Olaplex Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to Olaplex Holdings, Inc. 2nd Quarter 2023 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

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.

Speaker 1

Thank you and good morning. Joining me today are Julie Wong, President and Chief Executive Officer and Eric Taziani, 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.opalx.com.

Speaker 1

The forward looking statements on this call 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 atir.olplex.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.

Speaker 1

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 Zhu E. Wang.

Speaker 2

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 100 And adjusted EBITDA was $36,700,000 or a margin of 33.6%. With weaker than expected results in the Q2, 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 4 and misinformation related to our brand. Despite these headwinds, we Let me take a step back and walk through the perspective of what drove the revision to our full year outlook.

Speaker 2

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 hair care 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 investments 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, around the sign and emotional connection 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 would impact the business.

Speaker 2

We anticipated that trends would stabilize In the Q2, 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 Q1 earnings call in May through June. While our loyal customers remain highly engaged with Olaplex, we believe a continuation of negative 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.

Speaker 2

Several key assumptions have changed in this new outlook. 1st, demand slowed as trends weakened In our professional and specialty retail channel, due to slower sellout and some customers rightsizing that inventory position. 2nd, while we are beginning to see some We'll begin to deliver stabilization on an absolute basis rather than growth during the second half of the year. And 3rd, given our updated view on our trend line, We believe it is prudent to lower our expectation for consumer demand associated with new product introductions

Speaker 3

in the call.

Speaker 2

We believe we made progress towards achieving stabilization. Based on data from a 3rd 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, alloplex.com has increased traffic and improved conversion after the campaign launch. And 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.

Speaker 2

And as we balance sell in activities with demand, we believe the month on hand inventory positions at our major We have worked to normalize inventory levels with these partners in response to slower than originally planned sales and decisions from this partner to lower overall month on hand levels than previously carried. To put this in context, in the first half of twenty twenty three, net sales All sell in declined 44% overall, while sell out at Key accounts was down approximately 26%. Some of this difference can be attributed to the lapping of previously communicated prior year one offs, namely our 1 leader pipeline launch, 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 trends through brand building and education activations that we believe are the strongest levers to engage loyal users and bring new and less customers to all of us.

Speaker 2

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 expectations for marketing, inclusive of sampling and certain sales and marketing payroll to increase to a range of $80,000,000 to $85,000,000 in 2023 compared to our previous expectation of $70,000,000 and up from $40,000,000 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 plan for the year, we continue to make progress against our 4 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.

Speaker 2

Let me now walk you through the progress we made on this initiative during the Q2. Beginning with sales and marketing, year to date, we invested approximately $40,000,000 of the planned $80,000,000 to $85,000,000 investments for the year. In May, we kicked off an integrated full funnel creative campaign titled Strength Starts Inside, featuring hate 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 built strength from the inside with our patented this amino technology, as well as strengthening emotional connections with our community of pros and customers who aspire to bring out their own And in June, we generated excitement of 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 Gorilla Street sampling teams near local Sephora and Ulta Beauty doors in New York, Los Angeles and Chicago.

Speaker 2

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 Q4 of last We deployed a pilot of a third party field sales team trained by otoplax and following positive results Expanded the program to 400 Sephora and Ulta Beauty Doors during the Q1. This program has demonstrated the impact we can have in driving in person education with consumers and beauty advisors.

Speaker 2

An internal retail field team is not only more cost efficient of training on the Olaplex brand. Our 3rd priority is to reassert 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 Stylus. To that end, the team is implementing pro audience driven primarily by participating in high visibility distributor led events, silent appreciation days and in store activities. In addition, We continue to increase in person and virtual sales contacts and trainings 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 And are advancing our key opinion leader program by adding new salons and cultivating relationships with existing partner salons.

Speaker 2

For specialty retail, we are continuing to partner with our key New visual merchandising reflective of our new brand campaign and made progress on international expansion. Our 4th 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, who will help guide us on ways to develop educational content that underscores the safety and scientific capabilities of our products. We also continue to actively defend our brand against allegations that claim In July, the court granted Olaplex's motion to sever and dismiss The claims.

Speaker 2

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.

Speaker 2

JP 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. JP will be valuable addition 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 truly differentiated science with our patented bis amino technology.

Speaker 2

We believe we can reach new customers and reclaim users as we invest in our marketing model and develop within the 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 2nd quarter results in more detail and provide additional information on our revised outlook for 2023. Eric?

Speaker 4

Thank you, Julie, and good morning, everyone. Net sales in the 2nd quarter declined 48.2% to 109,200,000 This was below our expectation of modest sequential improvement in absolute dollars from $113,800,000 in the Q1 as our professional and specialty retail channels experienced slower demand and some customers further rightsize their inventory positions in response to current trends. We also lapped 2 challenging comparators from Q2 2022. First, we lapped an approximately $22,000,000 net sales impact in the Q2 of 2022 from the introduction of 1 leader size offerings in the North America professional channel. 2nd, in the Q2 of last year, we experienced Some pull forward in demand of approximately $10,000,000 as some professional customers chose to buy ahead of our announced price increase, which took effect on July 1 last year.

Speaker 4

By channel, the professional channel sales declined 61.2 percent to $40,900,000 versus a 32.7% increase last year. Our direct to consumer channel sales were down 6.4 percent to $38,500,000 compared to growth of 19.3 percent a year ago. And specialty retail sales decreased 53.7% to $29,800,000 following an increase of 68.5% in the prior year period. Moving down the P and L. Adjusted gross profit margin was 72.7%, down 250 basis points from 75.2% in the Q2 of 2022.

Speaker 4

Approximately 320 basis points is related to higher inventory obsolescence reserve, 230 basis points 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 As the overall mix shift to direct to consumer drove plus 3.50 basis points as well as the price increase we took from July 1, 2022, which contributed 100 basis points of favorability. Adjusted SG and A grew 73.4 percent to 42,200,000 from $24,400,000 in Q2 2022. The $17,800,000 increase And adjusted SG and A from prior year is primarily the result of a $14,100,000 increase in sales and marketing expense, including the upper funnel marketing campaign that launched during the Q2, as well as an increase in payroll attributable to workforce expansion and other related expenses. Adjusted SG and A excludes $3,500,000 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.

Speaker 4

Through the first half of twenty twenty three, we've spent 40,000,000 in sales and marketing against our updated $80,000,000 to $85,000,000 full year investment. Adjusted EBITDA declined 72.4 percent to $36,700,000 versus $133,100,000 in the Q2 of 2022. Adjusted EBITDA margin was 33.6% compared to 63.1 percent a year ago. Adjusted net income decreased 78.5 percent year over year to $21,200,000 or $0.03 per diluted share from $98,800,000 or $0.14 per diluted share in the 2022 Q2. Turning to our balance sheet.

Speaker 4

Inventory at the end of the Q1 was $128,500,000 down from $132,000,000 at the end of the Q1. We continued 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 prepared for product launches this year. Turning to cash flow. During the 1st 6 months of 2023, we generated $71,100,000 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.

Speaker 4

We ended the quarter with $378,400,000 in cash which is generating interest income at around 5%. Long term debt net of current portion and deferred fees was $651,700,000 Now turning to our financial outlook. As Joey 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 445,000,000 to $465,000,000 down from the previous range of $563,000,000 to $634,000,000 At the midpoint of both ranges, this represents a reduction of approximately $144,000,000 which can be broken down into 3 primary buckets.

Speaker 4

1st, the combination of weaker than expected results in the 2nd quarter and our assumption of lower baseline demand in the second half of the year amounts to approximately 60,000,000 2nd, we are no longer assuming baseline demand improvement in the second half of the year and now believe the investments we're making We'll first deliver stabilization of baseline sales on an absolute dollar run rate basis. The removal of this lift amounts to approximately $50,000,000 3rd, While we still expect to benefit from the impact of new product introductions and new distribution gains, we are lowering these assumptions With this new outlook, second half twenty twenty three net sales at the midpoint are now expected to be 232,000,000 versus $223,000,000 in the first half of twenty twenty three. 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 twenty twenty three. Given that our holiday kits are sold to professional and specialty retail customers, primarily in the Q3 ahead of the winter holidays, We expect net sales in the Q3 to be higher than the Q4 of 2023 on an absolute basis. For the same reason, we anticipate sequential improvement in sales on an absolute dollar basis in the 3rd quarter versus the Q2 of 2023 for both the professional and specialty retail channels.

Speaker 4

Conversely, we expect our direct to consumer channel to decline sequentially on an absolute dollar sales basis In the Q3 due to timing as we shift inventory in Q2 ahead of a major customer promotion in July. In the Q3, 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 higher selling of holiday kits. We now anticipate 500 to 600 basis points decline in gross margin for the year compared to our initial assumption of 300 basis points 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.

Speaker 4

This more than offsets the positive impacts of cost savings and price increases implemented in the second half of twenty twenty two. 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-seventy percent 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 Joey previously discussed. We now expect More adjusted EBITDA margin deleverage than our prior assumption. For 2023, We expect adjusted EBITDA in the range of $161,000,000 to $176,000,000 or margin of 36.2 percent to 37.8 percent.

Speaker 4

This compares to our previous range of $261,000,000 to $322,000,000 or a margin of 46.4 percent to 50.8 percent. We continue to expect interest expense to be $40,000,000 and 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 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.

Speaker 4

And 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.

Operator

Operator? Thank you. Our first question is from Susan Anderson with Canaccord Genuity. Please proceed.

Speaker 5

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? And then also, I believe there should be some headwinds from the sell ins of his 1 liter bottles, which extends the need for consumers to replenish.

Speaker 5

Just any details there? Thank you.

Speaker 4

Yes. Good morning, everyone. Eric Tuziani here. I'll take that. So that's right.

Speaker 4

We disclosed on the call that our net sales decline For the first half of the year was 44% against a minus 26% consumption decline at our key accounts. And that difference is partly explained by the one offs from the prior year in sell ins. So The 1 liter launch that you just mentioned in the first half of last year, our quota pipeline Shipments from Q1 of the prior year and some impact from pricing pull forward in Q2 of last All of which we previously disclosed. And while there's some ins and outs, the remainder of Difference between net sales decline and the consumption decline can primarily be explained by what we've seen as further customer Inventory rightsizing. And as Judy 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.

Speaker 4

This is, of course, dynamic. You also asked of 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.

Speaker 5

Thanks. 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?

Speaker 5

Or are you also spending fairly equally? Or just how to think about spending on retention?

Speaker 2

Thanks for the question. This is Julie, and I will take that. So we have always said, right, the Category that we have created is now more attractive. And therefore, in order for us to kind of build on that awareness for the category, We really need to step up on our investment in upper funnel as well as to support our pro community. So we will continue to test, Learn and optimize on our initiatives and it is an integrated full funnel investment approach.

Speaker 2

So we will look at the mix and as things work, we will sort of figure out what is best to kind of increase whether it's in consideration,

Speaker 5

Thanks. I'll hop back in.

Speaker 2

Thank you.

Operator

Our next question is from Andrea

Speaker 6

On the exit rate of the consumption number, you quoted the consumption decline of 26%. I understand this is the first half against first half of last year. So I was hoping to see if there is any improvement there in terms of consumption or conversely If things got worse as you progress the quarter. And then related to your investments, especially in Ulta, in the salons and increased awareness of the brand. How can you comment a bit on at this point, I think you've been through about 8 months of the campaign where you get a sample your samples 1, number 3, after service.

Speaker 6

Like wondering if you can Give us an idea how that converted? And lastly, on the shelf space, can you talk about I understand that part of the decline in guide was expectations from a modest shelf space growth. So I was wondering if you can comment on how are you feeling about the floor at The back wall, if there is anything we should be aware of in terms of negotiating with the quarter next year? Thank you.

Speaker 2

Well, thanks, Andrea, for the question. It's a 3 parter. So what I'm going to have is Eric to answer on the consumption first and then I'll Take the investment in the Salon and Pro and the shelf space question. So, Eric?

Speaker 7

Great. Thank you.

Speaker 4

Thanks.

Speaker 7

Thank you.

Speaker 4

Thanks, Chewy. Good morning, Andrea. So on the exit rate, you're right, the number that 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 Q2, so it was moderately worse in the Q2 than the Q1. And what you see in our outlook and our updated forecast is we've taken that 2nd quarter absolute dollar Sales run rate and use that to project forward a new baseline level of demand after the back half of the year.

Speaker 4

Yes, that's a key assumption change. We're now focused on using the investments we put into the business to Stabilize that sales trend in the back half of the year so that we can get into a point where we can rebound to growth in the future. So that's just a comment on the exit rate and I'll turn it back over to Julie.

Speaker 2

Thanks, Eric. And Andrew, to answer your question on the investment in Salon Professional, the sampling, as you know, we have always stayed true to the course, And this is why you are seeing us going into the field sales team with our own team members, It's not only more cost efficient, but we can also really communicate our message much more directly and also train Our own people in stores. We are seeing positive impact. That's why we are moving into this direction. But It is still early for us to kind of say where everything is tracking and we are working towards, as you have heard us say, On the back half towards stabilizing the business, so that we can look at continue as we go into The new year with a better foundation and a more resilient oleplex, as we have mentioned.

Speaker 2

Both the salon channel and which is the pro channel and our retail channel are very supportive of our integrated full funnel approach. So you have seen that in conjunction when we do all of this out of home activation, there is also people in store that help support Your other question regarding shelf space, we obviously cannot speak on behalf of The retailers, but I can tell you we have top to top meetings where we continue to be able to show them the equities of Otoplax. We are still per numerator the brand that drives the most new customers into the category. We are in the top five ranking in terms of our hair care prestige brand in all the channels that we are in and we continue to score Hi. On all the equities that is a brand that consumers trust that we are adjust this damage and repair hair, That we are also a brand that is represented by science and technology.

Speaker 2

When you have all that kind of equities and when you have meetings top These are considerations that they take. And my last my point that about driving new customers into the space, into the category, That's a powerful kind of driver for both the retailers and our professionals because awareness It's primarily what they need from a brand so that traffic into doors will materialize into conversion.

Speaker 7

Thank you. I'll pass it on.

Operator

Our next question is from Bill Chappell with Truist Securities. Please proceed.

Speaker 3

Thanks. Good morning. 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, I mean, when they will pop back?

Speaker 3

And as we look to Q1 of 2024, should some of these things go away based on kind of your sales forecast To feel like that some of the non cash or short term type stuff should go away pretty quickly. So any color there?

Speaker 4

Yes. Hi, Bill. I'll take that one. We continue to believe that we can return to a normalized Adjusted gross margin in the range of the mid-seventy percent. 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, Depressed in 2023 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.

Speaker 4

That includes the impacts of Providing for inventory obsolescence risk as we have in the first half of the year. So when you normalize, when we get Through stabilization in the second half of the year and our return to growth, we see those tailwinds returning and are confident in an adjusted gross margin range in that mid-70s, which of course then gives us the ability to continue investing back into the business.

Speaker 3

Got it. Just to clarify, so gross margins will, I guess, Trough next quarter and then maybe improve sequentially as you move to the Q4?

Speaker 4

So as we mentioned in our guidance 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. And as sales normalize and as we get through 2023, we believe we'll have less of these temporary Headwinds and return into that adjusted gross margin level of the mid-70s, yes.

Speaker 3

And then just a follow-up to the question we're getting What gives you confidence that this is a good number in terms of sales for this year? I'm trying to understand kind of On consumer takeaway, where that fell this past quarter versus your 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 and what you saw Intra quarter and even as we went into July that kind of gives you confidence in the updated guidance.

Speaker 4

Yes, Bill, I'll take that one. We thought it was important to share quite specifically the changes And our key assumptions from our prior guidance to this guidance, which as we mentioned were Number 1, the change in the assumption on baseline level of demand and this new approach to forecast In 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 very confident that Continues to be the right thing to do for the long term trajectory of the business. And then the third change in the assumptions that we cited were around the impacts of our new innovation and new distribution in 2023, which we continue to be very proud of And believe we're going to be drivers of growth into the future. It's really a call down that is more related to the overall headwinds that the brand is facing.

Speaker 4

So we believe taking this run rate from the Q2 into the second half of the year, assuming stabilization With the green shoots that Dewey mentioned on the call about where we see our investments working, particularly oldplex.com, which is where we're driving a lot of traffic from our marketing investments, we believe could be a leading indicator for that inflection point for the business.

Speaker 3

And just to clarify how July was shaping up Any improvement there?

Speaker 4

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.

Speaker 3

Okay, great. Thank you.

Operator

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

Speaker 8

Hi, good morning, everyone. As you think about the hair care category, any updates on the performance of the hair care category and how it's done how it's

Speaker 2

Thanks, Dana. This is Julie, and I will take that question. In terms of the hair care category, through Sukana that really looks at the distribution that We participate in it has shown that the category is up 14%. And obviously, you have seen that We are reporting in Q2 that is that our Q2 is down from the last quarter. But what is Encouraging to see that is that, that 14% is not an increase based on 1 or 2 brands, But a collection of brands because as we have mentioned, we have seen a lot more competition coming into the space.

Speaker 2

And then what happens is because omaplac is the driver of new people coming into the category, You have a lot of people who are not familiar with the prestige category that is exploring and treasure hunting. And this is where we believe through our I mean, I emphasize again, it is a category that we created in such a way that We know that the new normal here for us is to really focus on the communication, the investment And the support of the pro community. And we have been doing that and we are double clicking on it. And we believe that as this category grows, we are Leading it and we can participate in it despite the current headwinds that we're seeing from the increased competition from the The other question that you have regarding new product innovation, we are very intentional in terms of how we innovate And support our R and D launches and that is because anytime we launch something, it has to Make 2 highballs. 1, it is definitely going to add to our technology in such a way that it Depends on the technology that we have to really drive performance.

Speaker 2

The second is that we participate in segments that are large, But yet not cannibalizing the products that we have. So a good example is when we launch A clarifying shampoo or a PURPOSE shampoo, it does not cannibalize our existing shampoo and conditioner. So those are The very intentional strategy that we put behind our launches and so innovation will continue to be a Part of our growth, but again, we emphasize it's not about just piping in innovation

Speaker 8

Thank you. 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? Thank you.

Speaker 4

Hi, Dana. I'll take that one. So in terms of our own inventory levels, we continue to make sequential progress Quarter to quarter in terms of bringing those inventory levels down to where we want them to be. We're not there yet, but it's very much a High priority and key focus for the team. So we're managing our production schedules.

Speaker 4

We're managing our inventory purchases Very closely with our strategic suppliers and we expect to continue making progress on bringing those inventory levels down through the year matched with our current forecast and ongoing outlook for demand. So job is not done, but we're making good progress every quarter.

Speaker 8

Thank you.

Operator

Our next question is from Rob Einerstein with Evercore ISI. Please proceed.

Speaker 9

Great. Robert Ottenstein from Evercore. Thank you. A couple of follow-up questions. Number 1, The DTC business, I think you mentioned in the prepared remarks that, that benefited from some shipments to a large Customer, if I recall right, can you confirm that and then maybe if you could back out Those extraordinary shipments with the DTC business would have done.

Speaker 4

Hey, Rama, I'll take that one. So yes, we did mention that the direct to consumer channel was Benefiting in the Q2 from 2 primary things. 1, strength in our oaplex.com business, I'll come back to that. And the second was Shipments related to a key e commerce customer related to a key promotion that was running in July. So that was normal course in terms of phasing of those shipments.

Speaker 4

I'd say past that on an underlying basis, the direct to consumer channel is the one that performed actually better than our expectations in both sell in as well as So that's a channel where we've seen stronger trends and it's a channel where we've actually been Directing quite a lot of our investments, both in lower funnel activities and we're seeing very good ROAS in those activities, as well as our upper funnel activities driving to oaplex.com as an example.

Speaker 9

Okay. And then did so it was down 6% if it wasn't for the shipments, would it have been down 15 down 20, just trying to get an order of magnitude.

Speaker 4

We're not supplying specific numbers on that, but you're directionally in the right place, I would say. And I'll just reiterate there that the sell out, the consumption levels at direct to consumer were strong and this is not a channel Impact from this shipments related to this promotion is very representative of the sellout as well.

Speaker 9

So the sellout would have been minus 6 roughly?

Speaker 4

Again, sell in, sell out and direct to consumer are staying very close to each other. So we're not giving a number, but directionally that's correct.

Speaker 9

Okay. So that is it sounds to me like the strongest confirmation of the health of the brand and the business. That's fair?

Speaker 4

I think that's fair. And Judy, 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 chute that we're continuing to support and invest behind.

Speaker 2

Absolutely. Nothing more to add than the fact that it is gratifying to see that because they are Closest to the end consumer atoloplux.com. So that content, that messaging, all that creative It's definitely resonating.

Speaker 9

Terrific. Thank you very much.

Operator

Thank you. Our next question is from Jonah Kim with TD Cowen. Please proceed.

Speaker 7

Thanks for taking my question. 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 No competition, just what you're seeing in that channel? And just another point, you talked about it a little bit, but how does the muted demand Change or not change your new product launches for the year? Thank you.

Speaker 2

Thanks, Jonah. I'll take that question on the pro and the demand piece of it. Yes. In our prepared remarks, we did mention that our loyal customers in the pro channel continues to be Highly engaged with us. They are the ones who continue to really support us, talk to their clients about us and other stylists about us.

Speaker 2

But we also believe, as we mentioned, that the continuation of some of those negative factors have impacted them and especially to some stylists that are In the mix where they are hearing some of those misinformation, so what we have done, as you have seen, is that we believe In order for us to continue to be successful in this area, we need to continue to invest So, Brent, to build an awareness so that it can drive clients to their studios. Some of them are Many of them rather are single payroll entity. So that really helps them to kind of look at New client acquisition on their part and their own clients who see the brand and basically say, look, I want to continue can you please continue having The Olaplex treatment in my services with you. So with the PRO, we are double doubling on that. We are also making sure education, helping them address any kind of product knowledge, how to use the product better, how to really allow their clients To not use a product because they feel like they need to cut some of the time and or they need more time rather to use And then just very quickly in terms on the demand, we are believing that The pro channel, while they will have the challenge of having found their customers Coming in between services, leading it a lot longer, but the over the counter sales on retail is an area where they can really improve on And we are spending efforts in terms of education training to help them look at retail as part of their revenue generating stream.

Operator

And answer session, I would like to turn the conference back to Julie Wang for closing comments.

Speaker 2

Well, thank you everyone for your time. We look forward to I'll speak with you at our next earnings call. Thank you.

Operator

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

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Earnings Conference Call
Olaplex Q2 2023
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