Olaplex Holdings, Inc. Q1 FY2023 Earnings Call

Greetings, and welcome to the Olaplex Holdings First Quarter 2023 Earnings Conference Call. All participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick Flaherty, Vice President of Investor Relations. Thank you, Patrick. 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 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 turn the call over to JuE Wong.

Thank you, Patrick, and good morning, everyone. Thank you for joining us today. This morning, we announced results for the first quarter of 2023 that were ahead of our expectations. While we make progress, we know we have work to do to return the business to stronger growth. As discussed on our last earnings call, we view 2023 as a reset year, during which we are taking actions intended to build a stronger and more resilient Olaplex. As I will explain in more detail shortly, during the quarter, we made progress on our priorities for the year, and we believe that we are implementing the appropriate actions for resetting the business. Yet we also recognize that there is still important work ahead of us, shifting market dynamics and macro uncertainties continue to reduce our visibility, and we remain in the early stages of this plan, achieving its intended results. That being said, we believe the fundamental strength of our business and the category remain, and our confidence in our patent-protected technology and the long-term potential for Olaplex are unchanged. Turning to a brief overview of the first quarter. Net sales of $113.8 million were slightly better than our guidance. As we previously communicated, our sales decline reflected a lower baseline level of consumer demand, the continued negative impact of customer inventory rebalancing efforts from certain Pro and Specialty Retail customers, and a difficult comparison as we lapped the sell-in of a successful launch into Ulta Beauty a year ago. Overall, all three channels were essentially in line with our outlook. Lower sales coupled with our strategic decision to spend in support of our future growth with important investments in sales and marketing, R&D, and workforce expansion led to adjusted EBITDA of approximately $50 million in the first quarter for an adjusted EBITDA margin of 44%. Notably, we believe the Olaplex brand remains healthy with consumers and stylists alike as our third-party external brand tracker showed consistently robust metrics through March. According to respondents of the survey, we continue to lead in premium hair care equity attributes ranking number one or tied for number one in nine of the top 10, 15 equity statements while metrics on overall sentiment and trust in the Olaplex brand remain strong. Similarly, as evidence that our brand and technology differentiators continue to resonate with our communities, our product introductions launched during the first quarter are off to a strong start. In late January, we launched No. 4D Clean Volume Detox Dry Shampoo on olaplex.com, in our pro-channel and with Sephora. 4D detoxifies the scalp without clogging, neutralizes odor causing pollutants without a trace of white residue. 4D is performing well and has quickly become the number one dry shampoo at Sephora and launches with our other Specialty Retail and DTC partners in early May. In late March, we entered our first hair care adjacency with the launch of Lashbond, an eyelash enhancing serum universally formulated to promote the appearance of thicker, longer, stronger full volume lashes, formulated with a next-generation Olaplex peptide complex. Lashbond is prostaglandin-free and ophthalmologist tested. Lashbond is our first product to launch simultaneously across channels, and the launch is off to a strong start with notable performance at Sephora in the U.S., as well as Space NK in the UK, where Lashbond has already become a top 10 beauty SKU for the retailer. Before I discuss the progress made so far on our priorities, I think it's important to revisit why we are pursuing a reset this year and the benefits we expect from the activities and initiatives we are implementing. Following several years of significant growth, we are pursuing this reset as we recognize the need to invest and expand our marketing and educational outreach and ensure we have the necessary tactics, talents, and platform to realize the significant opportunity we see ahead for the Olaplex brand. Ultimately, we expect the benefits will be multifaceted and realized across the organization. At the heart of it all, we think our actions will enable continued growth in brand awareness and identity and ensure stylists and consumers are properly educated on the superior benefits of our technology. From an operations perspective, we expect the year will see us evolve our capabilities to enhance our agility, recalibrate and right-size our inventory levels, and continue executing against our new product developments pipeline. Importantly, we will continue to invest in our people, further building out our team and enhancing our culture. On our last earnings call, we introduced the priorities for a reset year that we believe will position us on a more solid footing. They include accelerating investments in sales and marketing, increasing and evolving our educational assets, reasserting our position with our Pro and retail partners, and improving our approach to PR. Let me now walk you through the progress we made on these initiatives during the first quarter. Starting with sales and marketing, we continue to expect marketing inclusive of sampling and sales and marketing payroll to increase to $70 million in 2023 from $40 million in 2022. During the first quarter, we spent approximately $17 million. We are implementing a full-funnel marketing approach this year with an increase of marketing investment in strategies to generate awareness and support brand health and brand love. We have also allocated investments and deployed resources to convert customers to our brand. To that end, we are launching a new full-funnel creative campaign intended to amplify our scientific authority and feature the transformative results from using our outstanding products while also highlighting emotional connections with our professional and consumer communities. The campaign kicks off later this month and includes digital, social, and out-of-home activations. We intend to measure the impact of this program as we go in order to optimize mix and spending as we progress through the year. We also continue to execute and enhance a sampling program designed to expand trial, whereby we expect to deliver roughly 10 million samples in 2023. Strategic programs this year include distributing samples via olaplex.com, sampling in Sephora's buy online pick up in store offering, and providing a number three sample with any Olaplex service at Ulta Beauty salons. Additionally, we intend to implement sampling programs with international partners, including Sephora Europe and Douglas, making our first foray into sampling internationally. We are still in the early stages with this enhanced program but remain confident in our ability to acquire new users to the brand, given how successful sampling has been with conversion in the past. As it relates to education, our refreshed educational assets behind the core of our assortment with a focus around number three are now being deployed, and we are pleased with the early feedback on the campaign. As a reminder, the goal of this work is to better educate stylists and consumers about how to use our core products, 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. Work is also underway to evolve and revamp our core educational curriculum for use across all channels and enhance the educational content on our Pro website and app. From a leadership perspective, we are excited to announce that John Moroney has joined us as our new Vice President of Global Education and Customer Experience. With over 35 years of experience in the professional stylist industry, John is highly regarded in the stylist community with deep expertise in beauty education, having served in various education roles with Aveda, Sebastian, Wella, and Kao Salon. Turning to our efforts to reassert our standing with our professional and specialty retail partners. For our Pro business, we continue to build our team in order to increase our frequency of contact with distributors, their sales teams, and salons. We have accelerated planning with key distributors, creating joint business plans that include new initiatives and programs, and working together to identify and pursue new business development opportunities and to enhance our partnership with prestige and opinion-leading salons. We have continued to enter new and nurture existing partnerships through our dedicated program, collaborating on digital and social content as well as high-profile events such as New York Fashion Week. Within specialty retail, we rolled out the third-party field sales and education team trained by Olaplex into approximately 400 Sephora and Ulta Beauty retail stores to directly engage with consumers and educate in-store beauty advisers. We are pleased with the program so far. We have shown a meaningful uplift in sales in participating doors and demonstrate the importance and influence Olaplex can have in driving in-person education. Internationally, we are happy with our continued expansion. We recently anniversaried our full fleet rollout with Sephora Europe and have partnered with the team to develop strategic marketing and education campaigns to drive further penetration with shoppers. With Douglas, a specialty retailer in Europe, we are rolling out into approximately 280 additional doors across Germany and the Netherlands, and we have partnered with Dufry to launch our travel retail presence in 12 UK airports and expect to launch in additional countries over time. Our fourth priority this year is building out our PR capabilities. By leveraging our social channels, we have been proactively distributing content focused on correcting misinformation about Olaplex in the market. We launched a section on our website entitled hair health, which acts as a hub and resource for consumers and stylists to assess accurate information about the science behind our products, our ingredients and tips for usage. Similarly, we are creating educational toolkits for our pro and specialty retail channels to supply their employees with the necessary information and details to respond to and correct misperceptions about our brand. Lastly, we are engaging a group of leaders in dermatology to form the Olaplex Scientific Advisory Board comprised of medical and scientific experts. The Olaplex Scientific Advisory Board in partnership with our internal team members will help Olaplex accomplish our mission of improving hair health through products and education for all of our customers. Underpinning our assets this year is our continued focus on building upon our strong corporate culture with highly talented and passionate team members. To that end, we are excited to announce two new additions to our senior leadership team. John Keppeler has been appointed Chief Revenue Officer leading and overseeing the sales organizations across all three of our channels. Prior to joining Olaplex, John served as the Head of U.S. and global sales at several consumer products companies across multiple categories. After several sales roles at the Pillsbury Company, John was Head of Global Sales for nine years at the consumer healthcare products company CNS. In addition, Nabanita Choudhury has joined us as Senior Vice President, Global DTC. Nabanita has over 15 years of experience in e-commerce, digital marketing, and loyalty, most recently serving as the Head of e-commerce at Nestle Nespresso USA. As I have shared our path forward for this year, it’s important to restate our focus on our core missions of making people feel more confident with healthier, more beautiful hair. With our science-based technology and our patented bis-amino ingredient, we are uniquely positioned to improve the hair health of millions of consumers worldwide. We are powered by the trust and passion we have built with communities around us. The professional stylist community has been the foundation of our brand and continues to be our biggest advocates. We are committed to the professional stylist community, supporting them with education and the tools to enable them to grow their business and deepen connections with the clients. In conclusion, although we had a challenging start to the year, our first-quarter performance was in line with our expectations and we made progress on the priorities we laid out for our reset year. Encouragingly, Olaplex remains the category leader with proven patented technology, one-of-a-kind engagement with stylists and consumers, and an innovation platform poised to continue disrupting the industry. We are confident that the actions we are taking this year will allow Olaplex to resume consistent and sustained sales growth at continued top-tier profitability in the future. I will now turn the call over to Eric to cover our first-quarter results in more detail and provide additional information on our outlook for 2023.

Thank you, JuE, and good morning, everyone. In the first quarter of 2023, net sales declined 38.9% to $113.8 million versus $186.2 million last year. We believe that the quarter was negatively impacted by approximately $21 million of year-over-year inventory rebalancing at certain key professional and specialty retail customers. Additionally, we faced a difficult comparison relative to the first quarter of 2022 when we shipped an additional $10 million of inventory pipeline to support our strong launch in Ulta. By channel, professional channel sales were slightly ahead of our expectations and declined 37.2% to $48.4 million versus a 62.6% increase last year. Specialty retail sales decreased 45.8% to $34.9 million following 102.5% growth in the prior year period. Our direct-to-consumer channel sales were down 31.9% to $30.5 million compared to a 15.1% increase last year. Geographically, international sales were flat for the quarter, while the U.S. was down 60.3% with the impacts of customer inventory rebalancing and the lapping of the Ulta Beauty launch specifically impacting the U.S. Moving down the income statement, adjusted gross profit margin was 72.6%, declining 650 basis points from 79.1% in the first quarter of 2022. Approximately 250 basis points of this contraction reflects deleverage and inflation in our warehousing and distribution costs. 230 basis points related to higher inventory obsolescence reserve and 110 basis points from inflation on product costs, with the remainder from increased sampling and unfavorable customer mix. These more than offset the benefit of the price increase we took from July 1, 2022, and favorable channel mix. Adjusted SG&A increased 59.6% to $32.9 million from $20.6 million in Q1 2022. The $12.3 million increase in adjusted SG&A from the prior year is primarily the result of an $8.6 million increase in sales and marketing expense to drive demand, as well as an increase in payroll attributable to workforce expansion and other related expenses. Adjusted EBITDA declined 60.4% to $50 million versus $126.4 million in the first quarter of 2022. Adjusted EBITDA margin was 44% compared to 67.9% a year ago. Adjusted net income decreased 65.7% year-over-year to $31.4 million or $0.05 per diluted share from $91.4 million or $0.13 per diluted share in the 2022 first quarter. Adjusted net income benefited from lower interest expense year-over-year due to our debt pay down and refinance in the first quarter of 2022 and higher interest income. Now turning to our balance sheet. Inventory at the end of the first quarter was $132 million, down from $144.4 million at the end of the fourth quarter. The reduction in inventory levels was a result of our focus on aligning production levels to the new sales forecast, which more than offset building inventory of new SKUs as we prepared for product launches this year. Turning to cash flow, during the first quarter, we generated $48.1 million in cash from operations. As we shared in past calls, 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 quarter with $369.3 million in cash and equivalents, which is generating interest income at a rate of 4% to 5%. Long-term debt, net of the current portion and deferred fees was $653 million. Now turning to our financial outlook. The fiscal year 2023 guidance that we provided on our last earnings call is unchanged, although we continue to operate in a dynamic environment with underlying macroeconomic uncertainty. Our team delivered during the first quarter, and we are moving forward with a continued deployment of strategic investments to strengthen our market position. Let me walk you through our assumptions for the remainder of the year. Beginning with the second quarter, we now currently expect net sales will only modestly improve sequentially in absolute dollars compared to Q1 and remain down significantly compared to the year-ago period. As a reminder, we are lapping challenging comparators from Q2 2022. First, we’ll 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 America 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 professional 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 growth headwind in the second quarter of 2023. We also anticipate that the second quarter will continue to be impacted by the continuation of a lower baseline level of demand. Our increased investments in education, sales, and marketing have recently been deployed, and we expect it to take time for these investments, particularly those in the upper funnel and other awareness-building activities, to generate improved consumer takeaway and have an impact on our shipments to customers. We expect the professional channel to be the most challenged, partially due to facing a difficult comparison from last year’s one-liter launch and the pull-forward impact from the price increases a year ago followed by specialty retail. We believe the DTC channel will be the least impacted. In terms of profitability due to timing shifts of sales and marketing spend into the second quarter, we expect that the second quarter will be a heavier marketing investment quarter. Therefore, we now believe the most adjusted EBITDA margin contraction of the year will occur in Q2. As we move into the second half of the year, we expect both net sales and profit trends to improve as we expect to more fully benefit from the net impact of new product introductions and additional distribution gains that are strategic and build brand equity. We also expect to benefit from an improvement in baseline demand as our increased investments in education, sales, and marketing begin to yield returns. You’ll see that this implies improvement in the back half compared to the first half, ultimately leading to growth in the fourth quarter and as we enter 2024. Taken together for the fiscal year 2023, we expect net sales in the range of $563 million to $634 million. Adjusted net income in the range of $176 million to $224 million. And adjusted EBITDA in the range of $261 million to $322 million. Turning to adjusted gross margin, we continue to anticipate a 300 to 400 basis point decline in gross margin for the year due to inflation, warehousing and distribution costs, and deleverage from lower sales volumes. This more than offsets the positive impacts of cost savings and price increases implemented in the second half of 2022. In the medium term, we believe that we can return closer to our historical adjusted gross margin levels in the mid-70% range as we work through higher costs, inventory obsolescence impacts, and as baseline demand improves. Given the confidence in our long-term strategy, we are continuing to invest for the long-term health of the business. We expect adjusted EBITDA margin in the range of 46.4% to 50.8% for 2023, down from 60.9% last year. As I mentioned earlier, we now believe the most adjusted EBITDA margin contraction will occur in Q2. We believe adjusted EBITDA margin rate will improve in the second half relative to the first half as an improvement in the top line drives operating leverage. We continue to expect interest expense to be $40 million, and adjusted effective tax rate of approximately 20% for the year. As I mentioned last quarter, we anticipate another year of healthy cash generation in 2023 as profitability levels remain high, and we improve our working capital position. In summary, we are in the early stages of our reset year but remain committed to improving the business and taking the necessary actions to enable the next phase of growth for Olaplex. We are deploying initiatives that have been successful for us in the past, and while we believe it may take time for investments to have an impact, we are confident we have the right strategies in place for improving demand. With our competitive differentiators, execution of our priorities, a solid balance sheet, high profitability, and strong cash generation, we believe we are well-positioned to navigate the near-term headwinds and emerge in an even stronger position. This concludes our prepared remarks. We will now turn the call back over to the operator for questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Olivia Tong with Raymond James. Please proceed with your questions.

Great. Good morning. Thank you. I wanted to ask you two questions. First, on promotion. Clearly, promotion has been picking up. So can you talk about to what extent this has been driven by you versus the retailers? And we have obviously seen some products ending up in channels you probably didn't intend. So can you talk about what actions you're taking to control that? And then you mentioned getting gross margin back to somewhere in the mid-70s. If you could talk about the drivers to get back there, that would be helpful, too. Thank you.

Thanks, Olivia, for the question. What I will do is I'll take the promotion question and then have Eric comment on the diversion and the gross margin question. So I just want to be very clear, when we participate in promotion, we have said before that we do promotions to really acquire new customers to the brand as well as allowing our loyal customers to buy deeper into the brand. As such, we partner with retailers on some of their promotions that really drive those goals that we have with them. So you've seen us in participation with Sephora in BI. But we don't do anything off the cuff that doesn't drive those kinds of programming. Hopefully, that answers your question because we want to be very clear again to double down is that we just don't do promotions indiscriminately for the sake of driving sales.

Thanks, JuE, and hi Olivia. I'll take your question on diversion first. Just to be clear, Olaplex has not changed the selling model. We do not sell our products into grocery stores or other mass retailers. When we find products in unauthorized channels, we thoroughly investigate who supplied those products and take commercial and legal actions to prevent further diversion. We use tools on our products like QR codes. Unfortunately, diversion is a problem that all consumer products manufacturers face, especially in beauty and fashion. We're striving to minimize those opportunities for diversion. Based on the tracking we've been able to monitor, we believe the overall diverted volume in these channels remains relatively small. The next question was on gross margin and getting to the mid-70s adjusted gross margin. The drivers of that include returning to growth which we expect volume leverage to help on the fixed cost component, specifically our fixed warehousing cost. Also, as we continue to work our inventory levels down to our target levels that lowers those warehousing costs and enables us to work through some of the higher cost inventory in our system and realize some of the benefits we're seeing in a more stable supply chain environment with costs coming down. The last driver is the savings initiatives that we're putting forward through our fuel for growth program. We see efficiency opportunities that can support adjusted gross margin at that level in the medium term.

Great, thanks. If I could just follow up one quick question, just early read-throughs on the Lash serum product and how that influences your decision-making around expanding beyond care. Thank you.

Thanks, Olivia. I'll take that question on Lash. So Lashbond is off to a great start, as you have heard from our call just now. What is encouraging is that it validates that our technology can actually play in adjacency. We will continue to monitor its success and how it's doing. As we've said before, our technology has cross-category benefits and opportunities, whether it's in skin care or nail care. This is a great example of us having permission to play in an adjacency category having already been the top 10 beauty SKU at Space NK in the UK and also a strong seller at Sephora.

Thank you. Our next questions come from the line of Rob Ottenstein with Evercore. Please proceed with your questions.

Great. Thank you very much. A couple of questions. First and perhaps most important, obviously, the demand for the core products, the repeat purchase is an issue, and there are a lot of possibilities, right? There has been the misinformation in social media that's been horrible. You cited competition, you did a price increase. We don't know to what extent that had an impact. So just – and I know it's really hard to be precise on this, but if you could kind of give us your best sense of kind of the two or three drivers that have been most impactful on the base level of demand of the core products and whether over the quarter and into April now if you're starting to see any abatement in any of those negative factors. So that would be my first question.

Okay. Thanks, Robert, for that question. Let me take that. Eric, if you want to add any or build on it, please do so. First and foremost, we don't believe that the price increase is a driver. In fact, we believe that it's a combination of factors, whether it's the macro environment, some more entrants into the space, higher levels of discounting in the industry, and some of the misinformation about our brand. However, from the data we have seen in terms of sell-out trends, we have seen stability since we reported last quarter, and we expect it to continue to do so. This stability is due to all the executions that we are putting through in both sales and marketing, that includes people in-store, the education, and the sampling. To summarize, the reasons for the decline include a combination of factors, and we are addressing that with education, in-store personnel, sampling, and a more assertive PR program to correct misinformation in the marketplace.

No, you said that right, JuE. I would just echo we've seen sell-out trends stabilize since our last call, and we're assuming improvement in that trend based on our actions and investments into the second half of the year.

Great. So you're seeing some traction there. That's great. And then shifting over to international, how can you just give me a little bit more detail in terms of your ability to get more distribution internationally? I know you mentioned you're going into some more Douglas stores. When I was in Europe, your product was just selling off the shelf in Sephora, and it was incredibly well placed and well positioned. In that context, it's a little surprising that you're not up and doing better internationally given the still low levels of distribution and the earlier stage in the brand's development. So perhaps you could give us a little bit more sense of what's going on in Europe.

Let me just take that. We have said that 2023 is our reset year. What we want to do is really go deeper with our existing distribution, which includes anniversarying Sephora in Europe and adding 280 doors to Douglas. This strategy is to ensure we can be an anchor brand and a brand that truly delivers performance when it comes to not only in products but also in generating revenue for those retailers. In terms of international, you can see there are other geographies where we have not made significant inroads such as Asia, the Middle East, and Latin America. These regions are ripe for expansion because they see how the brand performs in North America and Western Europe, which drives brand awareness, recognition, and desire. Internationally, there are definitely huge opportunities for Olaplex, we just want to continue to build that foundation to make our brand more resilient and stronger for now and the future.

Great. Thank you very much.

Thanks, Robert.

Thank you. Our next questions come from the line of Ashley Helgans with Jefferies. Please proceed with your questions.

Hi. This is Blake on for Ashley. I wanted to ask on the professional channel. If you could comment any more on how that trended throughout the quarter and just how those customers are buying their inventory in terms of closer to need? Also, maybe just comment on the time between salon visits if you've seen a change there from the end consumer as well. That's my first question. Thanks.

Hi, Blake. Yes, we've seen a consistent trend in the professional channel as we mentioned in the previous quarter: we believe the current macro environment is impacting the professional channel and the stylist community a little bit more than we've seen in other channels, which is increasing the time between visits. We see that in data from Klein, measuring front-of-salon sales, which in the fourth quarter of last year was actually down 9%. We've seen that continue and expect it to persist through 2023. That's balanced by the other channels. We've always said this category is strong and resilient despite macro challenges. We expect that to continue, though not immune. Our expectation is that, at least aggregating what we see in retail, direct-to-consumer, and Pro leads us to mid-single-digit growth this year. So a slowdown, but I emphasize resilient.

That's helpful. Thanks. And then on the guidance, I think I might have missed it, but I heard you say you expect positive growth year-over-year in Q4. Did you mention your expectations for Q3 at all versus Q4? Just trying to think about the magnitude of difference in growth between Q3 and Q4.

We didn't comment specifically on Q3. We've said that we expect to return to growth in the fourth quarter of this year as we believe the actions, and the investments we're taking, we're going to test, learn, and optimize. Those impacts are going to build gradually quarter-by-quarter as we get through the year. Admittedly, favorable laps are also expected in the fourth quarter, implying a return to growth as we enter 2024.

Got it. Thanks so much.

Thank you. Our next questions come from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Hi, folks. Thanks for having me in. Let's pick up where you just left off, growth – sales returning to growth by the fourth quarter. What gives you confidence in that? And how much of this is distribution related? What do you expect from accounts where you're currently distributed like U.S. Sephora or the Pro channel in the U.S.? What are the demand indicators you're seeing today that give you confidence that you found a level to grow off of?

Thanks, Jason, for that question. Let me start, and as usual, Eric can definitely build on it. I think first and foremost is the data we have seen in our sell-out trends have been stable since we reported last quarter, and we expect that to continue for the rest of the year. Why is that? Because we've been executing, as we mentioned, on proven high return on investment and performance-based marketing that has been successful in the past. While it's too early to be certain about our activations, what we have seen is our educational marketing support around our core that we just launched is showing positive feedback both from a digital perspective and sales stability in our current and even new distribution that we started late last year. Additionally, third-party field people in-store continue to help us generate the ability to educate and get feedback on what consumers are misunderstanding, so we can refine our educational content and materials. We are also more frequently contacting our pro community, focusing not only on selling product knowledge but also helping them in their business so that they can benefit from us not only as a product brand but as a brand with a purpose.

Okay. You mentioned in your prepared remarks, I heard you say your core mission, and I’m going to paraphrase, but the core mission is to make people feel more confident with healthy hair. We’ve talked in the past about the potential to diversify into skin. Does this core mission mean you’ll focus on hair only and ignore those types of adjacencies?

The good news is you've seen us launch an adjacency in Lashbond, right? It has done well and continues to capture the imagination of our consumers, as well as our retail partners, including our professional beauty supply locations where they are requesting more of the product. We believe that our technology now validates that it can be outside of hair. We want to focus on hair this reset year because it is about going deeper, not wider. But the technology play is significant in the marketplace, and when the time is right where we have the intersection of a cutting-edge technology and a new segment to enter, we will consider it. It's not a question of needing to, but wanting to do something groundbreaking.

Thank you. Our next questions come from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your questions.

Hey, good morning. Thanks for taking the questions. So first I’d like to touch on the guidance. I mean, you left it unchanged and it’s still a pretty wide range for the year. And I understand it’s a reset year and we’re still trying to figure out where things will settle out. But what would give you more confidence, say in the coming quarters to start tightening that guidance?

Korinne, I’ll take that one. As you just said, we’re only one quarter into the reset year. We’re in the early stages of implementing our plan, these actions, and these investments. As we’ve said, we’re pleased with the progress thus far, and we assume that we’re going to yield the benefits of those actions and investments in the back half of the year. To answer your question, as we progress through the year, testing, learning, and optimization will guide us, and that’s what would lead us to instructions to tighten our range. We didn’t feel that was appropriate at this point.

Got it. Thank you. And then just touching on some of the newer products. And I know you don’t disclose sales by product. But is there any color you could provide us on how much some of the newer products like say 4D contribute to sales? As we think about, as you've launched more adjacent products like Lashbond that are different price points than that typical $30 range, how should we be thinking about the margin differential of those products? If those become a bigger part of the mix, how should we think about the margin impact there? Thank you.

Korinne, I’ll take that one as well. We’ve just launched 4D, we’ve just launched Lash. I would just characterize these as similar type launches as what we've had in the past. Each sub-segment of Lash and the adjacent category represent smaller market sizes relative to hair but also represent meaningful and completely incremental opportunities. From a margin perspective, it's not just about the premium pricing, but also the costs that go into that. Lash is a good example of a product that has the potential to help gross margins from an accretive impact. It carries a higher margin than our normal category margins. This will continue to be an opportunity as we evaluate each launch and decide on appropriate pricing.

Awesome. Thank you.

Thank you. Our next questions come from the line of Jonna Kim with TD Cowen. Please proceed with your questions.

Thank you for taking my question. Just curious to see you can elaborate a little bit more on how the sales progressed in specialty retail on a sort of a like-for-like basis? Are you seeing any sort of progress there? If you can comment on the marketing spend over the medium term, do you continue to maintain the elevated levels that you are investing now or how should we think about that? Thank you.

Hey, Jonna. I’ll take that on specialty retail trends and then marketing as well. You’ve seen our specialty retail results in the first quarter were particularly depressed again by lapping the very successful launch we had in Ulta last year, as well as some inventory rebalancing that we experienced in the first quarter. Specialty retail sellout trends have been stable since our last call. Recognizing the results in the first quarter that performance has been behind the category due to lapping that very successful launch in Ulta. We assume that trend will improve in the back half due to our actions and investments. You also asked about our marketing investments. We said Q2 has additional investment against this upper funnel campaign that we’re excited to implement to build brand equity and awareness.

Got it. Thank you.

Thank you. Our final questions come from the line of Jonathan Keypour with Bank of America. Please proceed with your questions.

Hi, all. Thank you and good morning. I’m wondering in terms of how Olaplex goes to market. It seemed like maybe two years ago or a year ago, it relied very heavily on the salon professional channel. Now that has slowed understandably. I’m wondering if there is a high-level shift in how Olaplex is attempting to reach new consumers?

Thank you for the question, Jonathan. One thing we want to clarify is that our stylist community is the bedrock of Olaplex. Independent studies consistently confirm that the number one source of truth for consumers is recommendations by their hairstylists. We continue to enjoy their support, and we maintain strong relationships, providing business benefits for them. We are present where our consumers are. Consumers are taking recommendations from their stylists and listening to family and friends. Verified product reviews are important, and this is where we are focusing on ensuring our purchase-verified product reviews are strong through sampling. We can provide samples so consumers can try the product, then purchase it and leave a review. Social media is critical because that’s where consumers learn about products. Thus, we are specially addressing narratives and educating on product benefits. In summary, we are not shifting away but instead investing heavily in a full-funnel marketing approach.

Great. Regarding the inventory rebalancing, you pointed out $21 million this quarter. I’m assuming that it gets that difference between sell-through and sell-in narrows over the year. Any directional ideas on what the full-year rebalancing impact will be? Which channel is it most pronounced?

Absolutely. We have good visibility into inventory levels across major U.S. accounts by item tracking sellout versus sell-in for most of our global business. You mentioned the $21 million year-over-year impact we experienced in Q1. We also indicated the impacts we expect to lap in Q4 this year, which should be a positive sign. Customer inventory rebalancing relates to adjusting orders to align with sellout trends and macro conditions, alongside their decisions on month-on-hand levels. We’re monitoring closely, and it’s a dynamic situation, happening every quarter on various items at different accounts. We’re factoring all into our outlook and guidance, and as we mentioned, we’ve seen sellout trends stabilize since our last call, assuming improvement in the back half.

Great. Thank you.

Thank you. That concludes our Q&A session. I’d like to turn the call back over to JuE Wong for any closing comments.

Thank you. Thank you, everyone. We look forward to seeing everyone again at our next earnings call. Thanks. Bye.

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