Sally Beauty Gets A Rating Makeover, Morgan Stanley Downgrades

Beauty retailers, including Sally Beauty Holdings, Inc. (NYSE: SBH), remain under heavy selling pressure as competition within the beauty space continues to intensify. Investors also have to contend with the prospect of Amazon.com, Inc. (NASDAQ: AMZN) entering the beauty space, which adds another potential headwind for the group.

The Analyst

Morgan Stanley's Simeon Gutman.

The Rating

Gutman downgraded Sally Beauty's stock rating from Equal-weight to Underweight with a price target slashed from $22 to $15. (See Gutman's track record here.) 

The Thesis

The competitive landscape within the beauty segment is becoming more crowded as large department stores and retailers like Target Corporation (NYSE: TGT) are heavily investing in their beauty assortment, Gutman said in the Wednesday downgrade note. Sally Beauty's value offering is "relatively less compelling" compared to its larger rivals, which implies the potential for: 1) "subdued/modestly negative" comps, 2) margin erosion and 3) top-line "stress," Gutman said. 

Morgan Stanley's bearish case for Sally Beauty includes: 1) gross profit headwinds from a loyalty program transition, 2) the lapping of $20 million  in expense savings initiatives and 3) incremental investments in its omni-channel, which boosts spending at the expense of diluting margins.

Price Action

Shares of Sally Beauty fell more than 10 percent Wednesday morning and hit a new 52-week low of $14.22. Shares are also lower by more than 40 percent since the start of 2017.

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