Improvements are being made to stores. Simple steps like making stores less dense, introducing areas for product demonstrations, and highlighting key brands better will all help in the short term. In the longer term, a more radical revamp of stores will be necessary.
By Neil Saunders
Sally has ended a downbeat fiscal year on a dull note. Group sales continue to slide, with total revenue down by 0.8% and overall comparable sales dipping by 0.2%. Although these are not falls of great magnitude, they come off the back of declines in the prior year and a long run of underperformance.
While the top line looks grim, there are bright spots in the financials. Comparable sales growth at Sally Beauty Supply, the company’s retail division, was flat—the first time in seven quarters that the division has not been in decline. And despite the poor sales numbers, the bottom line is much healthier with net earnings up by 54.5%, although most of this is due to lower debt interest expense rather than coming from operating gains.
Growing economy brings competition
The lackluster performance of the past year has coincided with a strong economy and better consumer finances. From our data, the majority of Sally’s customers have enjoyed these benefits, but this has not translated into them spending more at the chain. One reasons for this is Sally is suffering from higher levels of competition in beauty from a number of directions.
On the general merchandise side, Target has improved its beauty offering and is pulling away some Sally customers in locations where the two chains are proximate. Walmart has also made more modest improvements to some of its stores and is enjoying higher levels of customer spend on beauty as a result. As the majority of Sally customers visit mass merchants regularly for a whole range of products, shopping there for beauty products is convenient and often cost-effective.
On the specialist side, the expansion of Ulta and, to a lesser extent, Sephora, have also taken their toll. Ulta, in particular, has become an alternative or complementary destination for large numbers of Sally shoppers over the past couple of years. Ulta’s loyalty scheme has played a big role in encouraging customer switching.
The final competitive group is online players, including Amazon. These retailers pose a general threat to all physical retailers, but Sally is in a much worse position to cope with the challenge or to seize the opportunity of online than players like Sephora, Ulta, and Walmart, which have invested much in their online propositions.
Speeding up transformation
Against this backdrop, Sally has not done enough to retain customers, but the group has realized this and has begun to speed up its transformation plan in a bid to stop the attrition.
Some changes, such as bringing together merchandising teams from the two main divisions, are designed to drive economies of scale and help the bottom line. While this will not necessarily drive more sales, it is essential to protect the bottom line when Sally is investing more in the salaries of store workers.
The effort to rebuild loyalty and drive revenue is multifaceted. Part of it involves launching a range of new products, such as new boxed hair colors to join the professional hair coloring selection already offered. More exclusive national brands will also be introduced. This is a step in the right direction as newness and innovative new lines are two things that help to drive trade and footfall at both Sephora and Ulta.
Improving store presentation
A newly revamped Sally Beauty Rewards program has also just been launched nationally and is designed to give Sally a more compelling loyalty scheme to compete more effectively with other specialists. While we applaud this initiative and believe it will generate more sales, the costs will be high and it will not be an immediate contributor to the bottom line.
Another important change is the improvements being made to stores. Our data show that Sally underperforms other beauty players on ratings for store presentation and ease of shopping, and this gap has been widening as other retailers have improved their store environments. Sally’s plans are not necessarily revolutionary, but simple steps like making stores less dense, introducing areas for product demonstrations, and highlighting key brands better will all help in the short term. In the longer term, a more radical revamp of stores will be necessary.
Overall, Sally remains an underperformer in a high growth part of the market. Its transformation plan is credible, but it needs to execute it quickly to demonstrate it can address the weaknesses in its business.
Neil Saunders is managing director of research firm GlobalData.