Investing.com -- Sally Beauty Holdings Inc . (NYSE: SBH ), the Denton, Texas-based beauty supply retailer, has been upgraded by S&P Global Ratings to ’BB’ from ’BB-’ due to successful debt reduction and sustained operating momentum. The company’s first quarter of fiscal 2025, which ended on December 31, 2024, showcased positive comparable store sales, gross margin expansion, and improved profitability across both of its segments.

In addition to its improved performance, Sally Beauty Holdings repaid $41 million of its $400 million term loan B, which reduced its net debt leverage ratio to the new target range of 1.5x-2.0x. This repayment is seen as part of the company’s commitment to sustaining a conservative capital structure.

S&P Global Ratings also upgraded the issue-level rating on the senior secured term loan to ’BBB-’ from ’BB+’ and on the unsecured notes to ’BB’ from ’BB-’. The recovery ratings for both remained unchanged.

The stable outlook from S&P Global Ratings reflects expectations for leverage to remain in the mid-2x area and a good annual free operating cash flow (FOCF) of $150 million to $200 million over the next 12 to 24 months.

Sally Beauty’s recent debt reduction and operating momentum have led to an expectation for leverage to remain at or below 2.5x over the next 12 to 24 months. The company’s use of excess cash to repay funded debt is seen as a sign of sustained conservatism in the capital structure.

Sally Beauty’s market position and business investments support its growth prospects. Despite an uncertain operating environment, flat revenue to low-single-digit growth is forecasted for fiscals 2025 and 2026. This is driven by low-single-digit comparable store sales growth at Sally Beauty Supply (SBS) and Beauty Systems Group (BSG), offset by foreign currency translation headwinds and a stable store count.

The company’s consumer base, personalization, education, and targeted marketing initiatives, as well as the early uplift from its recently announced SBS brand refresh, are expected to support demand.

Sally Beauty demonstrated good performance across its two main segments over the last four quarters. The first-quarter performance reflected the third consecutive quarter of positive top-line growth in both segments.

S&P Global Ratings anticipates stable profitability over the next 12 to 24 months, including an adjusted EBITDA margin of around 16%. Margins are expected to remain flat in fiscal 2025, following a 100-basis point decline to 15.8% in fiscal 2024 due to higher wage costs and strategic investments.

The stable outlook reflects expectations for continued operating momentum amid brand investments and its digital transformation effort, leading to leverage sustained in the mid-2x area and good annual FOCF generation of $150 million to $200 million.

S&P Global Ratings may lower the rating if leverage is sustained above 3x due to a deterioration in operating performance or a more aggressive financial policy, or if SBH’s competitive position weakens due to increasing competitive pressures or operating missteps that lead to a decline in market share.

The rating could be raised if the company continues its progress in its digital transformation and brand refresh, leading to growth in comparable store and omnichannel sales at both segments, or if the company adopts a more conservative financial policy, including S&P Global Ratings-adjusted leverage sustained in the 2x area or better.

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