Olaplex Holdings, Inc. (NASDAQ:OLPX) Q4 2023 Earnings Call Transcript
Olaplex Holdings, Inc. (NASDAQ:OLPX) Q4 2023 Earnings Call Transcript February 29, 2024
Olaplex Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.03 EPS, expectations were $0.03. 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, Inc. Fourth Quarter and Fiscal Year 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. [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. Please go ahead.
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 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 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. It's a pleasure to speak with you today on my first earnings call as CEO of Olaplex, and I am honored to lead this extraordinary business at a pivotal point in its evolution. I firmly believe that Olaplex has a bright future, and I'm excited to develop and execute a strategy that harnesses the company's unique strengths and build upon its foundation to achieve its true potential. While it is important to acknowledge that this journey will take some time, I'm confident that we have the brand strength, differentiated products, global relevance and the innovative mindset required to get there. I'd like to thank JP and the entire Board for their confidence and support, and I look forward to collaborating with them as we build upon the important work done to date to achieve our goal of delivering sustained long-term growth at top-tier industry EBITDA margins.
For today's call, I will provide a bit of background on myself and share some of my early observations on the business. Following this, I will discuss our priorities for the year ahead. I will then pass the call over to Eric, who will cover our fourth quarter results and financial outlook for 2024. My personal passions are brand strategy, product innovation and leading teams and I have had the opportunity for nearly two decades to build and lead some of the best brands in our industry at varying stages of their growth trajectory, including Super Hope, Dior Beauty and Clinique. From my time leading emerging organizations, I experienced the advantages that come with speed and agility, the excitement of building new categories and establishing culture and the importance of laying the groundwork for the long run from day one.
While working with established global brands, I came to appreciate what it takes to create enduring brand equity to achieve seamless execution and to develop the operational infrastructure required to support a much larger business. I also understand that creating a brand and a business is not always linear. There is a need to continuously innovate and rise above new challenges while staying true to what makes a brand unique. Lastly, I've become a true believer in the power of an extraordinary team and culture uniquely built for the business it serves. Since joining Olaplex in mid-December, I have done a deep dive on nearly every aspect of our business. Meeting with and learning from the people who are integral to the future of the company, Olaplex team members, stylists, consumers and our customers and business partners.
I wanted to understand what made the brand so revolutionary from day 1 and then harness that to transform Olaplex for the future. I've been incredibly energized by these conversations at the potential that lies within. . At the core of the Olaplex brand is an extraordinary technical foundation with truly differentiated science that delivers superior product performance and a company with the ability to deliver impactful innovation. Since the beginning, Olaplex has attracted and cultivated a passionate community of stylists and consumers will form deep connections with the product they love. The result is that this company is a category leader. Olaplex had five of the top six best-selling prestige hair products in 2023 Far Sircana's retail tracking data of the U.S. hair market, consistently ranked as a top brand in key accounts across our 3 distribution channels -- and in 2023, brought in the most new households to premium hair care of any premium hair brand according to numerator projections.
The unique global footprint and reach of this business is an advantage that can be capitalized on. As Olaplex proven performance across geographies and channels of distribution and our strategies can be deployed internationally and have impact at scale. Importantly, we have a talented and dedicated team who are ready to take this brand to the next level. Taken together, the brand has a strong foundation, and we believe we are positioned to benefit from the attractive high-growth prestige hair care category and the long-term industry trends of scientifically driven innovation and premiumization of hair care. I'm incredibly excited about where we can take the business. Although Olaplex experienced remarkable growth over many years, the past 18 months have been challenging.
I believe the headwinds were the result of the business growing too quickly suffering from execution errors and not appropriately investing in the resources needed to best support the professional stylist community, develop the right capabilities in brand marketing and prepare for the reality that often happens to a category creator increasing competition. In the year ahead, we plan to develop and implement a strategy to build this brand and business for the long run and get back to positive sustainable sales and profit growth. With an advantaged business model that harnesses our top-tier profitability. To accomplish this, we will do the following: First, we turn to our roots in the stylist community as the inspiration for and connectivity to everything that we do.
We will focus on bringing Olaplex back to the forefront of product innovation and earn true brand love by elevating our product development and marketing capabilities across all markets. Lastly, we will seek to improve our execution to better ensure our strategy drives intended results for enhanced processes and data-driven insights. At the same time, we'll be focused on operational agility and nurturing the entrepreneurial mindset that puts us in the leadership position we are in today. As you saw from our earnings release, we reported fourth quarter and fiscal 2023 results in line with guidance. Eric will share the details on our performance momentarily. Ahead of this, I would like to provide insight into our priorities and plan for 2024.
Overall, 2024 will continue the transformational journey that began last year. We're taking a long-term view and are prioritizing the strategies and actions that will build a healthier business that is better positioned for long-term success. This year, our initiatives are focused on three key priorities, which include: first, maximizing the impact of our sales, marketing and education investments to generate demand; second, strengthening our capabilities and culture to support the future; and third, developing the long-term road map and future vision for Olaplex. Now let me walk you through these three priorities. First, with regard to maximizing the impact of sales, marketing and education investments to generate demand, we'll focus on elevating our capabilities as brand builders and innovators dedicated to excellence and execution of those activities that drive brand desire, conversion and sell-through.
A critical pillar within this priority is recreating meaningful connections with the Pro community. -- ensuring they see Olaplex as a preferred brand that supports them and can help them succeed. I've had a wonderful time spending many hours with the stylist community since I joined two months ago, I'm encouraged by their enthusiasm and now have a better sense of what they need to be successful. To that end, we intend to deliver new educational tools increase our participation at in-person trade show events and host in salon support gate with our education and sales team. With our Pro distributor partners, we're taking a more strategic approach to account management. Tailoring our activations to what makes each distributor unique. Additionally, we are sustaining a more balanced full funnel marketing approach that we implemented in 2023, while we seek to optimize channel and asset strategy based on learnings from prior campaigns and deliver clear education and messaging about the strength of Olaplex science.
Our goal is to strike the appropriate balance as we prioritize our marketing efforts behind our core best-selling products while also investing in our new product introductions to ensure successful launches. As we do this, we will be mindful of always being data and ROI driven to maximize the impact of our marketing investments. We're focusing on proven brick-and-mortar and digital activations across all three of our channels and across the globe, which includes further rolling out our internal field sales team across Pro and specialty retail, upgrading visual merchandising, conducting additional sample wing programming and enhancing paid media at the retailer partner level. While we are intently focused on driving sell-through, we also recognize that we must take the appropriate actions to build and maintain the long-term health of the business.
These include pausing on certain initiatives and pulling back on some partnerships in an effort to build a long-term equity of the brand and allow us to execute with excellence within our current team resources. With this in mind, we intend to focus on our existing customers and strengthen our core products and current channels of distribution while limiting new distribution this year and combat the diversion of our products by closing some accounts where we find evidence that distributors were the source of diverted product. Our next priority is to strengthen our capabilities and culture to support the future and improvement on the foundational infrastructure across our organization. Much of this work began last year and is already in flight includes evolving our integrated business planning capabilities to improve forecasting and overall business performance management and enriching our insights and analytics.
To build on our strong corporate culture, we plan to bring our team together in person more frequently to facilitate even better collaboration, taking care to enable our people as the architects and drivers of our business. Our final priority is to develop the road map and vision for Olaplex, which will impact the business in 2025 and beyond. Critical components of this work stream are designed to define our market opportunity refine our brand identity, Rodin stylist, consumer, customer and category insights, ensure we win with innovation by enhancing the new product development process. And strengthen the way we leverage our omnichannel business and further pursue global expansion opportunities. The goal is to establish a long-range strategic plan and financial framework and look forward to sharing more at the appropriate time.
In summary, Olaplex is a powerful business with differentiated technology and developed global reach that we believe is still early in its growth trajectory. We recognize the current challenges and are facing them head on making investments to deliver on our long-term goals and the tough decisions that are necessary to set ourselves up for the future. Executional excellence and getting the details right will be top priority. We remain incredibly excited about the potential for the business and look forward to sharing updates on our progress towards returning our company to sustained long-term profitable growth. With that, I will now pass it over to Eric to report on our fourth quarter results and our outlook for 2024.
Eric Tiziani: Thank you, Amanda, and good morning, everyone. On behalf of all of the employees at Olaplex, I'd like to say that we are thrilled to have Amanda leading this team. Since joining the company less than three months ago, Amanda has made a significant impact, and we are excited about the direction that she's taking the business. To start, I'll say that our Q4 2023 results were in line with our expectations which landed on the upper end of our latest guidance on all metrics. We believe that these results were another positive step forward in showing a stabilized demand trend. Similar to last quarter, I'd like to provide an update on several metrics that we are tracking to measure progress on the demand trend. First, sell-through in Q4 2023 at key accounts was down 27% versus last year, comparable with Q3 2023 also down 27% versus last year, and full year 2023 down 28% versus last year.
Notably, our Q4 net sales or sell-in decline of 14.5% versus last year was better than the sell-through trend as we are beginning to lap inventory rebalancing from certain Pro and specialty retail customers from a year ago. As we shared last quarter, we believe that the month’s on-hand inventory position at our major accounts on our core items remain in a healthy position, and there is no inventory building in our channels. Second, aggregated sell-out sales dollars at key accounts on an absolute dollar basis grew sequentially in Q4 2023 versus Q3 2023 by 21%. This was in line with our expectation given what we've seen historically during the holiday season, including the sell-through of our holiday kits. Next, performance from olaplex.com remain strong, growing year-over-year for the third consecutive quarter and up double digits in Q4 compared to the fourth quarter of 2022.
And as we believe this business continues to build off of the momentum generated by our increased marketing investments. And finally, consistent with previous quarters, our brand health metrics among prestige hair care consumers remain strong and industry-leading. According to our external brand tracker, Olaplex is ranked number one or tied for number one for 13 of the top 17 premium hair care equities, up from 10 in Q3 2023, which include Best for my Hair, highest quality products and brand I am excited to talk about. Now turning to our financial results for the fourth quarter. Net sales declined 14.5% year-over-year to $111.7 million, in line with our expectations. By channel, as compared to the fourth quarter of 2022, our professional channel sales declined 22.7% to $42.5 million.
The direct-to-consumer channel decreased 2.8% to $42 million; and specialty retail sales were down 16.3% to $27.3 million. By geography, in the fourth quarter, the U.S. declined 27.9% compared to a year ago and international was flat year-over-year. Adjusted gross profit margin was 70.6%, down 190 basis points from 72.5% in the fourth quarter of 2022. Approximately 320 basis points of this decline is related to higher inventory obsolescence reserves, 140 basis points from promotional allowance and 50 basis points from inflation on product costs. These more than offset the 300 basis point benefit, primarily from lower warehouse and distribution costs and 140 basis points from more favorable product mix. Adjusted SG&A grew 54.4% to $44.5 million from $28.8 million in the fourth quarter of 2022.
The $16 million increase in adjusted SG&A from prior year is primarily the result of an $11 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 46.8% to $36 million versus $67.6 million in the fourth quarter of 2022. Adjusted EBITDA margin was 32.2% compared to 51.7% a year ago. Adjusted net income decreased 53.9% year-over-year, $22.3 million or $0.03 per diluted share from $48.3 million or $0.07 per diluted share in the fourth quarter of 2022. Turning to our balance sheet. Inventory at the end of the fourth quarter was $95.9 million down from $112.8 million at the end of the third quarter as we continue to make progress against our goal to lower our inventory to target levels of months on hand.
Turning to cash flow. During fiscal year 2023, we generated $177.5 million in cash from operations. We remain a healthy cash flow generating business due to our asset-light model high profitability and continuous improvement in our working capital position. We ended the year with $466.4 million in cash and equivalents up $36.8 million from the end of Q3 and an increase of $143.6 million from the end of 2022. This cash is generating interest income at an annual rate above 5%. Long-term debt, net of current portion and deferred fees was $649 million. Now turning to our financial outlook. As disclosed in our earnings release issued this morning, for fiscal year 2024, we expect Net sales in the range of $435 million to $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.
Now let me walk you through our assumptions for fiscal year 2024. Beginning with net sales. For fiscal year 2024, our plan assumes generally that the absolute dollar sell-through trend that we experienced in the second half of 2023, adjusted for seasonality represents our normalized base level of sell-through for the year. From there, we build in all expected volume drivers on a product and account level basis. I'll now elaborate on three of those major volume drivers. 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. We are continuing with our recent cadence of two to four launches per year.
Second, on the distribution front, we're taking several actions that are focused on our long-term success but have a negative short-term impact. We've decided to constrain opening up new accounts in 2024 and as we focus on improving awareness and penetration in our current key customers. In addition, we plan to rationalize certain distributors and accounts that do not build brand equity either due to off-strategy pricing for sub distribution into unauthorized resellers. We are using various methods, including our track and trace technology, third-party experts, and other anti-diversion and anti-counterfeiting measures to specifically target the distributor rationalization. We've already made good progress here in the second half of 2023, so we're planning to continue those efforts.
Lastly, we expect a year-over-year net sales growth tailwind as we lap the effects of customer inventory rebalancing in 2023 and which had the impact of depressing our 2023 net sales base. Geographically, we expect the U.S. to benefit the most in 2024 from lapping customer inventory rebalancing in 2023. In our international business, we expect continued growth in our emerging growth regions of APAC and Latin America, where we expanded our distribution in 2023. This will include our recent small-scale launch into Mainland China which we're able to execute while still adhering to our commitment to be a cruelty-free brand. We also note that the aforementioned distributor rationalization is expected to be a short-term negative volume impact, particularly in Europe.
On a channel basis, we expect year-over-year net sales performance to be balanced and similar across channels for fiscal year 2024. Now let me provide additional commentary on how we expect net sales trends to develop from a phasing perspective in 2024. In short, we expect momentum to build over the course of the year as our investments and initiatives land in the market. First, we have a more difficult underlying sell-through comparator in the first half of the year, particularly in Q1 and then we do in the second half of 2024. Second, we will be lapping the pipeline impact from our Q1 2023 new product launches and expect a more significant positive impact from our new product launches in second half 2024, given the timing of those launches.
Lastly, we expect the year-over-year tailwind of lapping customer inventory rebalancing in the prior year to benefit us primarily in the first half of this year. This will be partially offset, however, with the aforementioned distributor rationalization, which is phased across the year. With all of this in mind, specifically for Q1, we expect net sales in the range of $92 million to $97 million, when looking at year-over-year channel performance in Q1, we expect our DTC business will outperform relative to the professional and specialty retail channels. Moving down the 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 high 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 a 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 is expected in organization costs, primarily from annualizing the cost of head count additions made during 2023 and from the accrual for a normalized bonus payout in 2024. We believe that this puts our organization costs as a percentage of sales at a level that we expect to maintain for the foreseeable future. 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 expect full year non-payroll related marketing and advertising expenses to be in the range of $66 million to $70 million, an increase from $60.5 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 confident in the progress that we are making to support the long-term health and growth of the Olaplex business. We expect momentum to continue to build as we execute against our strategy and the priorities that Amanda has outlined for the business in 2024.
This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator?
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