Olaplex Holdings, Inc. Q4 FY2022 Earnings Call

Greetings, and welcome to the Olaplex Holdings, Inc. Fourth Quarter and Fiscal Year 2022 Earnings Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Patrick Flaherty, Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning. Joining me today are JuE Wong, President and Chief Executive Officer; and Eric Tiziani, Chief Financial Officer. Before we start, I’d like to remind you that management will make certain statements today, which are forward-looking, including statements about the outlook of 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, the 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 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 data contained in the industry publications or 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 JuE Wong.

Thank you, Patrick, and good morning, everyone. Thank you for joining us today. As disclosed in today’s press release, following multiple years of strong growth, we expect 2023 net sales down 15% from last year and adjusted EBITDA down 32%, in each case, at the midpoint of our annual guidance range. This expectation follows an analysis of recent business trends, the issues we face, and the growth opportunities in front of us. Based on this work, we realize that we need to invest more to keep pace with our rapid growth and current scale. As we look at our plan for 2023 with macro uncertainties and quickly changing market dynamics, reducing visibility, we see the need to reset and stabilize our core business with a long-term view. We are disappointed with this outlook and hold ourselves accountable for getting to this position and for improving the business. This year, we have a clear focus on increasing investments in sales and marketing, education, and our partner relationships, and we believe this initiative will optimize our potential and position Olaplex to resume growth in 2024 and beyond. On today’s call, I will walk you through our analysis and how we are addressing the issues and opportunities. It is important to take a step back and acknowledge what we believe are the lessons learned. Going back to the very beginning in 2014, Olaplex disrupted and revolutionized the prestige hair care category, improving hair health for millions of consumers. And since then, we have experienced tremendous growth, quickly growing from $148 million in sales in 2019 to $704 million in 2022. During this time, we focused on driving a synergistic omnichannel strategy, building out the infrastructure to enable our growth and investing in size and innovation capabilities to fuel further product introductions. We see significant long-term growth potential with our leadership position and ability to shape the global prestige hair care market, a market which is attractive, healthy, and in its early stages of growth. That said, with the recent change in momentum in our business, we have taken time over the past several months to not only assess impacts from the macro environment but also identify areas of our business that we could have managed better as we scale as well as take stock of the core fundamental strength that has and will continue to differentiate Olaplex. To start with the macro, there are factors that we have discussed previously, but it’s important to revisit. We are seeing U.S. professional stylists buying less and buying closer to need as they report clients lengthening the time between salon visits. Consumers have been price-sensitive, and our strategy to avoid over-promotion to manage the health of the brand has been a negative factor in the short term, and certain Pro and Specialty Retail customers have lowered inventory levels to adjust to those trends while global supply chain constraints have eased. Moving on to what we could have done better. We identified four key capabilities that we believe we need to invest in more and that need to be further strengthened. First, as the category leader, we have the resources, and we need to invest even more to build awareness and defend the brand from the natural competitive intensity that exists in an attractive category. We recognize that we could have benefited more if we had placed our Chief Marketing Officer sooner than January 2022. We have since built out the key internal marketing functions. These teams are now in place and building our efforts for 2023 and beyond. Next, as our assortment has grown through new product launches, we see the opportunity to invest more in education to help stylists and consumers fully understand the facts about our size, efficacy, and benefits for all hair types. We have highly talented educators on our team who deeply understand the needs of stylists and consumers. But at our scale today and with the global reach of our brand, we are presented with new challenges that require new approaches to informing consumers about the superior performance that our products deliver. Also, our partner relationships remain strong, but we need to show even more support for professional and retail communities. Our extraordinary community of stylists remains at the foundation of our brand and is core to maintaining our credibility in the category. The associates of our partners act as advocates for our brand, speaking to consumers about the benefits that Olaplex delivers. Lastly, we need to act faster and be better equipped to deal with negative PR and misinformation about our brand, such as has surfaced over the past year. While this information is not uncommon in our industry, we need to be better prepared to identify and address negative narratives and minimize that impact on the brand. Importantly, the core fundamental strength of the brand remains unchanged. This starts with our science-based technology and the active-patented Bis-amino ingredient that is woven into our assortment, delivering superior performance and fueling an innovative multiyear new product pipeline in hair care, adjacencies, and new categories. We also have best-in-class loyalty with stylists and consumers alike. Our products deliver real benefits to consumers and help our stylist partners grow their businesses. Respondents to our fourth-quarter external brand tracker continue to report high trust in Olaplex, and we remain the leader on numerous equity statements that drive consumer loyalty, including highest-quality products, mixed hair, healthier, and scientifically proven to benefit hair. The relationships remain solid, but as I mentioned, we think we can do even more by leveraging additional resources at our disposal today to deepen engagement. Also, there are many areas of our business that we believe are well developed. We have consistently invested in core processes and systems inside technology and operations that have supported our incredible growth and are ready to scale. We have always demonstrated strong discipline in managing our cost base and will continue to do so. We believe that now is the time to continue investing in the organization to position us for the long-term growth strategy that we seek to execute even through a more challenging year on the top line. Turning to the year ahead. Our priorities are tied directly to addressing these aforementioned opportunities head-on. They include accelerating investments in sales and marketing, increasing and evolving our educational efforts, reasserting our position with Pro and retail partners and improving our approach to PR, beginning with sales and marketing. We are amplifying our sales and marketing efforts and accelerating the activities that have proven successful in the past. In 2023, we expect marketing inclusive of sampling and sales and marketing payroll to increase to $70 million from $40 million in 2022. Our increased marketing investments are focused on amplifying our brand authority and credibility to drive global recognition and awareness of Olaplex. Additionally, we will continue to invest in high ROI activities, including digital community engagement, performance marketing, and visual merchandising activities. The strategic approach in all of these activities is aimed at building awareness, increasing consideration of our brand, and ultimately, driving conversion. We will also focus on enhancing our sampling program. Given the efficacy of our products, sampling is a highly effective tool for acquiring new customers and enabling existing users to buy deeper into our brand with a very solid conversion rate of 30% to 40%. To this end, we will increase sampling at first from approximately 6 million samples in 2022 to roughly 10 million samples this year. Another key objective this year will be increasing our education and training efforts on the Olaplex brand. This will allow us to more carefully explain the merits of our product and how to apply and combine our products for optimal results and will occur across both our professional network as well as our consumer community. One highlight of our education efforts is a refreshed marketing initiative around our core assortment. We recognize the need to formalize a consistent always-on approach for marketing our core products with an anchor around No. 3 as our hero SKU. As we launch new products, No. 3 needs to remain top of mind, and while No. 3 has been very successful, we believe there are opportunities to better educate on the product and how it is utilized. Along with new elevated content and visual assets across channels, the messaging of this initiative is intended to affirm our leadership in the bond-building space, reinforce the benefits of our products with versatile usage and tips, and introduce new claims and testimonials about the superiority of the results we deliver. Turning to our focus on the stylist community and our specialty retail partners, beginning with our professional business. To support strong relationships and build further awareness and affinity in this community, we are revamping the content and increasing the number of our sales-focused curriculum programs throughout the Pro network. We are evolving virtual education classes, content, and communication of the Pro community, including significant improvements to our Pro app. We are deepening partnerships with our distributors by improving joint business planning and increasing the size of our Olaplex field support team, leading to an increased frequency of contact with distributor sales teams. By adding new and expanding current partnerships with key opinion leader salons, we intend to further penetrate premium and prestige salons. A part of the category will be under-indexed. For specialty retail, in addition to enhancing visual merchandising, adding more digital education programs, and deploying a targeted CRM and loyalty program, we are rolling out a third-party field sales team education program framed by Olaplex into more Sephora and Ulta retail doors. You may recall that we piloted this program during the fourth quarter in about 75 doors, and we’re pleased with the results showing meaningful sales uplift in participating doors. This year, we are scaling this program to 400 doors nationwide, prioritizing key markets and will be engaging directly with consumers, but also driving education of Olaplex with in-store associates. We are also adding resources and building out our PR capabilities, which includes taking a more proactive and offensive position to support negative narratives and correct misinformation about Olaplex in the market. Not only are we refuting inaccurate information when it arises; we are also focused on getting ahead of rumors and potential misinformation by proactively and broadly distributing content focused on Olaplex and hair health to social channels and paid media. To that end, I want to address the recent negative media headlines that claim Olaplex products cause hair loss. So anyone experiencing hair loss and hair breakage, we understand the emotional toll it has and are empathetic to the impact on your well-being. However, Olaplex products do not cause hair loss or hair breakage. Olaplex products are safe and effective as millions of our consumers can happily attest to and as evidenced by our published HRIPT test results. We also recognize the concern that this misinformation may cause our loyal customers, stylists, and retail partners when hearing baseless claims about a product they love and trust. Unfortunately, there is no barrier to prevent this, and it is not unusual for consumer products to be targeted despite the lack of evidence. However, this allegation can only be completely refuted in the fullness of time. We are actively defending our brand against this allegation. We recently posted on our website independent third-party test results that show our products are safe. We have received positive consumer feedback under video testimonials published across our social media channels, email, and website, and social media sentiment on this topic continues to trend more positively. In conclusion, we recognize that this reset will not be easy, but our team is prepared to execute against this priority. Olaplex is the #1 professional bond builder brand in the world and loved by millions. We lead the attractive, fast-growing prestige hair care category, and we are focusing our resources to extend that leadership. We are confident that with our scale, future growth opportunities, industry-leading profitability, strong balance sheet, and robust cash generation, we will emerge from this year even stronger as an organization, as a business, and as a brand. At this point, I’ll turn the call over to Eric to cover our fourth-quarter results and provide additional details on our outlook for 2023.

Thank you, JuE, and good morning, everyone. In the fourth quarter of 2022, net sales declined 21.5% to $130.7 million versus $166.5 million last year. We believe that fourth quarter net sales were negatively impacted by approximately $29 million at several of our key customers as these customers lowered their orders to rebalance inventory in response to lower levels demand and to target overall lower levels of month on hand than previously carried. By Channel, professional sales declined 3.9% to $54.9 million versus a 9% increase last year, which was in line with our expectations. This decline was driven by reduced purchases by our stylist community in the U.S. and the U.K., partially driven by the tougher macro environment impacting the professional channel. This was evidenced by the latest available Klein data, which showed total market front of salon sales in the U.S. declined by 2% in the third quarter, while Olaplex front of sale sell-through in the third quarter was up 2% compared to last year. Specialty Retail sales decreased 45.3% to $32.6 million, following a robust 332% gain in the prior year period. Performance was below the expectations we provided on our third-quarter call, reflecting a softening in replenishment demand in an increasingly competitive environment, including heightened promotional activity during the holiday season. In addition, as we previously communicated, we were lapping the $15 million initial wave of Ulta pipeline fill in Q4 2021. Our direct-to-consumer channel sales were down 13.2% to $43.2 million following an 85% increase last year. DTC sales were better than our expectations, driven by strength during the key holiday selling weeks, especially Black Friday and Cyber Monday across olaplex.com and our DTC partners. Sales were down across geographies with International down 13.4% and the U.S. down 28%. The U.S. largely linked to the aforementioned Specialty Retail drivers, including the lapping of the Ulta pipeline. Moving down the income statement. Adjusted gross profit margin was 72.5%, declining 790 basis points from 80.4% in Q4 2021. Approximately 300 basis points of this contraction reflects deleverage and inflation in our warehousing and distribution costs, 190 basis points of unfavorable product mix, and 160 basis points from inflation on product costs with the balance primarily related to increased sampling and unfavorable customer mix. These more than offset the benefit of the price increase we took from July 1, 2022. Adjusted SG&A increased 27.6% to $28.8 million from $22.6 million in Q4 2021. The $6.2 million increase in adjusted SG&A from the prior year is primarily the result of a $5.8 million increase in sales and marketing expense to drive demand and support the long-term growth of the business. The remainder of the increase is attributable to workforce expansion and other related expenses. Adjusted EBITDA declined 38.9% to $67.6 million versus $110.7 million in the fourth quarter of 2021. Adjusted EBITDA margin was 51.7% compared to 66.5% a year ago. Adjusted net income decreased 32.3% year-over-year to $48.3 million or $0.07 per diluted share from $71.4 million or $0.10 per diluted share in the 2021 fourth quarter. Adjusted net income benefited from lower interest expense year-over-year due to our debt paydown and refinance in the first quarter of 2022. Now turning to the balance sheet. Inventory at the end of the fourth quarter was $144.4 million, down from $151.3 million at the end of the third quarter. The reduction in inventory levels is a result of our decision to alter our sourcing plans and slow procurement to match the new sales forecast, which more than offset building inventory of new SKUs as we prepare for product launches this year. Turning to cash flow. We remain an asset-light and strong cash flow-generating business. During 2022, we generated $255.3 million in cash from operations, up 27.6% from $200 million for the prior year. This included cash from operations growing year-over-year in the fourth quarter. For 2023, we anticipate another year of healthy cash generation as we maintain a high level of profitability and improve our working capital position primarily through lower inventory. We ended the year with $322.8 million in cash and equivalents. Long-term debt net of current portion and deferred fees was $654.3 million. Now turning to our financial outlook. As JuE mentioned earlier in the call, we believe 2023 represents a temporary setback in our longer-term growth trajectory as we lap tough comparators in the first half of the year and seek to rebuild our momentum through the execution of our strategy. We fully recognize that this guidance is disappointing versus expectations for 2023, and as JuE mentioned earlier, we take full accountability for what we consider to be key lessons learned in getting here. On that note, I think it’s important to acknowledge how we approach guidance for 2023, which we’ve noted as a reset year on our path back to growth in 2024 and beyond. First and foremost, we’ve considered and reflected our current view of consumer demand, taking into account that it will take some time for our marketing and sales actions to have their full impact. Second, given the uncertainty of the macro environment and quickly changing market dynamics, we believe a wider guidance range is appropriate for us in 2023. Lastly, we are seeking to provide additional details related to some of the noteworthy net sales milestones in the prior year and current year to help show the underlying business trends. As you will see, this leads to a plan in which we believe both net sales and profit trends will improve sequentially as the year progresses, ultimately leading to growth in the fourth quarter and as we enter 2024. Let me start with the drivers and our outlook for the first quarter. First, we expect the continuation of the negative effects from inventory rebalancing from certain Pro and Specialty Retail customers, which we have mentioned on prior calls. Based on current sell-in and sell-through assumptions, we expect the net year-over-year impact of this to depress sell-in growth for both the Pro and Specialty Retail channels for Q1 by approximately $25 million in aggregate. We are also facing a difficult year-over-year comparison with our successful launch at Ulta Beauty. Although the sell-in for our launch in Ulta began in the fourth quarter of 2021, in response to strong sell-through, we shipped an additional $10 million of inventory pipeline in the first quarter of 2022. We are now lapping those shipments in the first quarter of 2023. Next, while we are forecasting incremental growth from the sell-in of new product introductions in 2023, this is more than offset by a lower baseline level of demand for core products. Altogether, at the midpoint of our annual guidance, we currently expect net sales to decline 41% in Q1, which compares to a revenue increase of 57.6% in Q1 ‘22, representing a 7% decline on a 2-year stack. By channel, professional sales are expected to decline 43%, following growth of 62.6% in Q1 ‘22. Specialty Retail sales are expected to decline 47%, following growth of 102.5% in Q1 ‘22. And direct-to-consumer sales are expected to decline 28%, following growth of 15.1% in Q1 ‘22. Moving to the second quarter. We expect net sales to sequentially improve compared to Q1, but remain down significantly compared to the year-ago period. This is due to the continuation of a lower baseline level of demand as well as lapping two challenging comparators from Q2 2022. First, we will be lapping an approximately $22 million net sales impact in the second quarter of 2022 from the introduction of one-liter size offerings in the North American professional channel, which we do not expect to offset in 2023. Second, in the second quarter of last year, we experienced some pull forward in demand as some Specialty Retail customers chose to buy ahead of our announced price increases a year ago. Although the impact of this pull forward reverts in Q3, this results in a $10 million headwind in the second quarter of 2023. When looking at channel performance in Q2, because of the issues I just mentioned, we expect the professional channel to be the most challenged, followed by Specialty Retail and DTC. As we move into the second half of the year, we are no longer faced with any material headwinds from inventory rebalancing, the introduction of one-liter products or earlier timing of shipments ahead of price increases. We expect to benefit from the net impact of new product introductions and additional distribution gains that are strategic and build brand equity. We also expect to begin to benefit from an improvement in baseline demand due to our increased investments in education, sales, and marketing. Taken together, for fiscal 2023, we expect net sales in the range of $563 million to $634 million. Based on the midpoint of this range, this is down 15% versus 2022. Adjusted net income in the range of $176 million to $224 million were based on the midpoint, a 36% decrease versus 2022, and adjusted EBITDA in the range of $261 million to $322 million or based on the midpoint, a 32% decrease versus 2022. Embedded in our guidance is a 300 to 400 basis point decline in gross margin for the year as inflation and warehousing and distribution costs and deleverage from lower sales volumes more than offset the positive impacts of cost savings and price increases implemented in the second half of last year. As JuE indicated earlier, given the confidence in our long-term strategy, we are making the strategic decision to invest through the challenges we’re experiencing in 2023. So at the midpoint of our guidance, we expect adjusted EBITDA margin of approximately 48.7% for 2023, down from 60.9% last year. We expect adjusted EBITDA margins below this level in the first half of the year with the most contraction in Q1, higher than this rate in the second half with an improvement in the topline driving operating leverage. We expect interest expense to be $40 million and an effective tax rate of approximately 20.5% for the year. As I mentioned earlier, we anticipate another year of healthy cash generation in 2023, even in a reset year as we maintain a high level of profitability and improve our working capital position. In summary, we believe 2023 represents a reset in our long-term growth trajectory as we reposition the business for future growth. Although we are facing headwinds, we remain confident that our differentiated product technology, strong engagement, and disruptive innovation along with the execution of our strategy and the impact from reinvesting in core processes will enable us to return to sales growth with top-tier industry profitability and cash generation. This concludes our prepared remarks. We’ll now turn the call back over to the operator for questions.

Our first questions come from the line of Bill Chappell with Truist Securities.

Can you hear me?

Yes.

Yes, we can hear you.

I want to discuss the marketing promotion trial drive for this year. It certainly makes sense. As you reflect on the past, do you think the shortfall or slowdown in the latter half of the year was due to insufficient marketing advertising? Or is this initiative more about positioning you to reach your potential in the next two to three years?

Bill, this is JuE. I’ll take the question. So one of the things that we want to highlight is, obviously, it’s never going to be one reason. It is a combination of factors. If you look at what we have shared previously, that’s the macroeconomic environment. And we have always said we are resilient, but we are not immune, right, to macroeconomic conditions. There is also increased competition, and again, we acknowledge competition is good because it elevates the awareness for the category, higher level of discounting, which you have heard us say, misconceptions about our brand, all of this play a factor. It gave us some pause. We looked at it, but what is very important to understand too is our brand is still very strong. The fundamental of the brand is right there for us to see. Starting with our science and technology that we bring to the table, especially with our patented technology, we deliver very much superior performance and our innovation is set for multiyear. So hopefully, it answers your question on this point because if you look at even certain key metrics that we track primarily because it shows the health of the brand, which includes retention. Our retention is strong. I mean this is based on independent third-party data that omnichannel retention across retail is significantly higher than the peer set retained from 2021 to 2022. We have also shared in the past that while our customer acquisition has slowed, our brand’s final lapse rate is the lowest amongst peers. So I hope that this gives you some reasons to understand how we got here.

Yes, absolutely. As a follow-up, I want to discuss the professional channel, which appears to be the weakest of the three channels this year. Have you made any progress in turning around the recommendations, which are crucial for promoting the entire portfolio due to their origin from the stylists? I know you have seen improvements in recommendations over the past few months. Is this something we can expect more of in the coming months?

Well, we have already started working on improving our relationships with our stylist community. We have always done that. But what we are going to do is, we’re going to dial up, we’re going to amp up that coverage and the support of the stylist community, which includes both virtual and in-person support in stores. So all of this will help with the communication, the messaging and the branding, and stylists, as you know, love the interaction with Olaplex. When we do survey after survey and communications with them, the things that they love most about us is the community that we have built with them and around them.

Our next questions come from the line of Dana Telsey with Telsey Advisory Group.

Can you hear me okay?

Yes.

As you think about the brand and the product, how are you thinking about new product introductions, timing, and magnitude? How are you thinking about the core product and addressing either do you need to remarket it in a way? Or how do you think of being able to get that core customer back? And has any surveys that you’ve done given you indications of what people need to see or what they’d like to see? And what does this mean in terms of pricing and how you price the product in this more promotional environment?

Thank you for the question, Dana. Let me break it down for you. First off, regarding our product innovations and launches, as we've mentioned before, we plan to continue with 2 to 3 launches per year. We believe that by focusing our innovative efforts, these launches will enable our retailers to work closely with us to enhance representation both in-store and online. As for our innovations this year, we successfully launched our 4D dry shampoo, which has become the top-selling dry shampoo across all channels where it’s available. We currently have an exclusive launch with Pro and a particular Specialty Retailer, indicating its strong market presence even in exclusivity. Research indicates that recommendations from hairstylists to consumers are crucial for our brand's success. This insight is why we are committed to an ongoing campaign centered around our No. 3 product, which is our core SKU and hero item. While all our SKUs perform well, the No. 3 product remains central to our strategy. Our aim is to maintain continuous messaging that educates stylists, consumers, and retail partners about its usage and how it complements our overall product lineup.

Got it. And on pricing, JuE and Eric, how do you see pricing going forward?

Eric, you’re on mute.

Dana, so as you know, we’re a premium price product in the prestige category. We believe we’re at the right price for the consumer and relative to our competition. What we want to do is continue to offer our consumers and our stylists ways to trial the brand and in sizes and offerings that make sense for them. So we believe we’re adequately priced. Any promotional activity we do is only going to be focused on trial and building the regimen behind the brand. We’ve always said we choose not to overpromote as a strategy.

Got it. And is the new cost structure of the business, would you say the cost structure going forward that would be a more normalized cost structure?

What I’d say, Dana, is that we’ve recognized the need to increase our sales and marketing investments as the market leader in the category, and that’s consistent with what we’ve said in the past. We’ve just recognized we need to do more, and that’s what we’re doing in this recent year of 2023. We expect that to continue. And as we’ve returned to growth, as we regain the leverage from that growth. I’ll also add, as we improve gross margin, when that leverage returns, we expect that to help fuel the investments that we’re making in the business.

Our next questions come from the line of Andrea Teixeira with JP Morgan.

This is Shovana speaking for Andrea. You mentioned earlier and again today that your 2023 focus includes expanding into premium and prestige salons where you currently have less presence. Can you provide more details on the steps you’ve been taking? What response are you observing, and when do you expect to see positive results reflected in your numbers?

Thank you. Thank you for the question. This is JuE. I will take that question. So first and foremost, we have added resources to our team to make sure that those premium and prestige salons can be covered. We have also made sure that they have access to our direct-to-Pro platform because most of these premium salons do like an automated process to place orders and access educational content as well as social media content as we see fit. Our head of program has been installed for more than 2 years is a specialist, and this is its know-how in understanding and driving prestige and premium and key opinion leaders salon. We have already kind of implemented a lot of the recommendations and the strategy that we believe will set us up right to really address this cohort of specialty and premium salons. I will not be at a place to tell you exactly when we will see the results, but we are seeing a lot of adoption, especially from a direct-to-Pro app, where people are signing up and wanting to get more education and understanding about the brand. So that’s a great solid first indication of how this program is working.

Just a quick follow-up. Can you give us a sense of the magnitude of how many salons you’re seeing or interest level? Or is that something you would refrain from right now?

What I would just give you is what the Professional Beauty Association data point, points to. While the premium key opinion leaders salons are relatively small, they do represent a very material part of the revenue generated by the salon community. But what is more important is the premium prestige and key opinion salons are the ones that really set a lot of the trends and the conversations, and they are really also very much a community that really wants more information educational materials. We are situated and positioned right at this point to help stand with all of their wants and their needs.

Our next questions come from the line of Lauren Lieberman with Barclays.

Great. I guess, first, one thing that you haven’t addressed on the call this morning so far is just the investment in improving forecasting capabilities. So just wondering how that kind of is playing in? This is a very concrete business plan for this year, but as you think about some of the tools we discussed back in the fall about trying to build more visibility into inventory, not just in the U.S., but I guess, increasingly internationally. I was just curious about plans on that front to begin.

Thanks, Lauren. It’s Eric here. I’ll take that one. Absolutely. On our previous call, we talked about the need to improve our forecasting tools and processes. That progress is underway, and we’re happy with the progress we’re making. That includes new tools we’ve put in place in the demand planning space to better link sell-in and sell-through at our key accounts. It’s also new tools we’ve put in place, material resource planning tools through NetSuite. So we feel like we’re on good track there. We did hit within our guidance range in the fourth quarter, and it’s those forecasting tools that are helping us take the signals we’re seeing from current consumer demand and project it forward into the outlook we’ve provided.

Okay. My other question was about the focus on No. 3, which I found really interesting, especially considering that consumers may have a limited budget and need to make choices, making the full regimen less attainable. How does this influence your marketing and education strategies, particularly in promoting a single product versus a full regimen approach? Will this be a part of your marketing strategy moving forward?

Thanks, Lauren. I’ll take the question. One important point to highlight is that Olaplex is a bond-building treatment that falls under various hair care categories, including shampoo, conditioner, styling products, and hair masks. The key aspect is repairing hair bonds. Once the repair is done, other elements of hair care align seamlessly, which makes the emphasis on No. 3 vital. There isn’t any other product or technology that can genuinely claim to repair disulfide bonds like we do. We have secured our patent and communicated its details. While the science behind it is compelling, we aim to ensure that our messaging is consumer-friendly so that customers understand the significance of bond-building or bond-repair treatments. When that message is effectively communicated and consumers recognize its necessity, the remaining hair care regimen becomes quite intuitive. Everyone needs to shampoo and condition their hair, style it, and use a hair mask at least once or twice a week. Therefore, by concentrating on No. 3 and returning to our core focus, we believe it will enhance the visibility of our other products.

Okay. Great. And then sorry, one more. It was mentioned in the release on cost savings. G&A kind of as you look towards the back half, that kicking in. I was just curious. I was surprised to hear a mention of cost savings at all just given how the company has been. So how significant is this role of cost savings as you think about the profitability and OpEx equation for ‘23?

Of course, Lauren. As a normal course of business, we’re always going to be looking for opportunities to find efficiencies in our cost base that don’t have anything to do with those investments we’re making in sales and marketing and the core capabilities of the organization. That’s where we’re putting our money. So to give you an example, non-people-related costs in G&A, some of the money that we spend with consultants, those are efficiencies that we’ve been driving in 2022 and intend to in 2023. The other key area here is in our cost of goods as we can better negotiate prices with suppliers as we can find efficiencies in how we go to market. We put a fuel for growth program in place to gather ideas from all across the organization to do exactly that. So I look at it as the classic good cholesterol, bad cholesterol type of approach.

Our next questions come from the line of Susan Anderson with Canaccord Genuity.

I was wondering if you could talk about just sell-throughs in the retail channel. I’m not sure if you mentioned that versus obviously sell-ins. I’m curious kind of where Olaplex performed in the quarter versus the industry.

Thank you for your question, Susan. In the fourth quarter, we experienced strong sell-through, with NPD data showing that in the U.S. retail and DTC market, Olaplex significantly outperformed the category. As we look ahead to our Q1 outlook, we are seeing similar trends in sell-through across specialty retail and other channels. It's important to highlight that due to the impacts of inventory rebalancing noted in both the fourth quarter of 2022 and the first quarter of 2023, our sell-through performance is actually much better than the sell-in, which accounts for the net sales declines you are seeing.

Great. Could you discuss the performance of the dry shampoo? I understand it might be early, but I’m curious about any initial insights. Additionally, what new products do you have planned for the remainder of the year? Also, could you talk about the expected dollar impact from new products in 2023?

Yes. Let me take that question. And I just want to preface, we don’t break down what we are selling in, in terms of launches. But what we can tell you is every one of our launches is validated by trade data has been the #1 launch both in unit sales and dollar sales. So it was no different. Last year, No. 9 was indicated as a top revenue-generating SKU in terms of its launch for the hair care prestige category. We’ve just launched dry shampoo, as you have seen, at the end of February, early March, exclusively with one Specialty Retailer but also with our Pro channel. That is the #1 dry shampoo in every one of those channels that we are launched in. You can tell, again, when we put out a launch; it generally is the best in class because the world doesn’t need another shampoo, doesn’t need another dry shampoo. It has to deliver on what it says it does. We are very encouraged by the results, especially also proven by the ranking. Hopefully, that answers your question. I apologize that we can’t break it down for you as such as to what the sell-in is for the launch.

Yes, that’s helpful. That sounds really good. And then lastly, if I could just add. I’m curious, so the professional channel, the first quarter guide is obviously pretty much more of a decline than what we saw in the fourth quarter. I know you have the inventory rebalancing. How much of that $25 million is in the salon channel? And then also beyond that, I guess, what’s driving those worse expectations?

Thank you. So we’re not breaking out the magnitude of the inventory rebalancing across Specialty Retail and Pro. But I will just say again consistently here that the sell-through that we’re seeing in the professional channel is better. The projection for that in the first quarter is better than the guide we’ve given on sell-in because of that inventory rebalancing. It really is about all of the investments actions that JuE has mentioned throughout the call, some of which are directly focused on the professional channel and the Pro community. We expect those to take hold and they are taking hold now, but we expect them to have their fullest impact as the year progresses, and that’s why we’re calling out sequential improvement as the year progresses.

Our final questions will come from the line of Jonathan Keypour with Bank of America.

I'm interested in the $25 million dip expected in the first quarter and the $10 million in pipeline. It seems that if we adjust for this and consider what the first quarter typically looks like, we're still seeing a decline of around 23% to 25% when accounting for seasonal factors. Should we interpret this as indicating that the underlying demand is effectively down by about 25%? Is that a reasonable assessment?

Jon, it’s Eric here. So that’s exactly the right math when you back out the factors that we’ve disclosed related to inventory rebalancing and pipeline lapping. Of course, there are other factors, but doing the math that way is accurate. I think you get to that range of that minus 23% to minus 25% in the first quarter. If you apply that same math to the balance of the year, you see how we get to the midpoint of our range with some modest sequential improvement leading up to this return to growth as we exit the year and go into 2024. Fundamentally, that outlook is driven by the recent trends we’ve seen in consumer demand. Just keep in mind, we also believe we’re lapping particularly tough comps in that prior year 2022 period, and we seek to build the momentum as we go.

Right. Okay. You've mentioned that this is a reset year, which I agree is the right approach. I want to clarify if this is also a rebase year. Should we fundamentally rethink our expectations regarding long-term growth and margins? I understand that we need to adjust our expectations due to inventory rebalancing, but there also seems to be a decline in consumption and a recognition that we need to invest more in the business to effectively communicate and compete. Should we view this as a rebase, where in 3 to 5 years from now, sales might not be able to accelerate to the levels we anticipated a year ago, and where margins may settle at a level significantly lower than we projected last year? Is that a reasonable assessment?

So Jonathan, let me take this question first, and then I’ll have Eric build on it. I just want to kind of clarify and really double click on this. The fundamentals of both the brand and the category are very strong. If you look at where Olaplex is, we are in our early innings, right? We are not fully penetrated in so many of our distributions and yet we are ranked #1. So there’s a lot of opportunity for us. That’s why we want to double-click on the sales and marketing, on education as well as really looking at our Pro stylists. If you look at all of the international where we have room to play, we are not in the Middle East in a material way. We are not in Latin America in the material. We are not in Asia Pacific or Asia in a material way. Those are all runways for the brand. I would not look at it as a rebase here. It’s a reset year because what we want to do is continue to invest behind what we have already invested, which is technology, infrastructure, our capabilities in innovation and then double-click on the sales and marketing, the PRP, the education piece, and our community building piece. All this would just get us to a stronger and better Olaplex. I want to turn it over to Eric because you also have some numbers questions that you want to clarify.

Absolutely. Thank you, JuE, and thank you for the question, Jonathan. The short term is important, but the long term is even more important, and that’s what we’re focused on. I think you can appreciate the focus here has been on the reset for 2023 and repositioning ourselves to that return to growth. We’re not in a position to give new numbers or reframing our medium-term outlook here. We will do so at the appropriate time. I will just say we believe in the long-term outlook and potential for this business, and that we expect to be growing this business ahead of the global prestige category and returning to profit growth as well, and we’ll bring more details when we can.

Okay. Additionally, I have one more follow-up regarding the distribution runway. You mentioned international markets and other growth avenues you might explore. It seems that improving the U.S. situation is likely the top priority for 2023. I would like to know if you could outline some of the distribution opportunities you see within the states and whether you have adopted a different approach regarding the sectors you're willing to engage in and those you're choosing to avoid at this time.

So very quickly, Jonathan. If you look at 2023 in the U.S., we are only 15% penetrated at professional salons. That’s a huge run rate. We are now just early innings with the key opinion leaders salons. So on the Pro side, there’s tremendous opportunity for us. Our penetration at Sephora and Ulta are still very small. In the case of Sephora, we have been steadily growing, but in Ulta, it’s just year one going into our year two, and yet we are a top-ranking hair care brand. So there’s a lot of opportunities in the U.S. and North America alone. If we focus on what we have going deeper, we will win.

We have reached the end of our question-and-answer session. I would now like to turn the call back over to you for closing remarks.

Yes. Thank you so much, everyone, for joining us, and hope to see you again in our next earnings call. Bye.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.