Olaplex Holdings, Inc. Q3 FY2024 Earnings Call

Greetings and welcome to the Olaplex Holdings, Inc. Third Quarter 2024 Earnings Conference Call. This conference is being recorded. It is now my pleasure to introduce Patrick Flaherty, Vice President of Investor Relations. Thank you. You may begin.

Thank you, and good morning. Joining me today are Amanda Baldwin, Chief Executive Officer; and Catherine Dunleavy, Chief Operating Officer and Chief Financial Officer. Before we start, I would like to remind you that management will make certain statements today, which are forward-looking, including statements about the outlook of Olaplex's business and other matters referenced in the company's earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements. Additional information regarding these factors appears under the heading Cautionary Note Regarding Forward-Looking Statements in the company's earnings release and in the filings the company makes with the Securities and Exchange Commission that are available at www.sec.gov, and on the Investor Relations section of the company's website at ir.olaplex.com. The forward-looking statements on this call speak only as of the original date of this call, and we undertake no obligation to update or revise any of these statements. Also during this call, management will discuss certain non-GAAP financial measures, which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release. A live broadcast of this call is also available on the Investor Relations section of the company's website at ir.olaplex.com. Additionally, during this call, management will refer to certain data points, estimates, and forecasts that are based on industry publications or other publicly available information as well as our internal sources. The company has not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. Furthermore, this information involves assumptions and limitations, and you are cautioned not to give undue weight to these estimates. With that, I will now turn the call over to Amanda.

Thank you, Patrick. Good morning, everyone, and thank you for joining us. This morning, we reported third quarter net sales of $119.1 million, which declined 3.6% compared to a year ago. While this represented sequential improvement from Q2, we did underperform our expectations, primarily due to weaker-than-expected results in our international business as we continue in our efforts to build the right foundation for the future. Adjusted EBITDA was $44.6 million for an adjusted EBITDA margin of 37.5%. Coupling our third quarter results with our updated learnings, we are revising our guidance for fiscal year 2024 and now expect net sales in the range of $405 million to $415 million and an adjusted EBITDA margin in the range of 29.9% to 30.6%. As we have shared on past earnings calls, we plan for 2024 as a year to begin our transformation, taking a long-term view and prioritizing the strategies and initiatives aimed at building a healthier business. While we now believe it will take longer than originally expected to achieve our goal, we are making great progress and taking the steps we believe are necessary for the long-term health of the business. Much of this work has been happening behind the scenes, while at the same time this quarter, we announced 3 new innovative products: our No. 5 Leave-In Conditioner, Bond Shaper Curl Rebuilding salon treatment, and No. 10 Bond Shaper Curl Defining Gel. Although we are disappointed with this revised outlook for the remainder of the year, I remain confident that we have the right strategy and are implementing the right actions to achieve a solid foundation for long-term growth. Olaplex at its core is an innovative, science-enabled, and pro-inspired beauty company with demonstrated global appeal. As a top brand in the prestige hair care category, Olaplex had 4 of the 5 best-selling prestige hair care products year-to-date 2024 per Circana's retail tracking data of the U.S. hair market. Our research indicates that the Olaplex brand remains strong with positive associations to build upon, including innovative, reparative, healthy, and effective. And we possess a healthy balance sheet and strong cash generation, which provide flexibility and enable us to invest in future growth. Overall, I continue to believe that the best years lie ahead for this company. Let me walk you through 3 key assumptions that drove the revision to our full year outlook. First, we anticipate weaker performance from our international business as we reset for the future. We conducted a market-by-market review to better understand our business, evaluate our current structure and partnerships, and develop the go-forward roadmap for our global reach. I personally spent time meeting with many of our key partners and traveling the globe to see the brand in this current presentation on the ground and better understand the end consumer and unique markets. From this assessment, while the enthusiasm and passion for this brand remain incredibly high, we now believe that the issues within our international business are more complex than we originally anticipated. This requires simplifying our international model with fewer distributor partners as well as developing localized direct distribution approaches and brand support that are designed to be appropriate for the unique dynamics across the world. This work will take time, but we believe it will ultimately better position our business for long-term success. We have referenced throughout the year that we are consistently executing an international distributor rationalization program. This effort has primarily impacted our international professional business, where we have closed certain accounts that we believe were the source of diverted product, as well as our international DTC channel, where we have deprioritized certain international e-commerce customers that we believe do not build equity in our brand. As the year has progressed, we now believe it is appropriate to further realign our distributor network to fewer, stronger partners with clear accountabilities for market and brand development. While this activity will reduce net sales in the near term, we believe we're selecting the right partners who are excited about where we are taking the brand and will prioritize Olaplex, better support our transformation, and be more integrated into our own internal processes. Additionally, while we are redefining our international go-to-market strategy, we have felt it prudent to wait to align our new marketing efforts to coincide with deeper partnerships and our new brand vision in order to position ourselves to maximize the return on the investment. As such, we believe the slower investment in international sales and marketing in the near term has contributed to a moderation in demand. Second, from a sales and marketing perspective, we now believe it will take longer to experience a lift in the overall demand from our brand investments. Earlier this year, we kicked off the beginning of our marketing evolution, building a stronger go-to-market engine, which includes elevated content creation and a creator-led approach, focused investments on launches and our core products, deeper coordination with our stylists and retail partners, and more efficient ROI-driven media spend. We recently started to deploy this new strategy in the U.S. We have observed positive early indicators that our new marketing activations are resonating with professionals and consumers, with improvements in brand engagement and momentum in earned media value metrics. In this region, we continue to observe sell-through trends at our key accounts that are largely consistent on an absolute dollar basis with what we have seen throughout the year, demonstrating continued progress towards stabilization. However, coming into the year, we did anticipate that these investments would begin to yield growth across the entire business, but we have not yet experienced the overall lift in demand that we were expecting. We are encouraged by the sell-through trends of our new products launched during the third quarter, supporting our belief that powerful innovation, clear messaging, and stronger execution can drive better results. We plan to apply these learnings next year across our entire portfolio. But as mentioned, we now believe it will take longer for this new strategy to yield improved top-line performance across the assortment. Third, the beauty market remains healthy but also highly competitive. We previously believed that we would be able to pull back on promotional levels during the quarter, but now expect that the overall promotional environment will intensify during the holiday period and that we will need to participate effectively to win over the consumer. We continue to prioritize strategic promotions that maintain brand health and new customer acquisition, but we anticipate our promotional activity across geographies during Q4 will be higher than originally expected. At this stage in our transformation, we continue to believe marketing investment is essential for the long term as we engage with our community and broaden the knowledge of our competitive strength, making a clear statement that Olaplex delivers results and stands apart from other brands. Therefore, we will continue to make such investments in the fourth quarter in an effort to maximize our performance during the important holiday season and build for the future. I am proud of the progress we have made so far on our transformation journey as we continue to execute against our 3 key strategic initiatives for 2024. As a reminder, these include maximizing the impact of our sales, marketing and education investments to generate demand, strengthening our capabilities and culture to support our future, and developing the long-term roadmap and future vision for Olaplex. As it relates to our first initiative to maximize the impact of our sales, marketing, and education investments to drive demand. One of the most important priorities of our new sales and marketing strategy has been to return to our stylist roots and nurture our connection to the professional community. By showing up in salons and listening to stylists' feedback, elevating our presence at industry shows, and investing in additional educational tools, we aim to increase our visibility, demonstrate our commitment, and deepen our engagement with this key audience. As an industry leader, we also recognize the significant role we play in delivering innovation and new services that can help stylists make their business even more successful. To that end, among our new launches during the third quarter were 2 products for curly hair consumers, which were developed with the professional in mind. First, our Bond Shaper Curl Rebuilding Treatment, which is a 3-step professional curl treatment to repair, redefine, and lock in the shape of natural waves, curls, and coils, created with new patented technology. And second, our No. 10 Bond Shaper Curl Defining Gel, which is an at-home reparative curl styling gel that revives natural curl patterns. To support these launches, our education team in partnership with our professional ambassadors and members of the Olaplex Pro Collective influencer team educated at more than 50 national and regional trade events and hosted virtual training sessions to educate stylists and our distributor partners about our new technology. We are pleased with the early performance as early adopter salons across the globe are offering the Bond Shaper Curl Rebuilding Treatment to their clients, and our No. 10 Bond Shaper Curl Defining Gel ranked in the Top 3 within Ulta Beauty's Curl subcategory. Another important initiative for our marketing team during the third quarter was generating excitement and buzz around our consumer-focused new product launch, No. 5 Leave-In Conditioner. Supported by a holistic marketing plan with social media and experiential pop-up during New York Fashion Week and trade activations, powered with support from our influencers and professional ambassadors, the campaign generated a strong response with more than 2 million social media impressions, people testing the product and touting its efficacy. Exceeding initial forecasts, No. 5 Leave-In Conditioner became a Top 2 SKU on olaplex.com and a Top 5 SKU in Sephora's U.S. leave-in conditioner subcategory. As I mentioned earlier, we believe these successful launches are signs of a stronger innovation engine and improved marketing strategy, delivering enhanced creative partnerships and improved content creation. On our last earnings call, we highlighted a new marketing campaign launched during the second quarter, featuring the transformative benefits of a complete routine of Olaplex No. 4 Bond Maintenance Shampoo and No. 5 Bond Maintenance Conditioner. The campaign drove positive lifts in brand favorability above our peer benchmarks and Olaplex's brand engagement levels have risen year-to-date across our competitive set. Also, we believe our strategic participation in our customers' tentpole marketing events indicates strong consumer interest in our brand. For example, our performance during key customer promotions in July was very successful, with nearly 70% of customers during that period identifying as new Olaplex users and 5 of our SKUs featured in the event were the #1 ranked items in their respective categories. Lastly, according to data tracked by CreatorIQ, we regained our position as the #1 U.S. hair care brand in earned media value in the third quarter with momentum building throughout as we earned the #1 spot in both August and September. Moving to our second priority to strengthen our capabilities and culture to support our future, we recently strengthened our leadership team with several highly talented appointments who we believe will position Olaplex for future success. Over the last several months, we've added a new Chief Operating Officer and Chief Financial Officer, Catherine Dunleavy, who is here with me today, as well as the Chief Marketing Officer and a Senior Vice President of International, both of whom will be important leaders of our go-to-market strategies across the globe. With these new senior leaders in place, we are transforming how we work across the organization to strengthen our foundation. We have implemented and continue to deploy enhancements to a new integrated business planning approach that will give us a better global view of the business. Also, we launched a new strategic planning process, bringing leadership teams across the organization together more frequently, working in even greater detail to craft the strategic plans for the future. As it relates to our marketing processes, we are streamlining and integrating how the entire marketing organization engages with our agency partners, developing a more disciplined approach that we believe will yield better planning and a higher quality creative content engine. We also expect this to strengthen each new product introduction as our new approach allows us to present marketing messages that are better aligned with how consumers interact with brands. We have more to do, but we're deep in this work. Overall, we believe we are creating a corporate culture that is more collaborative and makes informed decisions based on data and business processes that can be applied across the globe. It's rewarding and exciting to see our teams come together to work towards achieving a common goal. Our business leaders and team members are energized, committed, and working hard to move our business forward in a positive way. Our third priority is developing the long-term roadmap and future vision for Olaplex. Supported by an in-depth brand perception study rooted in pro and consumer insights, we've developed a new and clear brand vision for Olaplex that will start to be visible to the pro and consumer in the coming year. At various stages of this work, we have been in active dialogue with our partners. The feedback from these conversations has been overwhelmingly positive, and there is strong support and excitement for this new phase of Olaplex. We also completely redesigned our new product pipeline, development, and go-to-market processes following the creation of our new innovation team to align with our new brand vision. We rolled out new commercialization strategies for our product launches with additional enhancements planned for the next year. Additionally, as we work to inflect to growth, we're continuing to finalize our strategic plan and expect to provide details in early 2025. In conclusion, this is a truly transformational period for Olaplex that requires thinking and acting for the long term. I remain confident in the brand's strong foundation that we can build upon to return to sustainable growth, truly differentiated science that will deliver superior results, a powerful R&D platform, a passionate community of stylists and consumers who love our products, and a unique global footprint and a talented team that is dedicated to position this brand for success. With that, I will now pass it over to Catherine, who has been a tremendous partner already, and the company and myself are incredibly fortunate to have her with us on this journey.

Thank you, Amanda, and good morning, everyone. I am pleased to speak with you today on my first earnings call as the Chief Operating Officer and Chief Financial Officer of Olaplex. Since I've not met or spoken with many of you since I joined the company, I thought it would be helpful to provide you with a short summary of my background and what I've been focused on during the first 12 weeks of my time at Olaplex. For the past 2 decades, I have held senior leadership roles at leading global consumer and media companies, including Away, Nike, Comcast, NBCUniversal, and GE. During this time, I led and executed strategic operational and financial initiatives that helped drive profitable growth. The decision to join Olaplex was an easy one. As an everyday user, I am a loyal fan of Olaplex and have admired how the company disrupted the hair care category with its patented technology. I also thrive in fast-paced environments and see significant opportunity to take part in driving the strategy and elevating the company's financial foundation to provide the framework to maximize the power of our brand. Olaplex is an innovative company and one of my strengths is managing core functions with discipline, execution, and rigor while also leaving room for flexibility to enable creativity. Having been in the role for almost 90 days, I am very enthusiastic about the potential ahead. Olaplex possesses a strong community of people, partners, stylists, and consumers, and I am proud to be in a position to help shape our future. Now let me share more details about our third quarter results and our updated outlook. Net sales for the third quarter declined 3.6% year-over-year to $119.1 million. Although our Q3 net sales performance improved sequentially from the second quarter, this result was below our expectation with the underperformance largely driven by our international business. For the quarter, we continue to observe sell-through trends at our key accounts in the U.S. that are largely consistent with what has been seen throughout the year on an absolute dollar basis. Outside the U.S., sell-in was negatively impacted by our ongoing efforts to realign our business, as well as a moderation in demand trends due to slower investment in international sales and marketing, as Amanda discussed earlier. We continue to believe that the months-on-hand of core inventory positions at our major U.S. accounts remain in healthy position. In regards to performance by channel, specialty retail sales were little changed, down 1.3% year-over-year to $42.6 million, with our performance reflective of increased competitive intensity on our core SKUs, partially offset by the addition of product launches. Professional channel net sales decreased 12.6% year-over-year to $42.2 million, driven by our international business, which decreased due to weaker demand and a focus on prioritizing international distributors and partners that build brand equity, which more than offset the slight growth in our North American professional business. Direct-to-consumer sales were up 6.8% year-over-year compared to the third quarter of 2023, reaching $34.3 million due to strong sell-in ahead of a successful major customer promotion in July and growth from olaplex.com, which increased double digits year-over-year. This growth was partially offset by a decline in international DTC. Moving on, adjusted gross profit margin was 70.8%, up 110 basis points from 69.7% in the third quarter of 2023. This expansion was primarily driven by favorability due to lapping higher levels of inventory obsolescence reserves from last year. This increase was partially offset by contraction primarily due to an unfavorable product mix driven by the sell-in of holiday kits, which are highly profitable but lower margin relative to the rest of our assortment, as well as slight deleverage on warehouse and distribution costs. Adjusted SG&A increased to $40.4 million compared to $33.7 million in the third quarter of 2023, driven primarily by an increase in sales and marketing expense. During the third quarter of 2024, we spent approximately $16 million in non-payroll-related advertising and marketing expenses compared to approximately the same amount in the second quarter of 2024, bringing the year-to-date total to approximately $43 million. Adjusted EBITDA declined 13.4% to $44.6 million versus $51.5 million in the third quarter of 2023. Adjusted EBITDA margin was 37.5% compared to 41.7% a year ago. Adjusted net income decreased to $28.7 million or $0.04 per diluted share in the third quarter of 2024 from $33.4 million or $0.05 per diluted share in the third quarter of 2023. Let me now turn to our balance sheet. Inventory at the end of the third quarter of 2024 was $85.9 million, a decrease of $14.3 million from $100.2 million at the end of the second quarter of 2024. The sequential decrease was primarily the result of the sell-in of our holiday kits and new products during the third quarter. Moving to cash flow. During the first 9 months of 2024, we generated $93.4 million of cash from operations. We anticipate that 2024 will be another year of healthy cash flow generation as we continue to drive an asset-light model and high profitability. We ended the third quarter with $538.8 million in cash and cash equivalents, an increase of $30.9 million from the end of the second quarter of 2024. This cash is generating interest income at an annual rate of about 5%. Long-term debt, net of current position of deferred fees, was $645 million. Now turning to our financial outlook. As disclosed in the press release issued this morning, we are revising our guidance for fiscal year 2024. Starting with the top line, for fiscal year 2024, we now expect net sales in the range of $405 million to $415 million, down from the previous range of $435 million to $463 million. As Amanda mentioned earlier in the call, the revision can be broken down into 3 primary buckets. First, we anticipate weaker performance from our international business. As Amanda discussed earlier, we have performed a deeper assessment of our international operations and discovered that the issues are more complex than we originally thought. We are now redefining our international go-to-market strategy. Second, while we believe we continue to observe sell-through trends in our U.S. key accounts that are largely consistent on an absolute dollar basis with what we have seen throughout the year and our key accounts remain in healthy core inventory positions, we are not yet experiencing the anticipated lift in demand from the deployment of new sales and marketing investments. Third, we anticipate increased promotional activity during the holiday period across geographies relative to our previous assumptions. In the fourth quarter, from the perspective of year-over-year net sales growth rates in order of magnitude, we expect our professional channel to be the most pressured, followed by our direct-to-consumer and specialty retail. We now anticipate adjusted gross margin in the range of 70.9% to 71.6% compared to our initial assumption in the range of 72.5% to 73.1%. We expect that the primary driver of this decrease will be additional promotional activity during the fourth quarter and greater deleverage from lower sales volumes on our fixed warehousing costs. Furthermore, we now expect full year 2024 adjusted SG&A expenses in the range of $167 million to $170 million compared to our previous expectation of $172 million to $179 million. Specifically, we expect full year non-payroll-related advertising and marketing expenses in the range of $62 million to $65 million compared to our previous assumption of $66 million to $70 million as we continue to invest through our transformation. Given the lower net sales forecast against our expectations for continued investment in operating expenses, we now expect more adjusted EBITDA deleverage than our prior assumption. For 2024, we expect adjusted EBITDA in the range of $121 million to $127 million or a margin of 29.9% to 30.6%. This compares to our previous range of $143 million to $159 million or a margin of 32.8% to 34.3%. We expect net interest expense to be $34 million and an adjusted effective tax rate of approximately 19.5% for the year. In conclusion, Olaplex has significant competitive strengths that we believe we can build upon to deliver consistent and sustained rates of growth. We believe that we have identified key issues that have contributed to recent challenges as well as the appropriate actions to correct them. Fundamentally, we are working to build a better Olaplex, strengthening operating discipline, improving our business and financial processes, and maintaining strong cash generation. I look forward to sharing our progress along the way. I will now pass it over to Amanda for some closing remarks.

Thank you, Catherine. Olaplex remains an incredibly powerful brand, a leader in the attractive high-growth prestige hair care category, and an important strategic partner for our customers who are supportive of and excited about the direction we are taking the business. The trajectory of our transformation may have shifted, but we are progressing and making the tough decisions that we believe are necessary to create a healthy business set up for long-term success. Ultimately, we believe we are still in the early stages of the history of this company and that Olaplex can perform at a higher level. I remain optimistic as ever about the future. This concludes our prepared remarks. We will now turn the call back over to the operator for questions.

Our first question comes from Jonna Kim with TD Cowen.

Just curious about the overall consumer health, what you're seeing at the salon and as well as your DTC and on the retail side overall? You've mentioned higher promotions. Do you think it's more because the consumers are cautious? I would love any color there. And I would love to dig a little bit deeper into what you saw in terms of your international business. What are your key assessments there? And how you're thinking about the opportunity going forward and what it could be as a percentage of the mix over time?

Thank you for the question, and thank you all for being here today. I'll address the first part regarding the consumer, which includes both the salon channel and the broader retail environment. In the salon channel, we've consistently noted a trend of less frequent visits over time, and that remains unchanged. This reflects how people are approaching their salon visits. Our focus is to support stylists, particularly with initiatives like the Bond Shaper Curl Rebonding Treatment, which aims to provide more reasons for clients to return to the salon. Regarding consumer behavior overall, we made a deliberate choice this quarter to adapt to the expected more promotional landscape in the marketplace. This involves implementing standard promotions during key moments while also enhancing support for our retail partners across both the professional and consumer sides. We are closely monitoring these developments, especially as we approach the crucial holiday season. On the international front, I've recently devoted significant time to this area. The enthusiasm for our brand is exceptionally strong. One of the reasons I joined this brand almost a year ago was its unique global appeal. I've had the opportunity to engage directly with consumers, retail partners, and distributors worldwide, and it’s clear that our products connect well across different markets. To fully capitalize on this opportunity, we need to strengthen our relationships with distributor partners and refine our marketing strategies, ensuring they are effectively adapted for international markets. This means forming fewer but more impactful partnerships, which motivated us to bring on someone to lead that segment of our business. This way, we can become better partners and enhance our brand's global support.

The next question comes from Ashley Helgans with Jefferies.

So I know you kind of talked about not yet seeing the marketing efforts provide any sort of lift. Just any more color on when you expect to start to see a lift? And any changes you think you need to make to the strategy?

Thank you for the question. I want to clarify what we are observing with our new launches and the overall portfolio, as well as distinguish between the two. In marketing and sales education, I strongly believe that our brand, along with innovation, will drive this business moving forward. We have dedicated a lot of time to refining our brand vision and establishing the future product pipeline. This fall, we had the opportunity to launch two new products and begin developing our marketing capabilities. We've witnessed many positive developments from that. One highlight from the call was our No. 5 Leave-In Conditioner, which marks the first time this brand has implemented a comprehensive approach, alongside a strong partnership with Sephora. This collaboration allowed us to launch an exclusive SKU and engage in effective experiential and influencer marketing, using the right assets and messaging. We have emphasized that it’s not just about how much we spend, but rather how we allocate those resources. That launch is exceeding our expectations, which is encouraging. Moving forward, it's essential that we replicate this success across the entire portfolio, which will be Phase 2 of our strategy. As we plan ahead, our new CMO, Katie Gohman, who joined us in July, is instrumental in elevating our efforts. While these initiatives are still a work in progress, I feel confident that we are on the right path with the brand vision I mentioned, and I'm eager to share more as we see developments in our product pipeline. We will continue to improve in this area.

The next question comes from Susan Anderson with Canaccord.

Alec Legg on for Susan. On the fourth quarter, sales really do take a big step down with the updated guidance. How much of that is from the international realignment and expectations for how the U.S. will perform?

Thanks for the question. Yes, international is the primary driver of what is driving our fourth quarter guidance down. While all three factors are very important, it really is mainly the international and the impacts of the other two on international.

And then just a follow-up. I guess, with international being reset and realigned, what is the expectation for sales to start stabilizing? How long do you think it will take to recreate the brand that you're trying to work with the distributors over in Europe?

Well, we're still working through our plans for 2025 and beyond, and we're not really providing guidance today. But I can tell you a couple of things. One, as Amanda and I mentioned earlier, in our home market, on a week-in and week-out basis, our selling is relatively consistent. We started in the U.S. and put in place our actions, and that is starting to work. We just have to take that playbook and apply it internationally. As Amanda described, she spent a lot of time market by market, creating a very detailed strategic plan for how we're going to go to market. So this is a transformation. It will take some time, but we're confident we've identified the right actions to drive future success. I will just add that we are very fortunate to have a strong balance sheet and healthy cash flow that allows us to make tough decisions and continue to invest for long-term profitability.

The next question comes from Korinne Wolfmeyer with Piper Sandler.

I'd like to touch a little bit on the cost structure and how we should be thinking about that for Q4 and heading into 2025. I believe the SG&A guidance implies still a meaningful step-up in Q4, even though you're pulling back on some of the marketing and ad spend. So can you touch on what's driving that number? And then as we head into 2025, how should we be thinking about your marketing and advertising budget relative to the rest of the SG&A expense?

Thanks for the question. As Catherine alluded to, we think it's important to continue to invest behind this brand in the fourth quarter. So, we'll continue to make sure that we're building for the future. We aren't providing guidance for 2025 at this time, but we certainly are learning a lot from our marketing efforts that will help drive our planning for next year. We're spending a lot of time on this international business, so we really understand what it's going to take to set that up for success, as well as really spending a lot of time on the road now with the future brand vision, and we're really working with our partners to plan for next year.

The next question comes from Andrea Teixeira with J.P. Morgan.

This is Shovana Chowdhury on for Andrea. Can you give us a little bit more insight on the international competitive landscape and your confidence level in bringing about fruitful results by realigning the distribution network and updating the marketing strategy outside the U.S.? Additionally, I understand that the guidance was lower mainly due to the international space. But in quarter 3, the U.S. market top line also declined by 3.3%. So if you could just tell us a little bit more about that, as I understand it has to do with not seeing the lift in demand, but your new launches were doing pretty well as per the commentary.

I can take that first one as we think about the international competitive landscape. I think what you see is similar to a lot of different brands and different categories in beauty. You'll see some global players who will be very similar across the globe. Then you obviously see some more local players. When I was speaking earlier about really getting on the ground, understanding the dynamics, understanding the different channels, being in salons, being in the stores, watching what's happening online, really understanding what the consumer is seeing and what they're looking for in their respective markets. What I would say is it's more similar than it is different. There are certainly, like anything else, some global nuances to be mindful of. We do have a business that has incredible reach, and I think, again, there’s a lot of appeal for this brand. The fundamental nature of hair health, of hair repair, is something that is very consistent. How you might approach the market matters. This is actually a big advantage of having a distributor network: they are on the ground, and they do really understand the nuances of their individual markets. This is about a closer partnership having much more involvement in how we're going to market in these places and making sure that we're both leveraging our expertise. That is how we're thinking about that part of the business.

Then I'll try to address your Q3 question. In Q3, our professional sales were down 12.6%, and retail sales were only down about 1.3%, while our DTC was up. I think your question was specifically in the retail channel, what were we seeing there? It was down 1.3%. We did see some timing with some of our major customers with the sell-in of holiday kits, and that might account for some of the variance that you're seeing.

The next question comes from Lauren Lieberman with Barclays.

Amanda, I missed the beginning of the call, so apologies if you've kind of directly answered this already. But I know you talked about it's taking longer to see the lift in new product launches and the new campaigns, but also spoke about the success of the Leave-In Conditioner. So I just wanted to see if you could talk a little bit about almost like a postmortem on what hasn't worked so far compared to what has gone well with that Leave-In Conditioner product. I know you talked about the 360 on the Leave-In, so maybe it's more about what hasn't been working on the earlier pieces?

We've faced some challenges, and as a result, we've conducted thorough internal discussions. We have a new Chief Marketing Officer who brings an impressive background and has been actively engaging with her team on these issues, which we prioritize moving forward. The brand is resonating, and it's crucial to mention that as we enhance our marketing efforts, both professionals and consumers are responding positively. This understanding is essential as we develop our brand vision for the future, and we can see clear signs of success. One key point I highlighted upon joining was the importance of creator-led marketing, which we can effectively implement. The Leave-In Conditioner, in particular, marked our first experiential event, a pop-up during Fashion Week in New York, and I had the pleasure of attending. The turnout was impressive, with long lines, and what was exciting was the public's eagerness to engage with the brand and learn about our science. We are witnessing a strong interest in the effectiveness of our product and a desire to understand how it works, which we are increasingly able to communicate. We have a solid technical foundation that we need to explain better, whether it's to stylists, consumers, or through social media and influencers. Utilizing our technology and conveying it in a way that resonates with a wider audience is a promising development. However, I believe we can always improve, and that's something Catie and I are committed to as we refine our processes and marketing strategies.

The last question will be from Olivia Tong with Raymond James.

With respect to international, do you have a sense of how much has to come out of it and how long it will take? And what the business looks like after you have rightsized it? And more importantly, why do you think now is the right time to make the international changes you're planning? Obviously, you've got quite a bit on your to-do list already. So where is the incremental manpower coming from to drive more of a cleanup in international markets right now?

Yes, we have the good fortune of being able to make the hard choices and ensure we're building for the future. I really believe that we've talked about the power of marketing, sales, education, and innovation; these are the things that will drive this business forward. We believe we need to realign that international business to take advantage of that. However, there is a lot of enthusiasm for this brand, so we're going to do this in the right way. At this point, I'm not going to provide a timeline, but we'll do the same thing that we've done with everything else in this business. We'll operate with a sense of urgency that’s important in a transformation, but also take the time to ensure we do the right analysis, select the right partners, and execute this properly. We'll certainly keep people posted as we work through this.

Thank you. At this time, I would like to turn the floor back to Amanda Baldwin for closing remarks.

Well, I'll just say thank you for everyone who joined this morning, and please do reach out with any further questions.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.