Vladdeep/iStock via Getty ImagesOlaplex Holdings, Inc. (NASDAQ:OLPX) in May reported the company’s Q1 financials, showing a performance roughly in line with the previously announced sales guidance combined with good profitability. The company has its Q2 report ahead likely in the coming weeks, and with the reaffirmed 2024 guidance suggesting a gradual recovery into growth, I believe that investors should watch Q2 closely to see how the sales growth turnaround is performing. In my previous article on the company, titled “Olaplex Q4: Weak Short-Term Revenues But A Better FY2024 Outlook”, I upgraded the stock into a hold rating as the company’s financial outlook for 2024 was considerably better than could’ve been expected as a base scenario. The stock has since fallen -8%, though, compared to S&P 500’s return of 10% as the expectedly weak Q1 still showed a frail performance – so far, the rating upgrade hasn’t turned out very well. My Rating History on OLPX (Seeking Alpha)The Q1 Results Came In Nearly As Expected The Q1 results came in largely as expected, although revenues did slightly beat the given guidance. The reported $98.9 million revenues, down -13.1% year-over-year, beat the previously given guidance range of $92-97 million slightly. The normalized EPS came in at $0.03, down $0.02 year-over-year, but in line with Wall Street analysts’ estimates. The underlying operative profitability was even surprisingly good in my opinion, as the 19.8% operating margin saw a 1.8 percentage point increase from Q4 despite lower revenues due to significantly lower SG&A and a considerably higher gross margin. By channel, Specialty Retail sales only decreased by -1.2%, while Professional sales decreased by -19.9% and Direct-To-Consumer sales decreased by -15.7%. In the Q1 earnings call, Olaplex related the Professional channel’s decline in part to distributor rationalization and the Direct-To-Consumer decline partly to the timing of deliveries. I still believe that the underlying performance in the quarter was poor even when taking the mentioned factors into account, especially with Direct-To-Consumer sales declining as widely as they did. While US sales managed to grow by 2.5%, international sales declined by -24.3% related mainly to the distributor rationalization. Looking Ahead at Q2 and Beyond Olaplex should report its Q2 results in the coming weeks. Wall Street analysts are currently expecting revenues of $103.6 million for the quarter, a -5.1% year-over-year decline but a good sequential improvement from the weak Q1. With Olaplex’s reaffirmed revenue guidance of $435-463 million for 2024, the sequential improvement expectation makes sense starting in Q2 – without the company achieving any sequential growth, the revenue outlook would start looking too optimistic. In my opinion, investors should have some caution ahead of Q2, as the quarter can easily cast doubt on the 2024 revenue outlook if no financial improvements are made. The company hasn’t provided a Q2 revenue outlook range as it did for Q1, either, which could be a negative sign for the quarter. Margins are essentially a byproduct of Olaplex’s sales, but with the incredibly strong overall margins, Olaplex continues to generate very healthy earnings and cash flows despite the lower current sales – the given adjusted net income guidance of $87-100 million corresponds quite well to the given revenue range. In the Q1 earnings call, Olaplex restated that the company is looking at 2024 as a year where the company builds a foundation for future growth. The company especially communicates to have a focus on improved marketing and product education, and on strengthening the organization to streamline business planning processes. The Q2 results won’t necessarily make or break the turnaround into growth yet, but investors should watch the sequential improvements closely in Q2 and in the quarters afterwards. The company is still cautious about adding new accounts in 2024 with a more intense focus on optimizing current customer accounts for the time being, still potentially pushing better growth back by a few quarters. Leadership Team Changes Olaplex first announced the company’s prior CFO’s, Eric Tiziani’s, departure from the company in early April, as Tiziani went to pursue another opportunity. Afterwards, the company recently announced on the 11th of July that the company has found the successor to Tiziani, and also found a new Chief Marketing Officer. Catherine Dunleavy will be joining Olaplex as a Chief Financial Officer and Chief Operating Officer, bringing in expertise from consumer brands such as Away, Nike, and Comcast. Katie Gohman was appointed as the new Chief Marketing Officer, bringing knowledge from notable companies such as L’Oreal, Ralph Lauren, and Coach – both the appointments seem to bring a good amount of knowledge from very well-recognized brands into Olaplex to drive the company back to growth. I believe that the appointments are a definite positive for the company’s ability to drive the brand recognition further. Updated Valuation While major updates aren’t yet needed, I altered my discounted cash flow [DCF] model slightly. Due to quite a strong profitability in Q1, I have slightly altered the EBIT margin estimate up from an eventual 21.0% into 22.0%. With the lack of a Q2 guidance and slightly higher skepticism on the guidance, I now estimate slightly worse revenue growth at a CAGR of 2.4% from 2023 to 2024, with a -3% decline in 2024. The company continues having a great cash flow conversion due to a high amount of amortization. DCF Model (Author’s Calculation)The estimates put Olaplex’s fair value estimate at $2.10, 27% above the stock price at the time of writing – the stock’s valuation is beginning to look more attractive. Still, I want to note that the 2024 guidance could well be missed altering the investment case largely, and with the large PR headwinds that Olaplex has faced, the upside comes with considerable risks. The fair value estimate is up from $1.77 previously due to a lower cost of capital and the slightly higher profitability estimate. CAPM A weighted average cost of capital of 8.76% is used in the DCF model. The used WACC is derived from a capital asset pricing model: CAPM (Author’s Calculation)In Q1, Olaplex had $14.5 million in interest expenses, making the company’s interest rate 8.86% with the current amount of interest-bearing debt. I continue estimating a long-term debt-to-equity ratio of 30%. To estimate the cost of equity, I use the 10-year bond yield of 4.19% as the risk-free rate. The equity risk premium of 4.11% is Professor Aswath Damodaran’s estimate for the US, updated in July. I have kept the beta estimate at 1.21. With a liquidity premium of 0.5%, the cost of equity stands at 9.66% and the WACC at 8.76%. Takeaway Olaplex reported a Q1 slightly beating top line estimates and showing a good overall profitability level led by both a sequential gross margin increase and by lower SG&A. The company’s outlook still expects very good sequential improvements after a decline in Q1, though, and I believe that investors should have some caution currently considering the possibility of a weak sequential growth in Q2 potentially lowering the 2024 outlook. The investment case still carries a lot of risk related to the return to growth, and while the valuation is getting attractive in a base scenario, I remain at a Hold rating for Olaplex due to the heightened risk profile.
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