Olaplex Holdings, Inc. (NASDAQ:OLPX) Q1 2024 Earnings Call Transcript

Olaplex Holdings, Inc. (NASDAQ:OLPX) Q1 2024 Earnings Call Transcript May 5, 2024

Olaplex Holdings, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Olaplex Holdings First Quarter 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Flaherty, Vice President, Investor Relations. Thank you. You may begin.

Patrick Flaherty: Thank you, and good morning. Joining me today are Amanda Baldwin, Chief Executive Officer; and Eric Tiziani, Chief Financial Officer. Before we start, I would like to remind you that management will make certain statements today which are forward-looking, including the statements about the outlook of Olaplex’s business and other matters referenced in the company’s earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements. Additional information regarding these factors appears under the heading cautionary note regarding forward-looking statement in the company’s release and in the filings the company makes with the Securities and Exchange Commission that are available at www.sec.gov, and on the Investor Relations section of the company’s website at ir.olaplex.com.

The forward-looking statements on this call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Also during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company’s performance. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company’s earnings release. A live broadcast of this call is also available on the Investor Relations section of the company’s website at ir.olaplex.com.

Additionally, during this call, management will refer to certain data points, estimates and forecasts that are based on industry publications or other publicly available information as well as our internal sources. The company has not independently verified the accuracy or completeness of the data contained in the industry publications and other publicly available information. Furthermore, this information involves assumptions and limitations, and you are cautioned not to give undue weight to these estimates. With that, I will now turn the call over to Amanda.

Amanda Baldwin: Thank you, Patrick. Good morning, everyone, and thank you for joining us. Today, we reported first quarter financial results representing a solid start to the year. While internally, we’ve been making good progress on the business transformation plan we outlined in February. As discussed on our last earnings call, we view 2024 a year aimed at delivering stabilization in the business, while we continue to prioritize the strategies that are designed to build a stronger foundation and put us on a trajectory to generate consistent sales and profit growth. While this journey will take some time, I’m encouraged by the steps forward we are making and remain excited about the future of this business. We are intently focused on capitalizing on the power of the Olaplex brand with its unique quality.

Its extraordinary technical foundation and the differentiated science, which delivers superior product and performance. It’s innovative products that are sought after by a passionate global community of stylists and consumers and it’s an advantaged business model. At the same time, we are also taking actions that are designed to build and maintain the long-term health of the business, even if they have a negative short-term impact. As mentioned last quarter, we are limiting new distribution this year to allow for greater focus on our existing customers and current channels as well as rationalizing some accounts where we find evidence that the distributors with a source of diverted product. Turning to the highlights for the first quarter. We reported net sales slightly above the high end of our guidance range, driven by earlier-than-expected timing of shipments in our specialty retail channel, and we reiterated our outlook for the year.

Additionally, our brand health metrics among prestige hair care consumers showed continued industry-leading strength consistent with previous quarters. According to our external brand tracker, Olaplex is ranked No.1 or No.2 for all of the top 18 most important premium hair care equity, which includes best for my hair, makes hair healthier, recommended by stylist and a brand I’m excited to talk about. We continue to be a category leader at scale as Olaplex had four of the top five best-selling SKUs in prestige hair in the first quarter of 2024 for Circana’s retail tracking data of the U.S. care market and remained a top brand in key accounts across all three of our distribution channels. As it relates to our transformation, we are right on track with where we expected to be at this stage in our journey.

Supported by a strong foundation, I feel confident about the future direction we are taking. Throughout each conversation I’ve had over more than four months since joining the company, our professional stylists and consumers, customers and partners are highly engaged with our brand and our business. We’re receiving very favorable feedback regarding the actions we are taking, and I am optimistic that these conversations will culminate in future growth opportunity. All of this work is enabled by our passionate and talented team that is committed to executing against our priority. On our last earnings call, we introduced three key strategic priorities for 2024, which include maximizing the impact of our sales, marketing and education investments to generate demand; strengthening our capabilities and culture to support the future; and developing the long-term road map and future vision for Olaplex.

The first quarter included noteworthy accomplishments towards these goals on pace with the execution that we expected. Let me walk you through the progress we made on these initiatives. On our efforts to maximize the impact of our sales, marketing and education investments to generate demand, our initial focus is providing seamless execution on implementing brand-building activities that drive awareness, conversion and sell-through. Our goal is to sustain a more balanced full-funnel marketing approach this year and remain focused on ROI and optimizing our spend towards the best-performing channels and assets. At the core of this priority is returning to our stylist roots, and recreating meaningful connections with our pros. Olaplex would not be the brand it is today without the trust and support of stylists, and we are committed to enabling and empowering their craft and helping them succeed and grow the businesses.

We’ve increased the frequency of our participation at industry trade shows and sales events sponsored by our distributors and have established a greater presence of these events. We’re expanding coverage of our internal field sales and education teams to engage with salons directly and ensure our team’s close connection with the field teams of our partners. We’re developing new educational materials, curriculum and content to provide stylists with the knowledge and expertise about our science and technology. And our consumer engagement team has placed increased focus on engaging and partnering with influencers in the PRO stylist community, deepening our relationship with this important group allows them to speak from an expert perspective about the benefits of Olaplex to their highly engaged PRO and consumer audiences.

One exciting marketing activation in the first quarter was our campaign highlighting our best-selling Olaplex No.7 Bonding Oil. To celebrate Olaplex’s No.7 position as the No.1 prestige hair oil in 2023, according to Circana data, the campaign introduced a new activation and creator-led marketing strategy. By inserting the brand into culturally relevant moments in compelling ways, we drove the brand awareness and generated a combined total of more than 3 billion earned media impressions, demonstrating our relevance as a brand and future potential in our marketing efforts. Looking ahead, we intend to further evolve our marketing messages and aim to better articulate the strength of Olaplex science and our commitment to professional stylists.

To that end, in the coming months, we expect to launch a new campaign to enhance the positioning of our core SKUs and highlight the benefits of a complete Olaplex routine. We also plan to introduce activations that celebrate our PRO community as we celebrate our own 10-year anniversary as a brand. Our second priority is to strengthen our capabilities and culture to support our future. This work is designed to improve the foundational infrastructure across our organization. This includes the ongoing implementation of our enhanced integrated business planning processes, created with the help of an external third-party expert to better improve forecasting and overall business performance management. Additionally, we created an internal centralized work stream overseeing marketing investments across channels for more strategic spending and optimization.

We also opened a small office space in New York City, which will allow teams from all functional areas across our organization to come together and collaborate in an in-person setting. We believe this will further strengthen our corporate culture and allow us to build upon the speed and agility with which Olaplex has been able to operate. Importantly, we continue to forge ahead on our third priority of developing the long-term road map and future vision for Olaplex. This work is ongoing and includes a thorough assessment of our market opportunity, refining our brand identity, driving innovation and leveraging our omnichannel business platform. We recently undertook an in-depth brand perception study embedded in category, consumer and customer insights that confirm the strong foundation for Olaplex and will act as a guide for the evolution of our brand identity, messaging and design.

Encouragingly, there’s a strong base of consumer and stylist passion for our brand, the enthusiasm for what we will do next. Certainly, a solid foundation that I believe we can build off of. Additionally, we have formed a dedicated innovation team charged with accelerating our new product development. By leveraging existing executive leadership and bringing in new talent we have created a more robust integrated development function to lead the ongoing creation of our new product pipeline. This team is also charged with developing enhanced commercialization strategies for new product launches in 2025 and beyond. And as a brand with a proven global track record, we also continue to identify and see significant opportunities to expand our business around the world.

Our new Chief Revenue officer and I spent extensive time with our key domestic and global partners to better understand our business and their strategies. We recently traveled to Europe to meet with our local team, international distributors and customers to begin assessing the current structure and support needs for the future. I’ve also spoken in depth with our partners in Asia to assess our opportunity in this region and begin to develop a road map for the future. The feedback from these conversations was positive and insightful. I believe there is significant overlap in our goals and near-term opportunities to accelerate our partnerships. We believe we have an incredible opportunity to further develop our global brand as we focus on localized strategies that are designed to be appropriate for the unique customer and distribution channels across the world.

With these components in mind, we continue with the work to establish a long-range strategic plan and financial framework for the future. In summary, we are pleased with the progress made during the first quarter. With our performance to date and the initiatives underway, we believe we are well positioned to achieve steady progress toward our goals for 2024. Before I turn it over, I would like to take a moment to recognize Eric, who has previously announced is stepping down as CFO effective May 3 to pursue another opportunity. On behalf of the entire team at Olaplex, I would like to thank Eric for the leadership he has provided across the organization for nearly three years. It’s been a pleasure to work with him through my onboarding these last few months, and I wish him all the best in the future.

We also welcome Paul Kosturos, who will serve as our interim CFO following Eric’s departure. Paul is a financial executive with over 30 years of experience and who specializes in interim CFO assignment. We are fortunate to have Paul in our team, and we expect a smooth transition as we search for a permanent successor. And with that, I will now pass it over to Eric.

Eric Tiziani: Thank you, Amanda, and good morning, everyone. I’d like to begin by expressing my gratitude to the Board and to all of the employees of Olaplex for the opportunity to lead this tremendous organization as CFO. I continue to believe in the power and the long-term potential of the Olaplex brand, and the company is in an exciting juncture under Amanda’s leadership and strategic direction. I’ve been working closely with Paul over the past few weeks to hand off my responsibilities. And with the strong team we have in place to support him, I’m confident in a smooth transition. Now turning to our financial performance. We are encouraged by our results for the first quarter of 2024, which keep us on track for delivery within our full year guidance range.

Our aggregated sell-through trend at key accounts in Q1 was largely consistent with the seasonally adjusted trend that we experienced in the second half of 2023, marking a sign that demand for our products is stabilizing. Net sales for the first quarter declined 13.1% year-over-year to $98.9 million which slightly exceeded the high end of our first quarter guidance range that we have previously disclosed due to phasing of shipments in our specialty retail business. As a reminder, our Q1 net sales or sell-in decline versus last year was better than the Q1 sell-through decline versus last year at key accounts as we benefited from a weaker prior year net sales comparator due to certain customer inventory rebalancing in Q1 of 2023. This was partially offset by a negative net sales impact in Q1 2024 related to our previously announced decision to rationalize our business with certain professional distributors that we believe are the source of diverted product in the marketplace.

As we have previously discussed in recent earnings calls, we continue to believe that the months on hand inventory position at our major accounts on our core items remain in a healthy position and that there is not inventory building in our channels. Turning to performance by channel. Our professional channel sales of $38.7 million declined 19.9% versus a year ago, partly due to the aforementioned distributor rationalization, which primarily affects our professional business in Europe. Specialty retail sales were down 1.2% to $34.4 million and outperformed our expectations due to the earlier-than-expected sell-in of inventory in advance of our participation in key customer tent-pole marketing events. Specialty Retail also benefited from the weaker prior year net sales comparator related to customer inventory rebalancing.

The direct-to-consumer channel decreased 15.7% to $25.7 million and was impacted by the timing and phasing of shipments more than offsetting strong performance from olaplex.com, which grew year-over-year for the fourth consecutive quarter, and we believe, is seeing positive momentum from our increased marketing investments. By geography, in the first quarter, the U.S. increased 2.5% year-over-year, primarily due to lapping customer inventory rebalancing from a year ago. Our international business declined 24.3% versus a year ago, due in part to a more difficult prior year comparator and the impacts of distributor rationalization, which we believe has resulted in a short-term negative impact on our volume, primarily in Europe. Moving down the P&L.

Adjusted gross profit margin was 74.3%, up 170 basis points from 72.6% in the first quarter of 2023. Approximately 250 basis points of this favorability is related to lower warehouse and distribution costs, and 110 basis points is a result of lapping higher levels of inventory obsolescence reserves a year ago. This was partially offset by 110 basis points from higher promotional allowance and 80 basis points from inflation on product costs and unfavorable product mix. Adjusted SG&A grew 13.2% to $37.2 million from $32.9 million in the first quarter of 2023. The $4.3 million increase in adjusted SG&A from prior year is primarily the result of $1.2 million in distribution and fulfillment costs and $1 million in investments in sales and marketing, with the remainder a result of lapping the workforce expansion from a year ago.

During the first quarter, we spent approximately $12 million in non-payroll-related marketing and advertising expenses. Adjusted EBITDA declined 29.1% to $35.5 million versus $50 million in the first quarter of 2023. Adjusted EBITDA margin was 35.9% compared to 44% a year ago. Adjusted net income decreased to $20.6 million or $0.03 per diluted share from $31.4 million or $0.05 per diluted share in the first quarter of 2023. Moving on to our balance sheet, inventory at the end of the first quarter was $94.6 million, down $1.3 million from $95.9 million at the end of the fourth quarter of 2023 and down $37.4 million from the first quarter of 2023. We have made good progress on reducing our levels of inventory. And while our inventory levels are healthy, we believe we have additional opportunity this year to continue lowering our inventory to target levels of months on hand.

Turning to cash flow. During the first quarter of 2024, we generated $43.7 million in cash from operations. We anticipate that 2024 will be another year of healthy cash flow generation as we continue to drive an asset-light model, high profitability and continuous improvement in our working capital position. We ended the first quarter with $507.5 million in cash and cash equivalents, up $41.1 million from the end of 2023 and an increase of $138.2 million from the first quarter of 2023. This cash has generated interest income at an annual rate above 5%. Long-term debt, net of current portion and deferred fees was $647.7 million. Now, turning to our financial outlook. As disclosed in our earnings release issued this morning, we are reiterating our outlook for fiscal year 2024 and expect net sales in the range of $435 million, $463 million, adjusted EBITDA in the range of $143 million to $159 million and adjusted net income in the range of $87 million to $100 million.

The assumptions in our plan for the year are consistent with the details we shared on our last earnings call. Our forecast incorporates reasonably expected volume drivers on a product and account level basis. We continue to assume that the impact of our sales and marketing investments and our second half initiatives build on the level of demand that we’ve seen in the past several quarters. Let me remind you of three major volume drivers for 2024 that we shared on the last earnings call. First, we anticipate incremental sales contribution from new product launches this year, but expect the contribution from new products in 2024 to be lower than in 2023 given the timing of key launches starting later this year. Second, on the distribution front, we’re taking actions that are focused on our long-term success, but are expected to have a negative short-term impact.

This includes the decision to constrain opening up new accounts in 2024 as we focus on current key customers and rationalize certain distributors and accounts that do not build brand equity, either due to off-strategy pricing, or sub distribution into unauthorized resellers. And third, we expect a year-over-year net sales growth tailwind, particularly in the first half of the year, as we lap the effects of customer inventory rebalancing in 2023, which had the impact of depressing our 2023 net sales base. Specifically for the second quarter, we expect demand trends to remain largely stable to what we experienced in Q1, adjusted for the phasing and impact of certain activities with our customers. As we move into the second half of the year, we anticipate momentum to build as, our investments and initiatives land in the market.

We benefit from the sell-in of holiday kits during the third quarter in our professional and specialty retail channels and the seasonal lift we’ve historically seen in the fourth quarter, particularly in our direct-to-consumer channel. And we expect positive impact from our new product launches given the timing of those launches. Moving down P&L. For the full year 2024, we assume adjusted gross margin in the range of 72.5% to 73.1%, representing expansion of 110 to 170 basis points. This is the result of lapping higher levels of inventory obsolescence from last year and the expectation of normalized promotional levels this year as we lap promotions to move excess customer inventory last year. In addition, we expect to benefit from our dedicated internal cost savings program, which we expect will more than offset some inflationary pressures in product costs.

Furthermore, we expect full year 2024 adjusted SG&A expenses in the range of $172 million to $179 million, an increase of $19 million to $26 million versus 2023. Roughly half of that increase versus last year is expected in organization costs primarily from annualizing the cost of headcount additions made during 2023 and from the accrual for a normalized bonus payout in 2024. The other half of the increase is expected in our sales and marketing expenses as we invest at levels we believe are required to return to long-term growth. Specifically, we continue to expect full year non-payroll-related marketing and advertising expenses to be in the range of $66 million to $70 million, an increase from $65.5 million in 2023. Taken all together, we anticipate continuing to achieve top-tier industry profitability with adjusted EBITDA margin in the range of 32.8% to 34.3%.

We assume net interest expense to be approximately $32 million to $34 million and an adjusted effective tax rate of approximately 19.5% to 20.5% for the year. In conclusion, we are pleased with the first quarter results and progress on the priorities we’ve set out for the year. Our efforts are driving stabilization in our sales trend, expansion in gross margin rate and continued industry-leading profitability with strong cash flow generation. This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Jonna Kim with TD Cowen. Please state your question.

Jonna Kim: Thank you for taking my question. Just curious on professional channel, what you’ve been seeing lately on the salon — help with the salons and the stylist and also just the overall beauty category, if you’ve seen anything noteworthy, any slowdown in general? And then just another question on gross margin; you’ve seen nice expansion this quarter, any reason why we shouldn’t expect more expansion throughout the year.

Amanda Baldwin: So with respect to the broader consumer trends, both within PRO and beauty more generally, I don’t think we’ve seen any changes from what we talked about last — in last call. So there are certainly what I’ll call, distribution shifts that are happening in terms of where the consumer is buying in front of salon, but we do believe in the future of our channel and the future of the PRO, as you could hear me talk about, there’s certainly a lot of emphasis that we’re placing on the importance of the PRO across our strategy, but we will certainly see people buying products in different places as they think about their front of salon purchases. That’s different for us than anyone else. With respect to the consumer more broadly. Again, we really believe in the future of the prestige hair care category. We think there’s a lot of momentum behind that, and we continue to believe that it’s a great opportunity.

Eric Tiziani: And I’ll take the gross margin question, Jonna. Yes, we were pleased with the gross margin expansion versus prior year that we saw in Q1 and we’ve guided to similar expansion for the full year. If I just build on that, we expect to see similarly high gross margin in the second quarter and the fourth quarter. Just for seasonality reasons, it takes a little bit of a dip in Q3 related to the sell-in of our holiday kits. And I would say that, that gross margin outlook is well supported by the progress we’ve been making on our savings initiatives. We continue to have really good wins here. And just in terms of the puts and takes, similar to Q1, we expect the gains versus prior year in warehousing cost savings and then lower levels of obsolescence reserves to continue throughout the year.

Operator: Our next question comes from Andrea Teixeira with JPMorgan. Please state your questions.

Andrea Teixeira: Thank you, operator, and good morning to all and thank you Eric, for all the help and wish you the best of luck. I have one question for Amanda on consumption and a follow-up on international distributors. First on consumption, Amanda, how are the trends as you exit the quarter, in particular in light of what we have heard from your peers, from one of your customers? And second, on the international market commentary, I appreciate that you were reducing and streamlining, but international was a big decline. When should we expect you to lap that? And how far we in the innings of reorganizing and re-thinking about how to go to market internationally.

Amanda Baldwin: Thanks for the question, Andrea. I think what we can comment on at this point is really, as we think about that international business that we were lapping harder comps from last year in terms of when we had the impact on the sales from the PR moment. But what I would say going forward is that as I spent a lot of time with those partners, and I think we believe there’s a very strong future for us in the international markets and really building out strategies and thinking through how we’re going to really capture the demand in different ways across the globe. Okay, also on the trends exiting the quarter, I think that’s not something that we comment on specifically.

Operator: And our next question comes from Olivia Tong with Raymond James. Please state your question.

Olivia Tong: Great. Thank you. Thank you, Eric, for all the help through the years. So it’s nice to see that it looks like sales to retailers have stabilized. First, could you talk about if there was anything one-off or do you think you’ve reached a steady state on the retail channel? And then also as you limit the distribution and work towards controlling diversion, can you give us any color on where the diversion is coming from? I would imagine that PRO is the main culprit, but I would love to have some color there.

Eric Tiziani: Olivia, thanks for those kind words as well as well to Andrea. I’ll start on your question around the distributor rationalization. This is what we said last quarter that one of the steps we’re taking this year is to attack via — the challenges — diverted product in the marketplace by rationalizing some of our distribution where we think the source of that diverted product is from. And we do that using many levers, one of them is our track and trace technology that helps us find the source. By the way, I’ll just also say that we’re progressing well on that. We saw Q1 impact similar to what we were expecting and our outlook for the year in terms of the impacts of that continue to be consistent with last quarter.

It is in the professional channel. That’s where the arbitrage opportunity exists. It’s not unique to Olaplex at all. This is a challenge that all omnichannel professional hair care brands deal with. And what we’ve noted is that we’ve seen it particularly in our EMEA and European distributor base as a source of some of that diversion. That’s one of the reasons that we’ve cited for the weaker trend in international sales in the first quarter. By the way, we continue to feel good about other parts of our international business, not impacted by those challenges. We continue to see bright spots in areas like Latin America, Japan, Southeast Asia, where we’ve expanded distribution in recent years. And look, I’ll take Olivia, your other question as well on specialty retail, any one-offs.