Olaplex Holdings, Inc. (OLPX) Earnings Call Transcript & Summary

Let's get started. Really happy to have Olaplex with us today with JuE Wong, the company's CEO and Eric Tiziani, the company's CFO.

So let's just start off. I mean, it's been a challenging year, to say the least. So if you could just maybe speak to what has been the greatest hurdles to your performance, but also, what's gone better than what you expected over this time? And also, what gives you confidence that you can get to that stabilization in the second half of the year that's embedded in your guidance?

Right. Thank you, Lauren, for having us. Thank you to everyone for being here, and to the people on the webcast that's listening in. Yes, you're right. It has been a challenging year, but what is good about it is that we have focus and how, like, look at what is important and what has caused us with this slowdown. We look at the macroeconomics where some of our stylists are really buying closer to me because their clients are coming in for longer in between visits. We have seen more competition coming into the space, which is not a bad thing, because its raises awareness for the category. We have also seen more promotion activities and we have traditionally not participated, but we have decided that very intentionally how we're going to do that. And then finally, there's also misinformation surrounding the brand that we need to address. So all of this has caused a slowdown. But given that we know that this is what's causing it, how are we addressing it? So we are stepping up in sales and marketing. You have heard us that in 2021, we spent about $20 million, and this year, we are budgeting an $80 million to $85 million spend on sales and marketing, and sales and marketing really focus on 4 key areas. The upper space is fully integrated marketing programming; upper funnel, which is all about awareness build; middle funnel, which is all about consideration that includes education; and lower funnel, all about conversion, meaning that we want to look, make sure that the customers are engaged with us will eventually convert with us. What has, to your next question, what has actually sort of like, doing work for us and that we are happy that things are continuing in that direction is the fact that despite the slowdown, despite the challenges that we are up against, the fact that we have seen the top beauty brands and the top haircare prestige brand in all the channels that we operate in. We have brand equity that when our consumers -- when we track our brand health, still continue to see it's a brand that they trust. It's a brand that leads with science and technology, and it's a brand that they will recommend to their family and friends. So we feel that all this will help us lead into what we call stabilization and then eventually lead us to grow. So which are going to be maniacal in our focus in these key areas and continue to execute against our priority.

Okay. Let's maybe talk a little bit about the increased investments that you're making in sales, marketing education. And like you said, $80 million to $85 million for 2023, up from the initial expectation of $70 million and $40 million last year. So I guess what -- how are you maybe allocating the investments differently than you did last year? And when should we expect to see them yield a positive inflection in demand? Because I think you've been on this path since the start of the year, but we're not really seeing the results in performance.

So let me kind of like give it a little bit of a time line dimension. When we talk about the fully integrated funnel marketing, a lot of the upper funnel, and upper funnel really refers to out-of-home advertising, billboards that you see in the 5 key cities that we focus on, which is in Chicago, New York, London, Toronto and L.A., and what we have done is that started at the end of May. So we will start -- and that is usually a slowly-built, so the result of that is going to be a little bit later. But what we have seen is that in the middle funnel, which is education, where we are able to go both online and off-line in-store as well as on our social media platforms to really educate on not only the product knowledge, but any account misinformation around the brand. We have seen a little bit more traction. And then definitely, you saw from a direct-to-consumer when we reported at our August 8 earnings, but it actually has shown improvements with the digital media that we're directing to olaplex.com. So I think what's going to happen primarily for everyone in this room and everyone listening as yourself, it's how are we tracking and measuring the success. And we believe that over time, we will be able -- better able to share these results, but we are definitely testing, learning and optimizing. And specifically with media, we can look at the roll out and also with anything that is with conversion, whether our sampling program is working, our expanded sales team that is in the field is delivering the conversion, all this will help us get to that stabilization situation that we are aiming for.

Okay. Can we talk a little bit more specifically with the work you're doing to improve Olaplex is gaining the professional community? I know late last year, we've spoken about reinstating the Pro Affiliate program. Maybe you could describe for kind of what that is? And has that been a success to date?

Sure. Thanks for that. So the Pro Affiliate program in general is what we allowed us professional stylists to be able to tell their clients to buy from our -- from olaplex.com, and for that, they get a commission. We have been very discrete in launching that program. The first time we launched it was during COVID, and the reason why was all the salons were shutdown, and there was no means for them to make a living. And we wanted to allow that opportunity where they can direct their clients to us without any kind of promotional activity, they were able to do that and we're able to sustain at least some income. The second time we implemented that was well above last quarter Q4 at the beginning of -- end of Q3, beginning of Q4 last year, and that was because of the macroeconomic conditions, that the [ buying ] slower to me and their clients coming in less frequently. That was helpful, but we are mindful about that because they -- we also work with distributors, and we do not want the distributors to kind of think that they're taking customers away from them, but it's adding value. And we had those conversations with our distributors and the beauty supply location prior to launching the program, and they understood what we were doing. So we know that, that works. But how you build affinity with the Pro and built the love and the respect and the authority with them, it's really the activations that we are putting in. So that includes really more education on and offline, participating in events, a high profile or high activity, for instance, the trade shows and the hair show, but they are able to come to us and learn more about our brands and then through those classes, be able to buy their supplies for their salons. We are also looking at expanding our [ few ] sales team to include people in the beauty supply locations because when you do that, you are intercepting at the point of purchase. And then finally, key opinion leader salons. And what key opinion leader salons are, they are generally very influential and they have a lot of reach, because what they say matters to the other side in the community. We have -- we've built out a team that can go after this salon, what we call a key opinion leader salon. By doing all that approach, we see that we are investing in that channel, and the stylists know that they are important to us because they have always been a key pillar of who we are.

Okay. Great. Let's talk about international. So international had been one of the key growth drivers you talked about since the IPO. In the near term, my understanding is there's similar challenges as you see in the U.S. and sort of English-speaking countries. But is your longer-term growth prospects internationally still intact?

We absolutely see international growth as a major opportunity for our short, medium, long-term growth potential. And just to frame it, we're already over -- just over 50% of our sales coming from markets outside of the U.S., so this is a proven opportunity. It's not something that we haven't already shown we have done because -- shown we can do because our technology is truly hair agnostic. We've seen Olaplex brand, the products resonate across many different international markets. And the opportunity is both in existing international markets where we already have some maturity, but still a lot of runway left for further penetration. Think of markets like Western Europe, as well as international markets where we're really just getting started. We've just entered in the last 18 months or so or we still consider them white space markets. That's a big part around APAC, the Middle East and even Latin America. So we do expect that international growth will even outpace U.S. growth in our long-term growth algorithm.

Okay. And how should we think about the margin differential between U.S. and non-U.S. markets? And as international, you said it will be the biggest driver of growth. Like, how much of a negative mix impact is that on margins?

It's really not a factor whether it's international or not, and we go to market internationally in various ways. We run the business from the U.S. We've been increasingly putting boots on the ground to help manage relationships in different time zones and with our distributors in those markets, and so the cost structure is actually quite similar. The bigger impact is the channel footprint. So if we're going to start the market, let's say, through the professional channel and then build out the omnichannel model, then we've always talked about our margin differential between the channels as good, better, best, and the professional channel has a very good margin. The retail and pure play e-commerce has a better and then the best is our olaplex.com. So it's more of a factor of the maturity level of the channel footprint than it is the actual international market.

Okay. And also, notwithstanding what you just said, I'm curious if that changes as you establish the local supply chain in Europe? Does that -- how does that impact the profitability? What's the time line of...

Yes, it's certainly a benefit. So the most recent example of that is the co-manufacturer that we set up in Europe to produce several of our core items, servicing that region of the world. And it significantly reduces the costs we incur on transportation, which would have otherwise been coming from the U.S., and obviously, is a tailwind to our gross margins in that part of the world. That's the model. When we see scale at a certain level in different parts of the world, we'll make the decision to continue expanding our manufacturing network to get that production closer to that point of sale, so that's also a proven lever we already demonstrated. And that's already place in Europe, and it's what we'll continue to evaluate in other parts of the world.

Okay. Let's just discuss innovation. So I was curious if you could talk a little bit how you prioritize, how to attract the different white spaces, right? So you recently entered dry shampoo, eyelash, and [indiscernible] other areas of potential growth over time including skin, which recently you've talked a lot about during the IPO. So how do you prioritize which categories to go after? And maybe on the flip side, are there areas in which you'd rather not participate and why?

Right. A great question. So if you look at our sort of ability to look at innovation, first of all, we have a focus and a priority to make sure that we have a 72-month growing pipeline for innovation, and how our innovation gets informed is that we have a transformation team that really spikes the market size opportunity, that segment where we have permission to play and win. So that data-driven decision-making really takes -- helps us really be more informed. And then we now have built out an R&D facility that, really, is world-class, as far as I'm concerned, compared to 5 other companies on an emerging category. It is a 15,000 square foot space on the Pfizer campus, which is on the border of New York and New Jersey. And what is exciting about the facility like that is we can formulate, we can do clinical testing and we can batch. When we can do those kind of batch testing, you now attract world-class scientists who wants to collaborate with us. So that helps us with our innovation, whether it's on the technology front or participating in the [indiscernible]. Yes, you've heard us talk about, even at the IPO, saying that our technology, the patented bisamino technology has applications in other categories of beauty, including skin care. And while we have gone into an adjacency like Lash, I think given that this is our reset year, we really want to focus on getting ourselves back to a stabilized situation and then looking at growth. While we know our technology has those applications, we always have an opportunity to go into that direction. But until we get our efforts stabilized, I think that is where our -- the last question on that is why don't we want to get there sooner? And that's really the reason why. It's not because we don't think our technology can compete toe-to-toe. On the contrary, we have done testing our technology and it is truly a really game changer when it comes to other adjacency category, just as you have seen in Lash -- in Lashbond. So I think time will tell, but what is more important for us as a team would be to focus on the present and making sure that we get this business to a good place, then we can build off even more. Being a more resilient and a more stronger foundation, Olaplex is definitely in better progress.

Okay. Great. So I mean, 1 of the questions we had in that gain is how Olaplex, the sort of regimen-based approach with [ hair ] in a recessionary environment? And we were, I guess, not technically in a recession, there's segments of the U.S. population that's certainly -- are experiencing what we feel like a recession. So -- and then there's a question of what's still to come. So on your earnings call last month, you did call out several factors impacting your performance. But macro actually, interestingly, wasn't 1 of them. So I was just wondering if you're seeing any impact from lower basket size, less frequent purchasing, things that maybe would -- you could, presumably, would be tied to the macro?

Right. So yes, we have shared that the buying closer to need by the professional stylists had somewhat of an impact because that is also probably [ trim-in ] by the clients coming in on, let's say, they need to come in at 6 to 7 weeks to color their hair. Driven by extending it by the week by extrapolation, you can see the impact. What is, I think, good about the offerings and the innovations that we put through both for the professional community as well as for the end consumers is that for the professional community, they know they have products and SKUs that we launch that truly is extremely exclusive what we call the backbar. The backbar is by prescription only, so when you're doing a service and you're mixing in the Olaplex prescription products, you are -- that product is never going to be sold at retail. So that gives them a lot of -- a sort of incentive to stay with us. But at the same time, our education and the ability to really show them how they can use the product to elevate their artistry and elevate the experience for their clients. The other thing is for the consumers, we have constantly launched products through our transformation team, kind of information and data that impede into us that are non-cannibalizing, and it actually adds value to the offering so that we can recruit new customers to the brand. I'll give you a very specific example. We now have almost 5 shampoo [indiscernible] in our offering, yet not 1 of them cannibalize each other. We have a daily use shampoo, we have a clarifying shampoo, we have a purple shampoo and then we have a dry shampoo. So if you think about it, all these new shampoos in the mix does not take a customer that's already using us away. In fact, it allows them to buy people into the offering but also attract new customers into the mix. And when you do that, it actually helps with the stylist professional community, because that gives them another avenue to retail our products to their clients.

Okay. And then I guess what would you say is more important or achievable in a tough consumer environment? Is it getting more consumers to shop -- to participate and be an Olaplex and like building awareness? Or is it increasing the penetration with existing consumers?

Right. At few places we have to do. One is the longer built with the professional in bringing them back to the [indiscernible], giving them the reason to continue with Olaplex is longevity for us in terms of amplification of how they see us and how they communicate -- communicate for us with the clients. And that's because for these, other studies have shown, including our own independent research, shows that more than 60% of end consumers will never take a recommendation on their haircare from the hair professionals, like anyone else. Not a TikTok influencer, not a celebrity, not any kind of media [ sentiment ]. They are on top of that. That is interesting, is that when the stylist recommends that product, it allows us to understand what exactly are they looking at? So that, to me, is an important piece of the ecosystem, of the professionals coming to us. But in terms of end consumer, that's important. Like retaining them, reclaiming the lapsed customers and also acquire new customers. It's just as important because they are the ones that will drive interest of the brands to the stylists because 90% of the stylists in the U.S., at least in majority of the world, are what we call single payroll entity, so they don't have any money to market themselves. They need the brand to drive clients to that. So I would say the two funnel approach, the longevity piece as well as the newness piece to also reclaim black customers. This is the #1 reason white people move away from Olaplex, many questions. It's never that, the product does not work for me anymore or I don't believe in Olaplex. It's usually, I'd like to try something new, which means that we are still top of mind, which means that they are still in the category, and we can bring them back into the fold.

The only thing I'd add there is in this macro environment, we're trying to remove the barriers, whether it's for trial or expanding the regimen. So that's why sampling is so important for us to take a consumer that hasn't tried 1 of our silent products, let's say, and put a sample in their hands. Or to attract new consumers, it's why we put trial kits out there at the right value proposition for someone to enter into the brands.

Great. So let's maybe switch gears to some financial questions. So Eric, and JuE, you're welcome to answer. So on the earnings call last month, you mentioned that your inventory position at key accounts is in a much better spot going into the second half of this calendar year. So should we expect that the destocking dynamic is largely behind you in 3Q? Is that fair?

Yes. I think exactly -- as we said on the earnings call, just to take 1 step back after a period of very fast growth in a more uncertain supply chain environment, our customers were holding higher levels of inventory to support that growth and just because that was the macro dynamic coming, right? They were holding more months on hand. Over the past several quarters, we've been going through an inventory rebalancing headwind as our own growth momentum slowed, and we're in a more stable supply chain environment. So a customer that may have been holding 4 months on hand decided to hold 3 months or 2.5 months, et cetera. We believe that at our key customers on our core items, we enter into the second half in a much better position. We have access to that data, our planners are working with their planners at those key accounts to be able to say that, and therefore, we do feel like we're in a better position going into the second half. It is dynamic. We have no control over a customer that says, you know what, I can even go further. I'm going to hold 1.5 months on hand. So those are always factors, but we're in a much better position.

Okay. And then last quarter, direct-to-consumer sales were much stronger than we'd anticipated, to which shipments ahead of a major customer promotion in July, which is presumably was Prime Day. So I may have mentioned that sales will decline on a sequential basis just due to that. Is there anything else you'd share in terms of how much of an impact that's had on second quarter results, and how sales are trending on brand dotcom?

Yes. So I would just say that had more of an impact on the absolute dollar sales in the direct-to-consumer channel in the second quarter versus the third quarter than the growth trend because it's the same event that we did in the prior year as well. All right? So that's more of a comment on the sequential dollar progression as we go through the year. And in that sense, the trend that we started to see in the second quarter where direct-to-consumer, and just for everyone, that's in both our own dotcom as well as pure-play e-commerce retailers like in Amazon, was much stronger. That's 1 of the green shoots that we pointed to say stabilization is our goal in the second half of the year, and this is 1 of the reasons to believe because our investments are very much funneling into that channel. And so that includes within what we call direct-to-consumer, our olaplex.com business actually growing. And we believe Q2 is a good demonstration of that, and that's the reason we believe the second half will follow a similar trend.

Okay. And Eric, when you talk about gross margins returning to the mid-70s level in the medium term, can you just walk through some of the moving pieces that bridge us back to that level?

Yes. Let me call out 3 drivers from where we are right now, which is right around 70s -- how we're going to get back into the mid-70s range. One is, we are still sitting on higher levels of our own inventory than we've targeted for ourselves. So there are some elements to that, that warehousing space, that cost can come down, and back to leverage impact as well as we return to growth. So that's one driver. The second one is, as we've been dealing with that excess inventory, we've taken some provisions for obsolescence. We took a $3.5 million charge in the second quarter. That's an example of a headwind related to that, that goes away over time or it normalizes over time, and that's material. And the third point is actually mix. As we talked about earlier, the margin differential across our channels and direct-to-consumer is, as we expect that to continue to grow relatively fast relative to other channels, that has a positive mix impact in the business as well. So that's why we have a belief that we will see gross margins normalize at that level in the medium term.

Okay. And just curious, what level of sales growth do you need to have more favorable operating leverage both to the P&L?

Well, there's not a magic number there in the sense that the fixed costs, which fall into cost of goods and fall into gross margin, are largely related to warehousing costs. So any growth is going to help. And then the other factor is the inventory coming down. When you look at our SG&A, it's largely our corporate costs, which already are very efficient, and we intend to keep them efficient even while we invest imports of the SG&A. And so modest growth even creates leverage opportunities on the P&L structure.

Okay. Great. And then just last question on this topic was promotional activity. So should promotional activity remain elevated and does that impact the time line for getting back to that mid-70s?

So I would say that we strategically have maintained a position that we're not going to overpromote the brand. That's not good for the equity of the brand. But we are going to participate in key customer tent-pole events that are strategic for us to attract new customers that we can gain information along with our partners to retarget those customers as well. That's a normal level of promotion. Even if it's less than a lot of our peers, we consider that a normalized level of promotion activity moving forward. The only bit that's, let's say, yet to normalize is, let's say, we have an item at a customer that's in an excess inventory position, and we need to promote through that a little bit. That's a little bit of what we're experiencing in 2023. That is a tailwind once we get past that hump as well.

Okay. And then just on the topic of sales and marketing investments. I know this year, you said $80 million to $85 million, about 18% of sales. How should we think about spend levels going forward? Should we assume there's always deleveraging on this line item to continue to fuel the sales growth?

Yes, not necessarily. So I mean if you were to just take a step back on the P&L structure. So now, we're around $0.5 billion in sales business with gross margins in the 70s, with the current level of marketing investment in the mid- to high teens, which is much more competitive in our peer set, and then at a very efficient other SG&A structure to get to our EBITDA margins in the high 30s. We feel very good about that investment level this year, focused on using that investment to stabilize the business and create this inflection point back to growth. We're focused on testing, learning and optimizing, as JuE said earlier. And it's too early for us to say whether that's going to go up a little bit or down a little bit as a percentage of sales in 2024 and beyond, but we start from a very attractive financial model and profile that we think is sustainable.

Okay. And when we gave the initial guidance in February, we discussed '23 as a reset year, and JuE referenced that again earlier today. But as the year's unfolded, it's taken longer to see sales stabilize, so is it still the right way to think about it? Could the reset possibly continue into next year?

I mean, I think let's look at it this way. We want to work towards stabilization, right? I think that's really what's going to be the key factor for us, and everything that we are implementing and putting in place really helps us get there because, especially when we are able to measure anything that is measurable and tracked, we can feel very comfortable to -- I mean, and it will give us permission to spend deeper into it. And if it's not, Eric is going to tell us, look, this is insane. Like, if you want to relook at something. But on the upper funnel, we are going to still put our focus on it because that is building brand awareness. When we look at our brand health tracker, aided awareness is higher, but our unaided awareness is still about 15%, which means that 85% of the people don't even know who we are. There's a lot of runway for us to help us to be more aware, and then really have people consider and engage with us and eventually convert them.

Okay. Just in our final minutes, I'd just be curious to hear from you both. What does success look like for each of you? And we're hopefully sitting here, you have this new calendar for next year, right? So what does success look like a year from now?

I think, first and foremost, we are able to come here and show you that, look, the business has stabilized. We are on a quarter-on-quarter healthy sort of trajectory. And very important, how for us to get there is that we need to make sure that our core competence continues to be strong, which means that outside this community that continues to see the best fruits of our investment behind them and behind the category. That our core schemes continue to resonate and be the best in class, because we have seen them continue to be the top SKUs in the business, and in the channels that we operate in. Definitely, our innovation. Our innovation needs to [ halo on ] core. And then be able to also share with you that the culture that we have, that our people are motivated, that they are inspired to continue to deliver because we continue to invest [indiscernible].

Yes. And I'll just say, delivering what we've said we intend to deliver this time next year which is, first, stabilization, and then an inflection point back to growth. I come back to the financial profile of this business, which is very profitable. It generates a lot of cash. We have incredibly engaged consumer and stylists base. We have excellent partnerships with our key accounts and distributors. We get this business back to growth this time next year, and there's a tremendous value creation opportunity, we believe.

Okay. Great. We'll wrap there. Thank you so much for being here this year. We're going to go to a breakout session, but please join me in thanking JuE and Eric for being here.

Thank you. Thank you very much.