Olaplex Holdings, Inc. Q2 FY2023 Earnings Call

Greetings. Welcome to Olaplex Holdings, Inc. Second Quarter 2023 Earnings Results Conference Call. Please note, this conference is being recorded. I will now turn the conference 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 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 helpful 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 the data contained in these industry publications and any 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. As outlined in our press release issued this morning, we had a challenging second quarter. Net sales of $109 million were below our expectations of modest sequential improvement from the first quarter, and adjusted EBITDA was $36.7 million, or a margin of 33.6%. With weaker-than-expected results in the second quarter coupled with our updated assumptions for the remainder of the year, we are reducing our guidance for fiscal 2023, expecting net sales in the range of $445 million to $465 million. Overall, our business continues to be negatively impacted by competition, a more promotional environment, and misinformation related to our brand. Despite these headwinds, we are continuing to invest by increasing efforts on upper funnel marketing designed to build brand equity and expanding our focus and support for the important professional community. Let me take a step back and walk through the perspective of what drove the revision to our full year outlook. Earlier this year, we announced that we are approaching 2023 as a reset year to build a stronger and more resilient foundation to position Olaplex for long-term growth. The prestige haircare category, which Olaplex revolutionized in 2014, has evolved into a healthy and vibrant category, but with more competition. In order to support our future growth, we must continue to amplify our investment and expand our marketing and educational capabilities. And to that end, we initiated an integrated full funnel marketing approach this year to build brand awareness, increase consideration, and drive conversion. Beginning in the second quarter, we invested heavily in upper funnel and other creative marketing activity aimed at building long-term equity around the science and emotional connections associated with the Olaplex brand. When we introduced annual guidance earlier this year, our visibility was limited as there was uncertainty regarding how shifting market dynamics will impact the business. We anticipated that trends would stabilize in the second quarter and sales demand would rebound in the second half of the year as our increased investments in sales, marketing, and education began to yield returns. We also expected to benefit from new product introductions and new distribution gains. However, we have now seen a weaker sales trend persist since our first quarter earnings call in May through June. While our loyal customers remain highly engaged with Olaplex, we believe a continuation of negative factors has impacted the business. We recognize that these factors are having a particularly negative impact on the performance of our professional channel and views of the brand with some members of the stylist community. As a result, we are revising our forecast for the balance of the year using this recent trend as the run rate for the business. We recognize that it will take a sustained and balanced approach to investing in marketing, education, innovation, and brand-building activations to grow the business. Several key assumptions have changed in this new outlook. First, demand slowed as trends weakened in our Professional and Specialty Retail channels due to slower sellout and some customers rightsizing their inventory position. Second, while we are beginning to see some positive early indicators from our upper funnel market campaign, we are not yet experiencing the lift that we were anticipating across the business, and we expect that this activity will begin to deliver stabilization on an absolute basis rather than growth during the second half of the year. Third, given our updated view on our trend line, we believe it is prudent to lower our expectations for consumer demand associated with new product introductions and new distribution gains. Eric will provide more details on our outlook later on in the call. We believe we made progress toward achieving stabilization. Based on data from a third party, we have seen a lift in awareness and positive opinion of Olaplex following the start of our upper funnel marketing campaign in June. Similarly, olaplex.com has experienced increased traffic and improved conversion after the campaign launch. Because that channel tends to act as a leading indicator, given its close proximity to the end consumer, we believe the messaging, content, and creative assets of the campaign are resonating. As we balance selling activities with demand, we believe the months on-hand inventory positions at our major accounts on our core items are in a much better place relative to their targets. We have worked to normalize inventory levels with these partners in response to lower than originally planned sales and decisions from these partners to lower overall month-on-hand levels than previously carried. To put this in context, in the first half of 2023, net sales all selling declined 44% overall, while sellout at key accounts is down approximately 26%. Some of this difference can be attributed to the lapsing of previously communicated prior year one-offs, namely our 1-liter pipeline launch, Ulta pipeline in Q1 of 2022, and the impact of our July 1, 2022 price increase. The remainder of the difference between sell-in and sell-out can be attributed primarily to discontinued customer destocking actions in response to our lower demand. Our team is focused on executing and improving our sales trend through brand-building and education activations that we believe are the strongest levers to engage loyal users and bring new and lapsed customers to Olaplex. We are increasing the amount of investment for this year and are adjusting the mix of that investment as we test, learn, and optimize our initiatives. We are raising our expectation for marketing, inclusive of sampling and certain sales and marketing payroll to increase to a range of $80 million to $85 million in 2023 compared to our previous expectation of $70 million and up from $40 million in 2022. With this change, we are increasing aspects of our new brand campaign, repurposing some of the upper funnel out-of-home activations towards media and connected TV, and focusing more efforts on improving our standing with the Pro community. As we adjust our plans for the year, we continue to make progress against our four key priorities. These are accelerating investments in sales and marketing, increasing and evolving our educational assets, reasserting our position with our Pro and Specialty Retail partners, and improving our approach to PR. Let me now walk you through the progress we made on this initiative during the second quarter. Beginning with sales and marketing, year-to-date, we invested approximately $40 million of the planned $80 million to $85 million investments for the year. In May, we kicked off an integrated full funnel creative campaign titled Strength Starts Inside, featuring paid media, digital, social, connected TV, audio, and out-of-home activations. With this campaign, we intend to amplify our scientific authority by highlighting how Olaplex builds strength from the inside with our patented bisaminotechnology as well as strengthening emotional connections with our community of pros and customers who aspire to bring out their own inner strength. In June, we generated excitement for our 9-year anniversary as a company by celebrating National Olaplex Day. To celebrate this milestone, we hosted events with our professional ambassadors and activated fully branded guerilla street sampling teams near local Sephora and Ulta Beauty stores in New York, Los Angeles, and Chicago. Turning to education, we continuously look for new and better ways to inform stylists and consumers about the superior performance of our iconic products. In that vein, we are implementing a more active and engaged approach to field education and are establishing our own internal retail field sales team. You may recall that during the fourth quarter of last year, we deployed a pilot of a third-party field sales team trained by Olaplex, and following positive results, expanded the program to 400 Sephora and Ulta Beauty stores during the first quarter. This progress has demonstrated the impact we can have in driving in-person education with consumers and beauty advisers. An internal retail field team is not only more cost-efficient than engaging with a third party, but we believe that we will have even better control of training on the Olaplex brand. Our third priority is to reassert our position with our Professional and Specialty Retail partners. The Professional community remains the foundation of our brand and is core to maintaining our credibility in the category. We know it is critical to address and solve the issues we are facing in that channel by increasing our visibility and investing more to deepen engagement with stylists. To that end, the team is implementing new and incremental full 360 activations to show our support for the Pro audience driven primarily by participating in high visibility distributor-led events, stylist appreciation days, and in-store activities. In addition, we continue to increase in-person and virtual sales contracts and training with our new field sales managers and expanded education team, both in North America and internationally. We piloted and expanded data-driven programs to help our distributor partners target and secure new Olaplex salons and are advancing our key opinion leader program by adding new salons and cultivating relationships with existing partner salons. For Specialty Retail, we are continuing to partner with our key accounts to expand CRM campaigns and education content. We also introduced new visual merchandising reflective of our new brand campaign and made progress on international expansion. Our fourth priority this year is to build out and enhance our PR capabilities. With a focus on strengthening our global reputation, scaling influencer marketing, and delivering growth in earned media value, our PR assets are aimed at telling the story of our brand and educating consumers about our technology. We are broadly distributing content in partnership with our brand ambassadors focused on Olaplex and hair health, via digital and social channels. We intend to continue to develop the Olaplex Scientific Advisory Board program, which consists of a group of medical and scientific experts who will help guide us on ways to develop educational content that underscores the safety and scientific capability of our products. We also continue to actively defend our brand against allegations that claim Olaplex products caused hair loss. In July, the court granted Olaplex's motion to sever and dismiss the claims. As a result, all 101 plaintiffs are currently dismissed without prejudice. Turning to our progress on investing in our people and building out our team. I am pleased that J.P. Bilbrey has joined our Board in the newly created role of Executive Chair. J.P. joined us about a month ago, bringing extensive experience with growing and evolving global consumer brands after having served as the President and Chief Executive Officer of The Hershey Company and currently serving on the Board of Directors of Tapestry, Elanco Animal Health, and Colgate-Palmolive. It is a testament to the opportunities ahead of Olaplex that we could attract a leader of his caliber and credentials. J.P. will be valuable to the Olaplex team, and we are thrilled to welcome him to the board. I look forward to partnering with him and receiving his guidance on ways to implement best practices and processes as the company scales. In summary, while it is a challenging period for Olaplex, we continue to be confident in the long-term opportunities for this business. The prestige haircare category is in its early stages of growth, and we are an industry leader, offering fully differentiated science with our patented bisaminotechnology. We believe we can reach new customers and reclaim users as we invest in our marketing model and develop within the international markets, and we believe we have a compelling multiyear innovation pipeline that enables us to expand our product offering. With that, I will now pass it over to Eric to cover our second quarter results in more detail and provide additional information on our revised outlook for 2023.

Thank you, JuE, and good morning, everyone. Net sales in the second quarter declined 48.2% to $109.2 million. This was below our expectation of modest sequential improvement in absolute dollars from $113.8 million in the first quarter, as our Professional and Specialty Retail channels experienced slower demand and some customers further rightsized their inventory positions in response to current trends. We also lapped 2 challenging comparators from Q2 2022. First, we lapped an approximately $22 million net sales impact in the second quarter of 2022 from the introduction of 1-liter size offerings in the North America Professional channel. Second, in the second quarter of last year, we experienced some pull forward in demand of approximately $10 million as some Professional customers chose to buy ahead of our announced price increase, which took effect on July 1 last year. By channel, the Professional channel sales declined 61.2% to $40.9 million versus a 32.7% increase last year. Our Direct-to-Consumer channel sales were down 6.4% to $38.5 million compared to growth of 19.3% a year ago. Specialty Retail sales decreased 53.7% to $29.8 million following an increase of 68.5% in the prior year period. Moving down the P&L. Adjusted gross profit margin was 72.7%, down 250 basis points from 75.2% in the second quarter of 2022. Approximately 320 basis points is related to higher inventory obsolescence reserve, 230 basis points is related to promotional allowance, and 110 basis points from inflation on product costs, with the remainder from deleverage and inflation in our warehousing and distribution costs. These more than offset the benefit of favorable channel mix as the overall mix shift to Direct-to-Consumer drove plus 350 basis points as well as the price increase we took from July 1, 2022, which contributed 100 basis points of favorability. Adjusted SG&A grew 73.4% to $42.2 million from $24.4 million in Q2 2022. The $17.8 million increase in adjusted SG&A from the prior year is primarily the result of a $14.1 million increase in sales and marketing expense, including the upper funnel marketing campaign that launched during the second quarter, as well as an increase in payroll attributable to workforce expansion and other related expenses. Adjusted SG&A excludes $3.5 million related to a one-time settlement with a former distributor in the United Arab Emirates, which allowed us to establish a partnership with another distributor in the country. For the first half of 2023, we have spent $40 million in sales and marketing against our updated $80 million to $85 million full-year investment. Adjusted EBITDA declined 72.4% to $36.7 million versus $133.1 million in the second quarter of 2022. Adjusted EBITDA margin was 33.6% compared to 63.1% a year ago. Adjusted net income decreased 78.5% year-over-year to $21.2 million, or $0.03 per diluted share, from $98.8 million, or $0.14 per diluted share in the 2022 second quarter. Turning to our balance sheet, inventory at the end of the first quarter was $128.5 million, down from $132 million at the end of the first quarter. We continue to make progress on efforts to lower our inventory levels as the sequential reduction was driven by lower inventory levels of core SKUs to match a lower sales forecast, which more than offset building inventory of new SKUs as we prepare for product launches this year. Turning to cash flow. During the first 6 months of 2023, we generated $71.1 million in cash from operations. As we shared in past calls, we anticipate another year of healthy cash generation as we have a highly profitable business model and improve our working capital position, primarily through lower inventory. We ended the quarter with $378.4 million in cash and equivalents, which is generating interest income at around 5%. Long-term debt, net of the current portion in deferred fees, was $651.7 million. Now turning to our financial outlook. As JuE mentioned earlier in the call, we are revising our guidance for 2023. Let me walk you through our revised guidance and assumptions for the remainder of the year, starting with the top line. For fiscal year 2023, we expect net sales in the range of $445 million to $465 million, down from the previous range of $563 million to $634 million. At the midpoint of both ranges, this represents a reduction of approximately $144 million, which can be broken down into 3 primary buckets. First, the combination of weaker-than-expected results in the second quarter and our assumption of lower baseline demand in the second half of the year amounts to approximately $60 million. Second, we are no longer assuming baseline demand improvement in the second half of the year and now believe the investments we're making will first deliver stabilization of baseline sales on an absolute dollar run rate basis. The removal of this lift amounts to approximately $50 million. Third, while we still expect to benefit from the impact of new product introductions and new distribution gains, we are lowering these assumptions by approximately $35 million compared to our original assumptions given recent sales trends. With this new outlook, second half 2023 net sales at the midpoint are now expected to be $232 million versus $223 million in the first half of 2023. We expect to experience the addition of holiday kits in the second half of the year, which is a benefit relative to the first half of 2023. Given that our holiday kits are sold to Professional and Specialty Retail customers primarily in the third quarter, ahead of the winter holidays, we expect net sales in the third quarter to be higher than the fourth quarter of 2023 on an absolute basis. For the same reason, we anticipate sequential improvement in sales on an absolute dollar basis in the third quarter versus the second quarter of 2023 for both the Professional and Specialty Retail channels. Conversely, we expect our Direct-to-Consumer channel to decline sequentially on an absolute dollar sales basis in the third quarter due to timing as we shipped inventory in Q2 ahead of a major customer promotion in July. In the third quarter, from the perspective of year-over-year net sales growth rates in order of magnitude, we expect Specialty Retail to be the most pressured, followed by Direct-to-Consumer and Professional. Specialty Retail faces the most difficult comparison from a year ago when the channel experienced robust growth due to incremental distribution and a higher sell-in of holiday kits. We now anticipate a 500 to 600 basis points decline in gross margin for the year compared to our initial assumption of 300 to 400 basis points of contraction. The primary driver of this is deleverage from lower sales volumes on our fixed warehousing costs, as well as the actions we are taking to work through excess inventory. This more than offsets the positive impact of cost savings and price increases implemented in the second half of 2022. In the medium term, as we work through higher costs and inventory obsolescence impacts, and as baseline demand improves, we believe that we can return closer to our historical adjusted gross margin levels in the mid-70% range. Given the lower net sales forecast against our expectations for increased operating expenses, which includes increasing our sales and marketing investment for the year, as JuE previously discussed, we now expect more adjusted EBITDA margin deleverage than our prior assumption. For 2023, we expect adjusted EBITDA in the range of $161 million to $176 million, or a margin of 36.2% to 37.8%. This compares to our previous range of $261 million to $322 million, or a margin of 46.4% to 50.8%. We continue to expect interest expense to be $40 million and an adjusted effective tax rate of approximately 20% for the year. In conclusion, despite our disappointment with this weaker outlook, we are reminded of the pillars that make Olaplex a unique brand and a great business. We are a science-led company, and with our commitment to making people feel more confident with healthier, more beautiful hair, we have built an industry-leading brand that enjoys trust and credibility from a highly engaged community of professional stylists and consumers. We are driving a synergistic omnichannel strategy and have the support of our customers who view us as a strategic partner of choice for the future. Our highly profitable model and strong cash generation afford us the opportunity to invest to improve our performance and capitalize on the long-term growth opportunities ahead of us. This concludes our prepared remarks. We will now turn the call back over to the operator for questions.

Our first question is from Susan Anderson with Canaccord Genuity.

Alec Legg on for Susan. Just a question on your sellout comments. You said it was down about 26% at key accounts. How much do you think is driven due to misinformation driving demand down versus tougher comps? Additionally, I believe there should be some headwinds from the sell-ins of those 1-liter bottles, which extends the need for consumers to replenish. Just any details there?

Eric Tiziani here. I'll take that. So that's right. What we disclosed on the call is that our net sales decline for the first half of the year was 44% against a minus 26% consumption decline at our key accounts. That difference is partly explained by the one-offs from the prior year in sell-in. So the 1-liter launch that you just mentioned in the first half of last year, Ulta pipeline shipments from Q1 of the prior year, and some impact from pricing pull forward in Q2 of last year as well, all of which we previously disclosed. While there's some ins and outs, the remainder of that difference between net sales decline and the consumption decline can primarily be explained by what we've seen as further customer inventory rightsizing. As JuE mentioned earlier, we believe that based on current sales, our inventory position on core items at key accounts is in a much better place going into the second half of the year. This is, of course, dynamic. You also asked about the minus 26%, how much is being driven by these headwinds that we've talked about. So competition, misinformation, and a higher promotional environment, we're not really breaking that minus 26% out in that way, just to say that those continue to be the primary headwinds that the business has been facing.

And then a follow-up on the marketing spend. So you've been investing heavily in that this year. I guess, what type of ROIs are you seeing? And then is it primarily top of funnel, just to build awareness, or are you also spending fairly equally? How should we think about spending on retention?

This is JuE, and I'll address that. We have always stated that the category we've developed is now more appealing. For us to enhance awareness within the category, we need to increase our investment in the upper funnel and support our Pro community. We will continue to test, learn, and optimize our strategies, employing a comprehensive full funnel investment approach. We will analyze the mix, and as we find effective methods, we will determine the best areas to increase investment, whether that’s in consideration, conversion, or maintaining our focus on the upper funnel to build brand equity and awareness.

Our next question is from Andrea Teixeira with JPMorgan.

JuE, could you elaborate on the exit rate of the 26% decline in consumption that you mentioned? Since this data is from the first half, I'm interested to know if there have been any improvements in consumption as we move further into the quarter, or if the situation has worsened. Additionally, regarding your investments in salons and brand awareness, can you provide insights on the impact of the campaign where you've been distributing samples of your No. 3 product after services over the past eight months? I'm eager to hear how effective that strategy has been. Lastly, concerning shelf space, I understand that part of the decline in guidance was due to expectations of modest growth in this area. Could you share your thoughts on that, particularly as we approach the back wall and if there’s anything we should consider regarding negotiations for the next quarter?

Thanks, Andrea, for the question. It's a three-parter. I'll have Eric answer the consumption first, then I'll tackle the investment in salons and shelf space questions. So, Eric?

Thanks, JuE. Andrea, regarding the exit rate, you're right. The number we quoted, the minus 26%, was the consumption decline at key accounts for the first half of the year. We did say on the call that we saw some deterioration in that number in the second quarter. So it was moderately worse in the second quarter than the first quarter. What you see in our outlook and our updated forecast is we've taken that second quarter absolute dollar sales run rate and used that to project forward a new baseline level of demand for the back half of the year. That's a key assumption change. We're now focused on using the investments we've put into the business to stabilize that sales trend in the back half of the year, so we can reach a point where we can rebound to growth in the future. That's just a comment on the exit rate, and I'll turn it back over to JuE.

Thanks, Eric. In response to your question on the investment from a salon professional standpoint, as we have always remained committed to our course, and this is why you are seeing us moving into the field sales team with our own team members, where it's not only more cost efficient, but we can also communicate our message much more directly and also train our own people in stores. We are seeing a positive impact, which is why we are moving in this direction. However, it is still early for us to be definitive about how everything is tracking, as we work toward stabilizing the business for the latter half of the year, thus creating a better foundation moving forward. These channels, both the salon channel and the retail channel, are very supportive of our integrated full-funnel approach, which you have seen demonstrated in conjunction with our out-of-home activations, combined with in-store support to drive traffic. In terms of shelf space, we cannot speak on behalf of the retailers but can share that we have top-tier meetings where we continue to demonstrate the equities of Olaplex. We still rank as the brand driving the most new customers into the category and are in the top five ranking in haircare prestige brands across all channels. We continue to score highly on all the brand equities regarding consumer trust, addressing damaged and repairing hair, and representing science and technology. All these factors influence our meetings with retailers, as awareness is a critical driver that leads to further conversions.

Our next question is from Bill Chappell with Truist Securities.

One question on gross margin. Just trying to understand, I mean, I think some of the pressures that you've talked about are near term or short term as you work out inventory and obsolescence. Do you have a pretty good visibility on when they will stabilize? As we look at the first quarter of 2024, should some of these pressures ease based on your sales forecast? It seems like some of the non-cash or short-term pressures should go away quickly. Any color there?

Yes, Bill, I'll take that one. We continue to believe that we can return to a normalized adjusted gross margin in the mid-70% range, and as you point out, some of the challenges we're facing in our gross margin in 2023 are near-term and we believe more temporary issues that have depressed our figures this year due to deleverage from lower sales on some of our fixed costs like warehousing as well as what we cited as impacts from working down higher inventory levels. So when we normalize and stabilize during the second half of the year, this should help us get back to historical levels in adjusted gross margin. This means we’ll start to see a return to that mid-70s range, which, of course, will allow us to continue investing back into the business.

Got it. Just to clarify, are gross margins expected to reach their lowest point next quarter and then potentially improve as we move into the fourth quarter?

As we mentioned in our guidance color, we now expect adjusted gross margin for the full year to be that minus 500 to 600 basis points versus last year. So it's a similar trend in the second half of the year that we've seen in the first half of the year. As sales normalize and as we get through 2023, we believe we'll have less of these temporary headwinds and can return to that adjusted gross margin level in the mid-70s.

And just a follow-up to a question we're getting in; what gives you confidence that this is a good number in terms of sales for this year? I'm trying to understand consumer takeaway, where that fell this past quarter versus expectations. I mean, we all knew it was going to decline. There's a lot of noise out there, but just trying to understand how much worse things have been, what you saw intra-quarter, and even as we went into July that gives you confidence in the updated guidance.

Yes, Bill, I'll take that one. We thought it was important to share quite specifically the changes in our key assumptions from our prior guidance to this guidance, which, as we mentioned, are the change in the assumption on baseline level of demand and this new approach to forecasting the back half based on just the run rate we've seen in absolute sales in the second quarter. The second one was a more prudent view around the fact that it's going to take time for our marketing investments, particularly those upper funnel investments, to show a lift. We believe it's going to help us stabilize the trend in the back half of the year, and we're confident this remains the right strategy for the long-term trajectory of the business. The third change in the assumptions cited was around the impacts of our new innovation and new distribution in 2023. We're proud of these developments and believe they will be drivers of growth into the future. The updated forecast represents a prudent approach focused on stabilizing our business in the second half based on observations from Q2.

And just to clarify how July is shaping up or any improvements there?

We're not commenting, Bill, on any intra-quarter trading. We'll just say that all the trends we've seen to date have been reflected in the outlook that we've provided.

Our next question is from Dana Telsey with Telsey Advisory Group.

As you think about the haircare category, any updates on the performance of the haircare category and how it has performed relative to your own performance? With the updated guidance, are there any adjustments being made regarding new product introductions or expectations on performance?

Thanks, Dana. This is JuE, and I will take that question. Regarding the haircare category, the available data shows that the category is up 14%. Although we reported a decline in our numbers in Q2 compared to the last quarter, it’s encouraging that the increase is due to a combination of brands rather than just one or two. As we noted, there is more competition entering the space. Olaplex is helping to bring new consumers into the category, with many not familiar with the Prestige haircare segment exploring and discovering new products. We believe that through our increased investment, and I want to emphasize that we created this category, we can overcome current challenges. We are focusing on communication, investment, and support for the Pro community, and we are committed to enhancing these efforts. We believe that as this category expands, we will continue to lead it while facing challenges from increased competition and promotional pressures, as well as some misinformation in the market. Regarding new product innovation, we are deliberate about our innovation and how we support R&D launches. Every new launch must meet two criteria: it must enhance our technology for better performance, and it should involve large segments that do not cannibalize our existing products. For instance, when we launched a clarifying shampoo or a purple shampoo, these products did not cannibalize our current shampoo and conditioner lines. Our innovation strategy demonstrates our commitment to developing products that enhance our offerings and align with our core technologies.

And just one follow-up on inventory levels. How are you thinking about inventory planning through the balance of the year given the levels of demand for Q3 and Q4?

Dana, I'll take that one. In terms of our inventory levels, we continue to make sequential progress quarter-to-quarter in bringing those levels down. We're not there yet, but it's a high priority and a key focus for the team. We're managing our production schedules and inventory purchases closely with our strategic suppliers and expect to continue making progress on inventory reductions through the year, aligned with our current forecast and ongoing outlook for demand. While the job is not done, we are making good progress every quarter.

Our next question is from Rob Ottenstein with Evercore ISI.

Robert Ottenstein from Evercore. A couple of follow-up questions. Number one, the DTC business; I think you mentioned in the prepared remarks that it benefited from some shipments to a large customer. Can you confirm that? If you could back out those extraordinary shipments, what would the DTC business have done?

Rob, I'll take that one. Yes, we did mention that the Direct-to-Consumer channel was benefiting in the second quarter from two primary things. First, strength in our olaplex.com business, and secondly, shipments related to a key e-commerce customer for a promotion that was running in July. That was in line with the normal course of phasing for those shipments. Past that, I'd say on an underlying basis, the Direct-to-Consumer channel performed better than our expectations regarding both sell-in and sell-out. This has been a channel where we've seen stronger trends, and it is one where we've been directing considerable investments in both lower funnel activities and seeing strong results in those efforts as well as in our upper funnel activities driving traffic to olaplex.com, for example.

Okay. It was down 6%, but without the shipments, would it have been down 15% or 20%? I'm trying to understand the extent of the decline.

So we're not supplying specific numbers on that, but you're directionally in the right place, I would say. I'll just reiterate that the sell-out and consumption levels at Direct-to-Consumer have been strong. This is not a channel where we've been dealing with any material customer inventory rightsizing. So, aside from this one impact from the promotions, what you're seeing in selling is representative of the sell-out as well.

So the sellout would have been minus 6% roughly?

Again, sell-in, sell-out, and Direct-to-Consumer are staying very close to each other. We're not giving a number, but directionally, that's correct.

Okay. So it sounds to me like the strongest confirmation of the health of the brand and the business. Is that fair?

I think that's fair. JuE, I don't know if you want to add to that, but this is why we especially called out olaplex.com as a leading indicator, and a green shoot is something we're continuing to support and invest in.

Absolutely. Nothing more to add than the fact that it is gratifying to see that because they are the closest to the end consumer at olaplex.com. The content, the messaging, all that creative is definitely resonating.

Our next question is from Jonna Kim with TD Cowen.

I just wanted to get a little bit more color on the Professional channel. I know you talked about it, but do you think it's more of a function of stylists being more frugal or competition? Just what you're seeing in that channel? Additionally, you mentioned muted demand; how does this affect your new product launches for the year?

Jonna, I'll take that question on the Pro and the demand piece. Yes. In our prepared remarks, we mentioned that our loyal customers in the Pro channel continue to be highly engaged with us. They are the ones who continue to support us and talk to their clients about us and other stylists about us. However, we also believe, as we mentioned, that continued negative factors have impacted them, especially among some stylists who are hearing misinformation. We believe that to continue to succeed in this area, we must enhance our integrated full-funnel marketing. As we've said before, for professionals, the #1 priority is brand growth and awareness to drive client traffic to their studios. Many stylists operate as single payroll entities, so their success in client acquisition is crucial. We are doubling down on initiatives in this area, ensuring education, addressing product knowledge, and assisting them in helping clients understand how to utilize our products effectively amidst time constraints.

We have reached the end of our question-and-answer session. I would like to turn the conference back to JuE Wong for closing comments.

Thank you, everyone, for your time. We look forward to speaking with you at our next earnings call. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you again for your participation.