We’re taking Sally Beauty (SBH) off our long list. We originally went long this name on 1/29 at $15.10 as we were modeling four quarters of material earnings beats, with recovery earnings in 2022 approaching $3 per share. We made it clear all along that this was an atypical call for us, given that SBH is a secular loser with mediocre management that is underinvesting in the (arguably overstored) fleet of stores (especially compared to ULTA). Sally is actually more typical of the type of name we’d be short. But since our original call we got three solid earnings beats, so the model definitely didn’t disappoint, and the stock is up ~35% since our call. This quarter was impressive in itself, with a top line and EPS 5% and 13% above 2019 levels, respectively. But we’re starting to see SG&A aggressively march higher in the face of a potentially delayed revenue recovery due to the delta variant and stricter mask rules. We’re still getting to an earnings beat in 4Q – but only by about 5%, which is not enough for us to stick with a name we don’t believe in over a TAIL duration. Looking out, we think that this stock has annuity-like earnings in the $2.40-$2.50 range, and that a $3 number is no longer in play. At $21, its arguably cheap on that steady-state earnings number – but this name was built to be cheap. We’d hardly call Sally Beauty a mispriced security at 9x EPS and 7x EBITDA. Multiple expansion was never part of our thesis, and it certainly won’t be today. We’re going to book the gain. And if it turns out that the company is sandbagging its 4Q SG&A commentary (unlikely as labor inflation and freight are the real deal), then we’ll look to short this name in the mid-$20s.
Takeaway: Keeping a trade a trade. We rode three solid earnings beats, but there might not be a fourth. We’d short this secular loser in the mid-$20s.
