Ugly news for Sally Beauty; Loses L’Oreal

[admin]

http://www.chicagobusiness.com/cgi-bin/news.pl?id=23252   (Reuters) — Sally Beauty Holdings Inc.'s shares fell 19% on Wednesday, a day after the salon products retailer said it would lose much of its exclusive rights to sell L'Oreal's professional products, crimping sales as Sally starts out on its own. The news, which means a loss of about $110 million in revenue in the last nine months of fiscal 2007, comes a month after Sally Beauty made its debut as a public company after being spun off from Melrose Park-based Alberto-Culver Co. Inc. Two of the three analysts who follow the stock cut their ratings on Sally Beauty. The company, which has annual revenue of more than $2 billion, said that it hopes to mitigate some of the lost revenue by taking steps such as marketing certain products that it didn't sell before and expanding existing product lines in new territories. Prudential Equity cut its rating on Sally Beauty to "underweight" from "neutral" and Oppenheimer & Co. took its rating down to "sell" from "neutral." Bear Stearns analyst Justin Hott, who has an "outperform" rating on the shares, lowered his year-end 2007 price target on the shares to $10 from $12 but told investors not to sell. "We clearly misjudged the L'Oreal issue and their resolve to leave BSG," Hott said. "Right after the blowup is not the time to abandon the Sally story. L'Oreal or no L'Oreal, this company should grow again." Shares of Sally Beauty fell $1.78 to $7.48 in afternoon trading, posting the largest percentage decline on the New York Stock Exchange. Late on Tuesday, Sally Beauty said that its Beauty Systems Group unit, other than its Armstrong-McCall division, will lose its rights to distribute professional products from L'Oreal USA's professional products division through its sales consultants. The consultants, who go to salons to sell products, will lose exclusivity on the products as of Dec. 31 and lose rights to sell them as of Jan. 30, 2007, Sally said. Beauty Systems Group's stores will lose exclusive rights to the products as of Jan. 1, 2007, in the U.S. areas where Beauty Systems Group had distribution rights and the Armstrong-McCall division will lose the right to distribute Redken professional products through sales consultants or its stores. "The altered relationship seems to have come as a surprise to (Sally Beauty), as recent negotiations with L'Oreal only concerned a loss of sales for BSG East consultants about which CEO Winterhalter referred to as immaterial," Prudential analyst Constance Maneaty wrote in a research note. As of Jan. 1, 2007, Beauty Systems Group will have non-exclusive rights to distribute the same L'Oreal professional products in its stores that it previously had exclusive rights to in stores and through consultants. Armstrong McCall, meanwhile, will keep its exclusive rights to distribute Matrix products in its territories. Denton, Texas-based Sally said that L'Oreal professional products will still be sold in Beauty Systems Group stores that currently carry these products and that its Sally Beauty Supply stores, which carry different L'Oreal products, are not affected.