Olaplex Holdings, Inc. (NASDAQ:OLPX) Q3 2023 Earnings Call Transcript

Olaplex Holdings, Inc. (NASDAQ:OLPX) Q3 2023 Earnings Call Transcript November 7, 2023

Olaplex Holdings, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.04.

Patrick Flaherty: Good morning. Joining me today are J.P. Bilbrey, Interim 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 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 statements in the company’s earnings 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 these industry publications and any other publicly available information. Furthermore, this information involve assumptions and limitations, and you are cautioned not to give undue weight to these estimates. With that, I will turn the call over to J.P. Bilbrey.

J.P. Bilbrey: Thank you, Patrick, and good morning, everyone. It’s a pleasure to be with you today. I joined Olaplex’s executive chair in July 2023 because I saw an innovative company with a special brand. A leader in the attractive high growth and resilient Prestige Hair Care category, offering product differentiated by patented technology that delivers superior performance. Since joining the company, I have been spending my time digging in to the business, trying to better understand both our strengths and our areas of opportunity. For this process, I’ve developed a stronger understanding odds and appreciation for the competitive differentiators that make Olaplex unique. I have conviction in the potential for long-term growth and the opportunity to create significant long-term value.

The passion of our loyal base of professional stylists and consumers is strong. I see significant opportunity for consistent, sustained growth as we evolve out portfolio with new technology leading innovation and build our business in attractive geographies and I believe our advantage business model will allow us to continue to deliver top tier profitability and cash generation. That being said, the business has faced several headwinds over the past year, including our own execution in the face of increased competition.I believe though that we’re at a pivotal point in the company’s evolution and the next phase of growth for Olaplex. It requires a different level of focus and improvement in brand building capabilities. My goal is to enable a path to long-term profitable growth and make the company stronger ensuring we have the right structure, tools, and operating systems in place to achieve our goals.To that end, I’ve been focused on leading 3 key initiatives since I’ve joined Olaplex.

First, I’ve been overseeing the redesign of our integrated business planning processes to improve forecast innovation delivery and overall business performance management. Next, we’re enhancing and investing in our insights and analytics capabilities, which I believe will give us the tools to invest more thoughtfully in our brand and distribution channels and become a more customer and consumer focused organization. And third, I’ve been managing the execution of our omnichannel strategy, seeking to reassert our position professional channel and ensure that the stylists are at the center of our brand.In addition to these initiatives, we reviewed and assessed our organizational capabilities to determine what we need for long term success and recently announced a leadership transition.

We are very excited that Amanda Baldwin will join Olaplex as our next Chief Executive Officer by mid-December, bringing significant leadership and expertise in the beauty industry to the company.Amanda has spent the last 7 years as CEO of Supergoop, the leading SPF Skincare brand where she has led the company through significant growth. Prior to Supergoop, Amanda served as a Senior Vice President at L Catterton, a Global Consumer Focused Investment Fund, collaborating with management teams across the portfolio with a particular focus on the beauty sector and she previously led the omnichannel marketing strategy of Dior Beauty and held several positions at Clinique.She’s an accomplished beauty executive. Amanda has deep experience with building Prestige brands and her mix of strengths across marketing, partnering with customers, product and team development, make her the ideal person to position Olaplex for long-term success.

Until Amanda joins the company, I have the privilege to serve as interim CEO. My priority is to ensure that we remain focused on delivering our operating plans which starts with achieving stabilization in our sales trend in the second half of 2023. Our third quarter results and our 2023 guidance support our belief that we’re making progress on that goal and in a moment, Eric will provide more details on those results. In summary, Olaplex is driven by great science and we see untapped opportunity for growth as we innovate, drive our existing channels and expand in to new geographies. We identified and are implementing changes that we believe will powerfully unlock the high potential of the Olaplex brand and I’m excited and look forward to partnering with Amanda, the board, and the entire Olaplex team to capitalize on these opportunities.

With that said, I’ll now pass it over to Eric to report on our progress towards stabilization, the execution of our priorities, our third quarter results and our outlook for the remainder of 2023.

Eric Tiziani: Thanks, J.P. and good morning, everyone. Last quarter, we communicated that stabilizing our sales trends in the second half of 2023 was a top goal. We believe our Q3 results delivered solid progress against that goal. Our demand trends are stabilizing suggesting that our increased investment in the business is yielding positive results.I’d also like to share the following commentary on the progress we’ve made. First, aggregated sell-out sales dollars remained relatively consistent sequentiallyin Q3 with Q2 sell-out on an absolute dollar basis. This is a key metric we’re tracking in terms of what we mean when we say stabilizing the demand trend. Second, there was little difference this quarter between our reported net sales decline of minus 30% versus prior year and the sell-out trend in our key accounts, which was down 28% versus prior year.

As we continued the glide path to right size customer inventory levels for current levels of demand. As mentioned last quarter, we believe the months on hand inventory position at our major accounts on our core items remain in a good position. Next, olaplex.com performance remains strong, posting a second consecutive quarter of positive year-over-year growth. This channel has benefited from our increased marketing investment, particularly in upper funnel activations. In that regard, we continue to measure positive impressions of the brand from the Strength Starts Inside campaign with notable campaign lifts in brand awareness, consideration and affinity, and a more than $3 million increase in earned media value since the start of campaign. We believe this is cause for optimism for the broader business.

Additionally, we increased our activations in the professional channel during the third quarter and have already observed positive early indicators from this work. With a holistic approach to increase our visibility with stylists and demonstrate our commitment to their success we implemented increased sampling programs, in-person and virtual evets, trade media placements, visual merchandising updates, and participation in key promotions. We recognize that there is more work ahead to further deepen engagement with the pro community. However, from these early days of these efforts, we are encouraged that our actions appear to be resonating and lastly, brand health metrics on Olaplex among Prestige Hair Care consumers, as tracked by third parties, remain strong and consistent with prior months.

According to our external brand tracker, we are ranked Number 1 or tied for Number 1 for 10 of the top 17 premium hair care equities, including best for my hair, makes hair healthier, highest quality products and scientifically proven to benefit hair. In support of our stabilization goal for the balance of 2023, we also continue to deliver against the key priorities we establish our reset. These include accelerating investment in sales and marketing, increasing and evolving our educational assets and reasserting our position with our pro and Specialty Retail partners. Let me now walk you through the progress we made on these initiatives during the third quarter. Starting with sales and marketing, year-to-date, we have invested approximately $54 million and with one quarter remaining in the year, we now expect our marketing investment for 2023 full year inclusive of sampling and certain sales and marketing payroll to be in the range of $80 million to $82 million, compared to our previous expectations of $80 million to $85 million.

This year, we have deployed a more balanced full funnel marketing strategy with a test, learn, and optimize approach to our spending. This quarter, we invested further in our full funnel Strength Starts Inside creative campaign that kicked off in June. Based on our marketing mix modeling analysis, we were able to shift more of this investment into our best performing content in our best performing marketing channels, namely digital, social and connected TV elements. We also made the choice to re-phase some of these planned investment from the third quarter in to the fourth quarter where we believe it will have a bigger impact around key buying moments for our stylists and consumers. We have also consistently spoken about the importance of the earned media value metric in our marketing efforts, which we believe provides a multiplier effect on the value of our marketing spent.

We are pleased to report that in the third quarter, we regained the position as the Number 2 earned media value hair care brand in the U.S. and exited the quarter inSeptember as the Number 1 earned media value haircare brand according to Tribe Dynamics. This position was bolstered by the launch of a global creative social media campaign designed to reassert Olaplex’s authority in science and technology. The campaign generated significant buzz on social channels and in media coverage, with more than 40 million views and impressions of the campaign and nearly 80 million views of the campaign’s hashtag on TikTok. Moving to our education efforts. We continue to distribute new core education content focused on our science, provide more efficient and easier to use education materials for our US and international business partners and actively correct any mentions of misinformation on our brand in the market.

In addition, as a reminder, we recently established an internal field sales and education team. Resources deployed against our Specialty Retail and professional channels in the U.S. We believe building this capability in house is both more cost effective and provides even better control of training on the Olaplex brand. Feedback from our Specialty Retail partners has been very positive as we have displayed our commitment to expanding our reach and support of the in-store experience. Another reset priority is reasserting our position with the professional and Specialty Retail channels. In addition to the increased proactivations that I mentioned earlier, we are collaborating with our Specialty Retail partners by participating in their high-profile category marketing events ensuring that we deploy a balanced approach to our promotional strategy and analyze the activities to measure success.

We also leveraged the insight and capabilities of our Specialty Retail customers and executed targeted CRM activations with one recent campaign delivering millions of impressions, very high ROAS that exceeded industry benchmarks and a strong number of new users to Olaplex and we continue to deliver against our enhanced sampling program this year, with data revealing that our samples continue to convert at top tier levels in the industry. Now turning to our financial results for the third quarter. Net sales declined 30% year-over-year to $123.6 million in line with our expectations. By channel, as compared to the third quarter of 2022, professional channel sales declined 23.3% to $48.3 million. Specialty Retail sales decreased 41.8% to $43.2 million.

Our Direct-to-Consumer channel sales were down 18.2% to $32.1 million. As we had signaled last quarter, the sequential absolute dollar increase in Q3 net sales of $124 million versus Q2 net sales of $109 million was largely driven by the sell-in of our 2023 holiday kits in the pro and Specialty Retail channels. The sequential absolute dollar decrease for DTC from the second quarter to third quarter was primarily related to the Q2 sell-in for a major customer promotion that occurred in July. By geography, in the third quarter, the U.S. declined 30.9% compared to a year ago and international was down 29% year-over-year. The decline in international was driven by the UK, Canada, and Australia, partially offset by gains from our growing distribution in Southeast Asia, the Middle East, and Latin America.

Moving down the P&L, adjusted gross profit margin was 69.7%, down 5.40 basis points from 75.1% in the third quarter of 2022. Approximately 320 basis points is related to promotional allowance, 290 basis points to higher inventory obsolescence reserve and 70 basis points from inflation on product costs. These more than offset the 160 basis point benefit primarily from lower warehouse and distribution costs. Adjusted SG&A grew 18.8% to $33.7 million from $28.4 million a year ago. The $5.3million increase in adjusted SG&A from prior year is primarily the result of a $3.4 million increase in sales and marketing expense as well as an increase in payroll attributable to workforce expansion and other related expenses. Adjusted EBITDA declined 49.5% to $51.5 million versus $102 million in the third quarter of 2022.

Adjusted EBITDA margin was 41.7% compared to 57.8% a year ago. Adjusted net income decreased 54.5% year-over-year to $33.4 million or $0.05 per diluted share from $73.3 million or $0.11 per diluted share in the 2022 third quarter. Now turning to our balance sheet. Inventory at the end of the third quarter was $112.8 million, down from $128.5 million at the end of the second quarter reflecting good progress against our goal to lower our inventory towards our target range for months on hand. Turning to cash flow. During the first nine months of 2023, we generated $128.5 million in cash from operations. We are generating healthy cash flow through our highly profitable business model, and as we improve our working capital position, primarily through lower inventory.

We ended the quarter with $429.6 million in cash and equivalents, up $51.2 million from the end of Q2. This cash is generating interest income at annual rate of above 5%. Long-term debt net of current portion and deferred fees was $650.4 million. Now turning to our financial outlook, for fiscal year 2023 we now expect net sales in the range of $450 million to $460 millionversus our previously reported range of $445 million to $465 million. Adjusted EBITDA in the range of $166 million to $174 million compared to our previously reported range of $161 million to $176 million and adjusted net income in the range of $100 million to $108 million versus our previously reported range of $96 million to $108 million. For the year, we assume adjusted gross margins in the range of 70.5% to 71%.

In the medium term, we remain confident that we can return closer to our historical adjusted gross margin levels in the mid 70% range. We continue to assume net interest expense to be approximately $40 million and an adjusted effective tax of approximately 20% for the year. In conclusion, we believe the third quarter represented good progress against our goal to stabilize the demand trend in the second half of 2023 and we are pleased to update the annual guidance range for this year. We continue to believe our company will once again achieve consistent profitable growth as we invest in foundational capabilities, leverage our patented technology and powerful community of advocates and implement our strategic initiatives. This concludes our prepared remarks.

We will now turn the call back over the operator for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Our first question comes from the Susan Anderson with Canaccord Genuity.

Alec Legg: Good morning. It’s Alec Legg on for Susan. Just on the sell-outs, you mentioned it was starting to stabilize and are down 28% compared to 26% in the first half. I guess, can you talk about the exit rate of the sell-outs in the quarter?Just how the retailers are feeling about stocking levels and then maybe any incremental details on a unit basis just to kind of account for the promotional levels too.

Eric Tiziani: Thank you. Hey, Alex, it’s Eric here. Thanks for the questions.So yes, first I would just say, again, we’re pleased with Q3 results delivery in line with our expectations, the sharpening of our guidance for the year, which we believe show good progress against this goal of stabilization.What do we mean by stabilization, one of the ways in which we’ve been talking about that is looking at absolute sell-out dollars, trending over time and stabilizing that trend and what we saw in the end of third quarter was good progress against that so stabilizing the sell-out trend versus Q2 was relatively the same in absolute dollars versus Q2 and to your separate question, we saw sell-out and sell-in trends, very similar. So we believe that we’re passed and through the customer inventory rebalancing that we’ve experienced as a headwind earlier this year and that our key customers, our core items are all at healthy levels of inventory and weeks on hand.

So, that’s the key.The stabilization is the absolute dollar trend being relatively flat in the third quarter versus the second quarter happens to be a -28% sell-out trend in the third quarter and on a unit basis that was the last part of your question, we actually saw our average price tick up a bit in the third quarter versus the second quarter. As we continue to be less promotional on average than the rest of the category, but we are participating in some promotional events that we think are important for our customers, for our stylists and our consumers, especially when we see an opportunity to do that strategically and to acquire new customers, but not more promotional in the third quarter than previously and less than the category average.

Alec Legg: Thanks. And then just on the overall operating or EBITDA margins, I guess, how are you thinking about balancing the gross margins of operating costs as you ramp up marketing?And then like you said, compete with other brands when it comes to promotions?

Eric Tiziani: Sure. Well, let me start with gross margin.We know, and we’ve stated we’ve been dealing with some headwinds this year on gross margin, particularly around the actions we’re taking on excess inventory levels on our side and in some cases promoting through, some of the slower moving items of excess inventory at our customers.Those are the big headwinds we’ve been dealing with in gross margin this year.We still believe as we’ve stated, that as we get through those headwinds, we see gross margin returning to that mid-70s range that we’ve been at historically and that will continue to support the investment levels that we want to put elsewhere in the P&L. We talked about as a priority this year in 2023, increasing our sales and marketing investments to get our message out.To be proactive about the Olaplex message, building awareness, building brand equity, really building the brand and we’ve been following through on that priority this year and we’ll continue to do so.

We we’re measuring.We’ve talked about this as a test, learn, and optimize approach to our sales and marketing, and we’re very much using the data and using the ROI analytics to direct that spend where we think it can perform the best for the brand.We see that in the upper funnel with our Strength Starts Inside campaign. We’ve been partnering with an analytics firm on at the marketing mix modeling around that and as we mentioned in the call, we use that information toredirect some of that spend to the best performing assets in the best performing channels. And we certainly also see it in our lower funnel marketing spend.So some of our performance marketing, whether it be in olaplex.com and some of our e-commerce platforms and retailer.com where we get very strong ROI and ROAS metrics as well.

Alec Legg: That’s very helpful. Thank you.