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Healthy Investments in the Health Space: Sally Beauty Holdings, Inc. (SBH), Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA)

The retail industry is huge and has several stories associated with it, given the different dynamics within each sub-sector. Health & Beauty sub-sector is one of those areas which receive a lot of attention from customers but hardly seem to attract regular investors. Let’s see what the following stocks have to say about this sub-sector.

General Nutrition Centers: GNC Holdings Inc (NYSE:GNC) seems to be one of the best picks of 2013. The stock is a function of the wide fundamental/valuation disconnect. Although the company produced mixed earnings for the quarter, the stock is still up 14% since the earnings were released. The disconnect in the stock is a function of very tough top-line comparisons, concerns that recent momentum is unsustainable, and that insider selling is a signal that the best days are behind the company. Those concerns will prove unwarranted. The insider selling ahead of difficult comparisons has been a driver of that disconnect, which the recent purchases should help to resolve. The roll out of Member Pricing to more markets should be a positive for comps in the form of higher traffic and tickets, helping GNC extend the momentum that it has captured over the past couple of years.

Sally Beauty Holdings, Inc. (NYSE:SBH): Sally is a good call for long-term oriented investors. With expected 2013 EPS growth of at least 18%, this stock’s one of the more intriguing names in the Health & Beauty space. Tough 1H 2013 comparisons have been holding this stock back and may continue to weigh on the story. Due to several temporary drivers, comps in 1H 2012 increased 7.1% and 9.1%, respectively. Though 1H 2013 sales and EPS growth may slow temporarily as the tough comps gets cycled, there should be a re-acceleration in 2H 2013. I do not believe that the fundamental Sally Beauty Holdings, Inc. (NYSE:SBH) story has changed. This is a well-positioned company in a steadily growing segment that continues to generate consistently solid gross margin expansion. Going forward, the model should benefit from an added feature of share buybacks, which are expected to happen on a regular basis. Credit Suisse has set a target price of $32, which means 14% upside from current levels.

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA): ULTA is poised to have another strong year in 2013. That view is based on the company’s unique offering, rapid growth, expanding brands and products, and constantly improving execution. This stock trades at among the highest valuations in the Health & Beauty space; however, this seems to be justified, given the strength of Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s business model and market share opportunity in front of it. Almost everything went well for the company in 2012, including sales, gross margin, expense control, internet progress, and store openings. For 2013, continued improvement in these metrics and another record year of store openings is expected. The company’s e-commerce efforts will have a larger impact in 2013, as more features of the website are rolled out. Together, nearly 30% EPS growth and possible further multiple expansion is expected.

Foolish Bottom-Line

The Health & Beauty space seems to be an area full of money-making opportunities for investors given its expanding product lines and expected top and bottom-line expansion.

The article Healthy Investments in the Health Space originally appeared on Fool.com and is written by Masam Abbas.

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