Sally Beauty Holdings Inc. Outlook Revised To Ratings Affirmed

Stocks and Financial Services Press Releases Wednesday November 29, 2017 08:20
NEW YORK--29 Nov--S&P Global Ratings

NEW YORK (S&P Global Ratings) Nov. 28, 2017--S&P Global Ratings today revised its outlook on Denton, Texas-based beauty retailer/distributor Sally Beauty Holdings Inc. to negative from stable. At the same time, we affirmed all ratings, including the 'BB+' corporate credit rating.

The outlook revision reflects our expectation that soft customer traffic and a promotional environment could continue, and we now think debt to EBITDA will remain above 3.5x over the next year and interest coverage around high-4x area. We think competition with mass retailers in the beauty retailing space and other online retailers will increase as competitors vie for market share gains, which could contribute to weaker sales for the company. In addition, we view the intensified competition as a result of a higher promotional environment and a shift to online channels, including greater competition from Amazon and Wal-Mart, in the beauty segment. We also view its distribution segment could face pressure as customers continue to shop online for convenience and search for price value. The company reported weak same-store sales in fourth-quarter 2017 of about negative 2.5% for its retail segment, and we expect sales comparisons to remain soft for the next fiscal year. Going forward, we expect Sally will continue to modify its pricing strategy in an effort to regain lost market share from the heavier competition and manage its product mix, which could weigh on profits.

The negative outlook reflects our expectation that credit metrics will remain pressured as potential performance weakness at the SBS segment may cause the company to underperform our expectations. Though we recognize the company's efforts to balance its strategic initiatives and expansion into the online channel, leverage could continue to weaken.

We could lower the rating if leverage remains around 4x and competitive pressures cause a greater-than-expected revenue decline and a loss in market share. This could hurt profitability and lead to weakened cash flows. Alternatively, a downgrade could occur because of an aggressive financial policy that results in large debt-financed shareholder remunerations.

We could revise our outlook to stable if debt to EBITDA declines to the mid-3x area and if we are convinced that the company's competitive position and operating initiatives, such as expansion of its online channel or SBG segment, provides revenue and profit growth. This could come from better-than-expected operating performance with EBITDA margins improving 100 bps because of better same-store sales at SBS and meaningful sales and cost benefits from its strategic initiatives.

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