Hair Cut? Olaplex's Tangled Sales & Profit Runway Prompts Downgrade By BofA

Hair Cut? Olaplex's Tangled Sales & Profit Runway Prompts Downgrade By BofA
  • BofA Securities analyst Jonathan Keypour downgraded the shares of Olaplex Holdings Inc OLPX from Buy to Underperform and lowered the price target to $5 from $15.
  • The analyst said Olaplex issued Q3 FY22 preliminary earnings indicating Q3 sales and adj. EBITDA would underperform consensus by -15% and -22%, respectively.
  • For FY22, Olaplex lowered sales guidance to $704 million - $711 million (previous guidance was $796 million - $826 million) versus the Street view of $815.74 million.
  • The analyst noted the downward guidance revisions imply Q4 sales and EBITDA lagging consensus even more steeply by -37% and -50% at the mid-point.
  • The material revision was driven by a significant change in Olaplex's medium-term runway based on factors including discretionary consumption driven by macro pressures slowing customer acquisition, increasing competitor products priced at a discount to OLPX, and tightening of retailer inventories.
  • In Keypour's view, consumers' sensitivity towards Olaplex as a discretionary product is the most material change from where the company stood a year ago, setting up a critical roadblock to revenue growth.
  • Competition has been an acute concern for investors since day one, exacerbated further by K18 distribution in Sephora and the recent launch of Epres by the original creator of Olaplex, which the analyst expects will further prolong recovery.
  • Facing an impending recession and a preference to avoid discounting, the analyst doesn't expect inventories to normalize until late FY23, triggering the downgrade to Underperform.
  • The analyst noted the management laid out its strategy to re-energize customer acquisition, leaning on its current advertising formats to grow awareness, with incremental spending coming in Q4.
  • With a lower sales base and carrying higher inventory, margins should be materially pressured through 2023, Keypour mentioned.
  • The analyst looks to consumer reactions to these investments on topline and new European manufacturing, and U.S. warehousing savings on margins as signs of improvements take hold.
  • Olaplex's asset-light model leveraging well-developed relationships with haircare professionals has become more costly, challenging EBITDA margins as it invests in driving growth, the analyst added.
  • The company will report quarterly earnings on November 9, 2022.
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  • Price Action: OLPX shares are trading lower by 50.36% at $4.86 on the last check Wednesday.
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