$12.22
$31.55
bear $12.22
base $22.55
bull $31.55
margin of safety $13.50
market price* $16.65
Sally Beauty Holdings runs two businesses. Sally Beauty Supply operates retail stores and a consumer e-commerce site selling professional-grade hair color, hair care and beauty supplies to both salon professionals and retail shoppers. Beauty Systems Group (BSG), which includes the franchise-based Armstrong McCall, distributes professional brands to salons and stylists. In fiscal 2025 (year ended September 30) the company sold $3.70 billion: $2.09 billion through Sally and $1.61 billion through BSG, from 4,422 stores including franchises. About 18% of revenue came from outside the United States; besides the U.S. and Puerto Rico, the company has stores in Mexico, the United Kingdom, Canada, France, Belgium, Chile, the Netherlands, Germany and Ireland. What the business earns. We measure owner earnings: operating cash flow with working-capital swings removed, less stock-based compensation (treated as a real cost) and less the capital spending needed to keep the store base running. Because sales have been flat to falling in almost every year, nearly all capital spending counts as maintenance. On that basis owner earnings per share were $2.11 in fiscal 2017, $2.14 in 2018, $2.28 in 2019, $1.14 in 2020 (pandemic store closures), $2.44 in 2021 (post-lockdown and stimulus spending), $1.92 in 2022, $1.96 in 2023, $1.56 in 2024 and $1.56 in 2025. In dollar terms owner earnings fell from $274 million in 2019 to $162 million in 2025. Fiscal 2025 net income of $195.9 million included a $26.6 million gain on the sale of the Denton, Texas headquarters; we excluded that one-off gain, which is the main reason owner earnings sit below reported profit. The underlying picture is a mature, slowly shrinking business. Sales were $3.95 billion in fiscal 2016 and $3.70 billion in fiscal 2025, and comparable sales grew just 0.3% in each of the last two years, with Sally reporting fewer transactions offset by higher prices. Operating earnings fell from $458.5 million in fiscal 2019 to about $301 million in fiscal 2025 once the headquarters gain is removed, roughly a 6.8% annual decline. Per-share results fell less than dollar earnings because the share count dropped from 148.8 million in 2016 to 97.9 million by mid-2026. There are also signs of improvement. Consolidated gross margin rose to 51.6% from 50.9%, helped by the Fuel for Growth cost program, better promotions and lower freight costs. BSG's segment operating earnings rose 10.1% in fiscal 2025, helped by supply-chain savings, while expanded distribution rights and new brands drove its comparable sales. Interest expense fell to $64.4 million from $76.4 million as long-term debt came down from $1.81 billion in 2020 to $815 million by June 2026. Starting point. We anchor on $1.74 per share, the median of fiscal 2022 to 2025. We leave out 2020 and 2021 as pandemic distortions, and we leave out 2016 to 2019 because they describe a higher-margin business that no longer exists. The first nine months of fiscal 2026 support this level. Net income was $142.3 million against $145.9 million a year earlier, but capital spending rose to $84.3 million from $59.3 million, so owner earnings appear to be running close to the anchor rather than above it. Owner earnings per share did not grow in fiscal 2025 ($1.56 both years), so the base case assumes no growth in year one. Base case, $22.55 per share: owner earnings hold at $1.74 for three years as cost savings and BSG's brand gains offset flat sales. From year four, earnings decline 2% a year, in line with a store count that fell about 1% last year and falling transaction counts at Sally, reaching $1.51 by year ten. After year ten, the case assumes the same slow 2% annual fade continues. What keeps earnings going that long is structural: a network of more than 4,400 stores and long-standing, partly exclusive supplier relationships that have held sales between $3.5 and $4.0 billion for a decade, including through the pandemic. Bear case, $12.22 per share: the 2019–2025 decline simply continues. Owner earnings per share fell about 6% a year over that period, and this case applies the same rate from fiscal 2025's $1.56, falling to $0.84 by year ten and continuing to fade after that. The named risks behind it come from the filings. The five largest suppliers (Henkel, L'Oreal's Professional Products Division, Wella, John Paul Mitchell Systems and Kao) supplied about 48% of purchases, and those contracts can generally be ended on 90 days' notice or less, so losing a major line would hit BSG hard. Consumers are described as price-sensitive and suffering inflation fatigue, and tariffs are a disclosed cost pressure. Leverage makes this case worse. The $600 million of 6.75% senior notes mature in December 2032 and the term loan in 2030. If earnings keep shrinking, refinancing on similar terms gets harder just as that debt comes due. Even so, the case stays positive: owner earnings, which are already after interest, remain above zero throughout. Bull case, $31.55 per share: Fuel for Growth savings, the gross-margin gains already reported and BSG's expanded distribution rights carry owner earnings to about $2.09 per share within three years. That is slightly below the $211–214 million the company earned in fiscal 2022–2023, spread over today's smaller share count. Earnings then hold level through year ten and fade 1% a year afterward. This case does not assume a return to the pre-2020 margins. What could make this wrong. On the downside, losing a top-five brand or a faster decline in store traffic. On the upside, if the recent rise in capital spending turns out to be temporary rather than the new normal, owner earnings would be higher than we assume. We did not count future share buybacks as growth, because the cash used for them is already part of the owner earnings we value. Margin-of-safety price. This is a steady but slowly shrinking retailer with moderate debt and supplier concentration, so the estimate calls for a wide margin of safety. The margin-of-safety price is about $13.50, roughly 40% below the base value and close to the bear value. At that price our starting owner earnings would represent a yield of about 13%, and if the shares drifted back toward the base value, the base case implies more than 20% a year.