shows the difference between the current volume and the average volume over the past month. Typically, traders advantage this data to determine which stocks may be due for uncommonly large moves ahead.

Specifically, SBH’s volume level reached 20,118 contracts against an open interest reading of 21,005. Call volume hit 3,669 versus put volume of 16,449. The implied volatility (IV) rank hit 27.32%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To get everyone on the same page, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for SBH stock was 39.32% on May 18, 20232. Several months later on Oct. 10, SBH hit its IV high at 74.33%. Prospective investors should note that per Barchart.com’s technical analysis gauge, SBH ranks as an average 88% sell. In the open market, shares of Sally Beauty dropped nearly 36% of equity value. For context, during the same period, the S&P 500 index declined a bit over 16%.

Finally, Wall Street experts have little confidence regarding SBH stock. Three months ago, analysts had a consensus view of “moderate sell,” broken down as four holds and two strong sells. In the current month, both the consensus rating and the breakdown remain the same.

Beauty Care May Wake From Its Hibernation

While very few indicators suggest that SBH stock will do nothing more than continue to erode, contrarians may want to conduct further investigation. Fundamentally, the underlying beauty care market may simply be waking from its long hibernation.

A little more than two years ago, a Washington Post op-ed mentioned that the COVID-19 crisis represented “our pajama moment.” This description can be taken both metaphorically and literally. At the time, contactless services were in, meaning that people had little incentive to look presentable for the public. Indeed, government mandates urged folks to stay inside if at all possible.

Today, the paradigm has shifted – and will probably continue to shift toward full normalization. Recently, shared-closet platform Rent the Runway (RENT) enjoyed meteoric equity expansion, in part due to greater incentives undergirding the fashion and beauty industries. Also, note that AbbVie (ABBV) – which now owns wrinkle-fighter Botox – gained nearly 22% of equity value so far this year.

It’s a simple equation: social norms are reverting back toward pre-pandemic expectations. And that means a greater emphasis on presentability, which could be a surprising upside catalyst for SBH stock.

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