Beautify Your Portfolio with This Bond

02/27/2013 7:45 am EST

Focus: BONDS

Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

Marilyn Cohen of Bond Smart Investor says this well-known retail name can bring glamour—and profits—to your portfolio.

It’s a beautiful thing. In order of personal importance, I think we women rank hair and nails No. 1 and No. 2 on our priority lists. Sally Beauty (SBH) feeds into our female priorities, and the company’s business, balance sheet, and basic products give bondholders a firm sense of stability.

Sally Beauty Holdings operates in three business product segments: Hair care, nail care, and appliances sold to retail customers and professionals. Its Beauty Systems Group distributes products specifically made for professionals directly to salons. The company sells ho-hum items like shampoo, conditioners, hair color, styling tools, cleaners, hair, eye, and nail care products, to name a few.

And Sally Beauty Holdings sells stuff I’ve never even heard of until I decided to dig into their business. Ever hear of nail wraps? Neither had I. They are called the ultimate fashion accessory for nails. Who knew? They sell nail stencil kits, wax warmers, airbrush tanning systems, callus removers, and nail dryers. The list is endless and highly eye-opening.

The evolutionary history of Sally Beauty isn’t as important as its present-day success. The company has 25,000 employees spread among 4,500 stores in North America, Europe, and Japan. Fiscal 2012 ended in September for Sally, and it was a beaut. Here’s a laundry list of what went right for the company:

  • Sales rose 8%
  • EBITDA (earnings before interest, taxes, depreciation, and amortization) was up 18%
  • Cash flow improved
  • Margins improved
  • Same-store sales were up 6.4%
  • Annual sales clocked $3.523 billion
  • Leverage was about 2.7 times, with interest coverage at 4.3 times

Management is targeting a 4% to 5% same-store sales increase in 2013. Their only flaw (according to bond investors) is their $300 million share-repurchase plan. But at least they aren’t borrowing to buy back the shares.

The company has refinanced its long-term debt. Sally Beauty now has two bond issues and a revolver. That’s it. This is a good company, executing rationally and productively.

Buy the Sally Holdings Senior Unsecured 6.875% (CUSIP: 79546VAH9) due November 15, 2019, with a yield to maturity of 4.96%. Rated Ba3 by Moody's and BB+ by S&P, the bond is callable on November 11, 2015.

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