• Net Sales: $98.9 million, a decline of 13.1% year-over-year.

• Adjusted Gross Profit Margin: Increased to 74.3%, up 170 basis points from 72.6% in Q1 2023.

• Adjusted SG&A: Grew 13.2% to $37.2 million from $32.9 million in Q1 2023.

• Adjusted EBITDA: Declined 29.1% to $35.5 million from $50 million in Q1 2023.

• Adjusted Net Income: Decreased to $20.6 million or $0.03 per diluted share from $31.4 million or $0.05 per diluted share in Q1 2023.

• Cash Flow from Operations: Generated $43.7 million during Q1 2024.

• Cash and Cash Equivalents: Ended Q1 with $507.5 million, up $41.1 million from end of 2023.

• Inventory: $94.6 million at the end of Q1, down $1.3 million from Q4 2023.

• Long-term Debt: Net of current portion and deferred fees was $647.7 million.

• 2024 Financial Outlook: Net sales expected between $435 million and $463 million; Adjusted EBITDA between $143 million and $159 million; Adjusted Net Income between $87 million and $100 million.

• Warning! GuruFocus has detected 4 Warning Sign with OLPX.

Release Date: May 02, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Olaplex Holdings Inc (NASDAQ:OLPX) reported net sales slightly above the high end of their guidance range for Q1 2024, indicating effective sales strategies and market demand.

• The company has maintained strong brand health metrics, ranking #1 or #2 in the top 18 most important premium hair care equities, demonstrating continued consumer and stylist confidence.

• Olaplex Holdings Inc (NASDAQ:OLPX) is making progress on its business transformation plan, focusing on sales, marketing, and education investments to generate demand and strengthen capabilities.

• The company has a robust innovation strategy, with a dedicated team focused on accelerating new product development and enhancing commercialization strategies for future growth.

• Olaplex Holdings Inc (NASDAQ:OLPX) continues to generate strong cash flow, ending Q1 2024 with $507.5 million in cash and cash equivalents, up from the end of 2023.

Negative Points

• Net sales for Q1 2024 declined 13.1% year-over-year, reflecting challenges in market conditions and strategic distribution adjustments.

• The professional channel sales declined by 19.9% compared to the previous year, partly due to distributor rationalization efforts which primarily affect the European market.

• The direct-to-consumer channel decreased by 15.7%, impacted by the timing and phasing of shipments despite growth from olaplex.com.

• International business declined by 24.3% year-over-year, influenced by a more difficult prior year comparator and the impacts of distributor rationalization.

• Adjusted EBITDA declined by 29.1% to $35.5 million versus $50 million in Q1 2023, with a decrease in adjusted net income as well.

Q & A Highlights

Q: Just curious on professional channel, what you've been seeing lately on the salon -- help with the salons and the stylist and also just the overall beauty category, if you've seen anything noteworthy, any slowdown in general? And then just another question on gross margin. You've seen nice expansion this quarter. Any reason why we shouldn't expect more expansion throughout the year.A: Amanda G. Baldwin, CEO of Olaplex Holdings, Inc., responded that there haven't been significant changes in consumer trends within the professional and beauty sectors since the last call. The company continues to focus on the importance of professional stylists in their strategy. Eric Tiziani, CFO, added that the gross margin expansion seen in Q1 is expected to continue similarly throughout the year, supported by cost-saving initiatives and lower levels of obsolescence reserves.

Q: Thank you Eric, for all the help and wish you the best of luck. I have one question for Amanda on consumption and a follow-up on international distributors. First on consumption, Amanda, how are the trends as you exit the quarter, in particular in light of what we have heard from your peers, from one of your customers? And second, on the international market commentary, I appreciate that you were reducing and streamlining, but international was a big decline. When should we expect you to lap that? And how far we in the innings of reorganizing and we're thinking about how to go to market internationally.A: Amanda G. Baldwin noted that the company is focusing on building strategies to capture demand differently across global markets. She mentioned that the decline in international sales was partly due to lapping harder comps from the previous year. Baldwin emphasized the strong future for Olaplex in international markets.

Q: Thank you, Eric, for all the help through the years. So it's nice to see that it looks like sales to retailers have stabilized. First, could you talk about if there was anything one-off or do you think you've reached a steady state on the retail channel? And then also as you limit the distribution and work towards controlling diversion, can you give us any color on where the diversion is coming from? I would imagine that PRO is the main culprit, but I would love to have some color there.A: Eric Tiziani explained that the company is addressing diverted products in the marketplace by rationalizing distribution where necessary, using track and trace technology to identify sources, primarily in the professional channel. He confirmed that the trend in specialty retail has improved and is expected to continue improving with the company's ongoing initiatives.

Q: And Eric, best of luck in your next endeavors. First, I'd like to ask a little bit on if you could quantify that kind of like pull forward of sales in the specialty retail channel and how much that may have pulled out of Q2? And then on the marketing spend, if I did the math -- I mean you're trending at about, I think, 15% of sales on spend on marketing this year. That is significantly lower than what we still see with a lot of other beauty peers. So what gives you confidence that, that's kind of like the right rate for Olaplex, and then as we think over the longer term, is that a proper sustainable rate going forward?A: Eric Tiziani did not disclose specific numbers regarding the pull forward of sales but confirmed it was factored into Q1 results. Amanda Baldwin addressed the marketing spend, stating the company believes the current level is appropriate for this year and that they are focusing on planning and executing marketing strategies effectively.

Q: You talked a bit about some new product launches coming out this year to help drive sales. Just wondering if you could give some color on kind of what these products will be or what category they'll be in? And then also, when we think about the rollout, should we expect a full retail door launch or certain retailers? I guess, just trying to get an idea of the magnitude there.A: Amanda G. Baldwin mentioned that multiple innovative products are planned for launch, but did not provide specific details for competitive reasons. She emphasized that innovation is crucial for the brand's growth.

Q: And just a follow-up to Lauren's question. At some point in time, the declines were attributed to some sort of misinformation in social media. And your assessment suggests that, that misinformation actually wasn't the factor. So if it is not misinformation and if it is not the brand perception in the consumer side, what in the business model didn't work, you feel? Is it that you were asking too much to the stylist in terms of pushing and defend the brand what exactly then? Because it's not misinformation, the brand equity is okay. So what happened then?A: Amanda G. Baldwin clarified that while misinformation did impact the business at a certain point, it is not the core issue currently. She highlighted the need for continuous engagement with consumers through marketing and new product launches to maintain cultural relevance and top-of-mind awareness in a competitive beauty industry.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.