Sally Beauty (SBH) is executing on its turnaround better than expected and beyond what is already priced into the shares. However, further upside depends on sustained topline growth and incremental profitability, where visibility remains limited, Morgan Stanley said Tuesday.

The fiscal 2026 sales guidance is at the lower end of Sally's long-term algorithm of 1% to 3%, while earnings before interest and tax growth of approximately 2% at the midpoint are below its 3% to 5% algorithm, Morgan Stanley said.

The firm said it needs to see clearer progress towards delivering on the long-term algorithm to become more constructive on the stock.

Near-term, the business is moving in the right direction, and initiatives like marketing and personalization, category expansion, and store refreshes should continue to benefit the company throughout fiscal 2026, the investment firm said.

Morgan Stanley believes comparable sales could be near the high end of both the fiscal Q2 guide of 0.5% to 1.5% and the reiterated fiscal 2026 guide of 0% to 1% due to early traction in category expansion, potential incremental benefits from tax stimulus, and healthy broader beauty industry trends.

The firm said it sees limited room for margin expansion from the reiterated fiscal 2026 EBIT margin guidance of approximately 9%, as margin drivers post-Fuel for Growth initiatives are limited.

Morgan Stanley models comparable sales growth of 0.7% in fiscal 2026, about 30 basis of gross margin expansion, and an EBIT margin of 8.8%.

Morgan Stanley raised the price target on Sally Beauty to $16 from $14 and maintained an underweight rating.

Shares of the company were down more than 7% in recent Tuesday trading.

Price: 15.84, Change: -1.17, Percent Change: -6.85