Does current IPO Olaplex (NASDAQ:OLPX) have what it takes to be an amazing enterprise? Join Motley Fool analysts Sanmeet Deo and Emily Flippen as they talk about the tailwinds and challenges of investing in hair care.
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This video was recorded on Dec. 14, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, December 14th. I’m your Consumer Goods host, Emily Flippen. Today I’m joined by Motley Fool analyst Sanmeet Deo, and we will be speaking about Olaplex. It’s a distinct segment hair care enterprise, but it surely’s valued at over $16 billion. Maybe area of interest is not the correct phrase to explain it with however Sanmeet, thanks a lot not only for becoming a member of, however for bringing this inventory to our consideration.
Sanmeet Deo: Yeah, thanks for having me on. Like you might be saying I’m glad to deliver a feminine hair care merchandise to the combo right here.
Emily Flippen: [laughs] Well, I at all times say this, I’m a horrible host of this shopper items present as a result of in contrast to the vast majority of folks of my demographic, I do not spend an almost sufficient time or cash on issues like clothes, make-up, or hair care. I blame the pandemic in the truth that I sit behind a display all day. [laughs] I’m embarrassed to say I had truly by no means heard of this firm till you began speaking to me about it as a enterprise that you just actually favored. When I say actually favored, I do not imply simply within the context of, properly, perhaps we are able to discuss this on Industry Focus, have an attention-grabbing dialog. I imply within the context of, I wish to advocate this firm. This is an attention-grabbing enterprise that’s rising fairly considerably. As I discussed on the prime of the present, I used to be astounded after I noticed that its market cap was over $16 billion as a result of for hair care enterprise, that is fairly lofty. Pretty uncommon we see pure-play hair care companies valued at such a excessive charge. Naturally, I used to be extraordinarily . I’m sitting right here with my barely broken hair, so I truly went out and I purchased myself a few of Olaplex’s merchandise.
Sanmeet Deo: Awesome.
Emily Flippen: They have a whole suite numbered order lead for you the place you possibly can check out. I put a few of my hair. I’ll say I loved it though I did discover how costly the product was. But earlier than I get into my very own private ideas concerning the firm, what’s it about Olaplex that made you so excited?
Sanmeet Deo: When we talked final in Industry Focus, we talked about Sweetgreen and the way I discovered that simply from seeing it, retail shops shopper merchandise, fairly often you see on the earth and also you get all in favour of once you’re investor. You say, hey, is a public, let me look into it. This was not like that, it was truly a reputation I received from a fellow investor who pitched it to me to say, hey, check out this, is a shopper product firm. I took a fast look within the financials Lumewave first-off. That in itself was the very first thing that basically blew my thoughts by way of the insane quantity of progress and margins that it has. Then as I began digging in, properly additional to determine, properly, what does this firm truly do? I’ve tried earlier than since you will not see it underneath my hair however I do not actually have a lot hair. It does not actually profit me, however having spouse that makes use of a whole lot of hair care merchandise, I requested her and she or he hadn’t tried it both however she has some good views on the trade, so I’d like to the touch base together with her on that. But admittedly, the financials is de facto what caught out to me like at the start. Then as I began digging into it, the enterprise and what they’re doing appears very attention-grabbing and I can see why they’ve the expansion that they’ve.
Emily Flippen: Well, sticking with me and never falling squarely into this demographic I’ll say, lots of people in my demographic which is very younger ladies with a whole lot of hair spend extra time on social media platforms in thought. This is de facto the bread and butter for Olaplex to have a whole lot of model ambassadors. People on the market who’re truly getting paid by the corporate to advertise the product. But it isn’t simply paid promoters, it is also some fairly natural unfold throughout social media that has introduced this firm to lots of people’s consideration. It has a whole lot of, I’ll say followers on the market. If you truly take a look at their web promoter rating, if reminiscence serves their web promoter rating is over 70, which is de facto robust particularly once more for these consumer-facing companies which might be tougher once you’re promoting a shopper product to get that Net Promoter Score up. Some actually large followers, I’ll say on the market out there immediately. They have a very attention-grabbing strategy by combining each skilled settings with this retail setting. Lots of people will get publicity to Olaplex, not simply by social media, scrolling by their information feeds, seeing folks apply it to their hair and speak concerning the outcomes, but in addition by going into their salon. Olaplex truly has a few merchandise that they name ProRx. They’re just for professionals who will use these merchandise on their prospects hair after which advocate them to their prospects. They have this dual-pronged strategy, if you’ll, combining each these ambassadors inside social media with ambassadors and salons as properly.
Sanmeet Deo: Yeah, completely. That’s the attention-grabbing factor about this firm the place they can stability that. It’s not one thing I knew however as I began taking a look at some feedback from a competitor, balancing that may be very tough. Typically what occurs is a product is likely to be extremely popular with stylus. Stylus really helpful it, they’re very all onboard, and other people belief their stylus. They look to their stylus to full product suggestions. But then what occurs is as soon as they go retail, they begin promoting in several shops, on-line, totally different channels. Sometimes that eats into the stylus enterprise of recommending they usually don’t love that. They wish to be unique and it perhaps takes the unique or professionalism of the product away. Them having the ability to stability that’s truly fairly spectacular for those who actually dig in and work out that that is not likely generally carried out and it is extra uncommon than we as trendy customers would possibly assume. Again, such as you mentioned, they’ve a really robust engagement on social media platforms. Let’s be trustworthy, merchandise like this are that is virtually like a bread and butter in a extremely popular approach to get their merchandise on the market identified and locally and used and demonstrated. Its very visible product. Once somebody’s use it exhibits earlier than and after photos, persons are going to acknowledge, wow, this factor appears to work. They have over 2.1 million followers on Instagram. They have over 350 million hashtag Olaplex views on TikTookay and 230,000 skilled stylus in Olaplex lead communities on Facebook. Then even have a million-plus distinctive hair diagnostic quiz takers since October 2020 on their olaplex.com web site. They are hitting all the principle on-line communities and channels to essentially get their title on the market.
Emily Flippen: I like this dynamic between professionals and customers. You can perceive why enterprise like Olaplex would wish to goal each. Both are vital for progress. In truth, whereas these numbers are as of the S1, so they could have modified a bit because the firm went public earlier this 12 months. Around 55 p.c of gross sales come by these skilled channels compared to 27 p.c of gross sales coming direct-to-consumer. That’s olaplex.com or Amazon. Another 18 p.c coming by specialty retail which is stores like Sephora or Ulta. Now, that’s to say they’ve this very various mixture of the place they’re pulling income from. It’s comprehensible that they wish to retain relationships with professionals that account for over 50 p.c of their gross sales whereas additionally nonetheless driving folks to different avenues which might be truly rising a lot sooner than their skilled channels. They’re getting progress from each avenues right here. But when you concentrate on the connection that Olaplex has between these professionals and these customers, how do you navigate that? Because there are some professionals that may say, hey, why am I selling a product that’s freely out there on a retail retailer cabinets. It’s the thought {of professional} or salon-quality, the second it leaves their salon, it loses a few of that credibility.
Sanmeet Deo: Yeah. They’ve positively routed themselves additionally in science. Their patented chemical product that they use of their hair care merchandise, decimino, it has an extended title, is scientifically confirmed to rebuild bonds within the hair. It’s one thing the place they’ve positioned themselves in deeply in science, but in addition in magnificence. They are balancing not solely simply the stylist within the affect space, they’re additionally balancing the science and the sweetness. What provides me consolation for the funding within the firm is that stylus have such conviction within the product that they can be OK with it being in retail and being bought as a result of the skilled merchandise looks like it’s completely bought in skilled and prospects cannot get that product anyplace else. All the opposite merchandise are extra shopper oriented merchandise that persons are truly shopping for after the stylus simply advised them about a few of their merchandise. Then as soon as they study concerning the merchandise from the stylist, then they’re going to exit and say, hey, I need some further merchandise, so I do not wish to strive a distinct product from them and go on Amazon or Sephora and test it out. There’s a pleasant stability of customers utilizing and getting the merchandise from each channels.
Emily Flippen: That’s actually the place this enterprise I believe shines, is as a result of after I take a look at what they did once they went to retail, I believe they did their finest to navigate the retail skilled relationship by conserving that higher-price-point. Now it is time for my anecdotal story right here. I went out eager to strive Olaplex. I went on-line. I used to be a type of million plus individuals who did their hair care quiz. They gave me a few suggestions about what I can purchase. In explicit, a handful of their merchandise which they’ve numbered 0-7. Number 1 and a couple of had been solely out there professionally. But they really helpful that I get quantity 0, quantity 3, 4, 5, and seven. So I did. I attempted all of those totally different numbered merchandise. While I’ll say, it did make my hair really feel very good, gentle, and glossy, they had been additionally very dear. While you will get a few of them in some packs, these trial packs, individually, every bottle sells for about $28 and they’re small bottles. I believe three and halfish ounces if reminiscence serves, so fairly small quantities for a reasonably excessive worth factors. I discover myself actually conflicted about what this worth level does the patron. Because on one hand having a premium picture for a product that perhaps it is purchased much less regularly is de facto good for Olaplex, as a result of it let’s professionals preserve the assumption that Olaplex is that premium product. Whereas however, once you’re pricing shampoo and conditioner at $28 a bottle, for very small bottle, that grow to be one thing that quickly limits the dimensions of the market, so actually solely influent individuals who shall be making this bought, but in addition perhaps decreases the frequency with which they’re going to be prepared to make this buy. I believe I could make an argument on both aspect of the fence concerning the worth level of this product. I see good issues and I see unhealthy issues.
Sanmeet Deo: Absolutely, there is a higher-priced product and it will price some cash to purchase it. They do promote bundles, and that brings the associated fee down a bit bit. But what’s attention-grabbing too in about even shopper merchandise usually, shopper merchandise or shopper eating places or retail. If the product is de facto differentiated, it does not have as a lot competitors, it is distinctive, folks shall be prepared to pay out for the merchandise in the event that they actually see worth out of them. I believe that is the place they’re positioning themselves they usually’ve carried out an excellent job of positioning themselves. The CEO of Olaplex now JuE Wong, was once the CEO of one other hair care firm, which you would possibly know of and you will have tried Moroccanoil, which has grow to be fairly a well-liked model over time. I believe they do, it is a non-public firm so do not actual numbers, however near anyplace between 100-500 million. I do know it is a wide array of gross sales, but it surely’s as a result of it is a non-public firm, so it isn’t simply accessible. But Olaplex has already surpassed that and that may be a product that has been ubiquitous. My spouse loves that product. It works nice, it smells nice. People adore it. It’s bought in every single place. People will purchase up for one thing that delivers worth to them. Olaplex, from what I’ve learn from opinions and simply doing a little work on it, there’s not many merchandise which might be doing what they’re doing. In truth, I do not assume there’s any merchandise. From everybody that I’ve requested and the opinions I’ve learn, there is not a product that is doing precisely what they’re doing in repairing hair rapidly and properly. I believe they’re actually differentiating themselves, which might maintain that worth.
Emily Flippen: I’ve some ideas concerning the hair care trade, about what you mentioned is that significantly utilizing Moroccanoil for example. But I’m going to carry off on my ideas till we get to the danger sections, since you did speak a bit bit concerning the gross sales right here. You talked about on the offset of the present that what made Olaplex standout to you is the monetary efficiency. When you take a look at the monetary efficiency of this firm, what stands out?
Sanmeet Deo: What stands out essentially the most are the margins. The margins are astronomically excessive. The gross margins are above 80 p.c. If you simply take the previous final 12 months as of September, gross margins, 81 p.c, EBITDA margins 64 p.c. EBITDA margins are much more tough to get such excessive margins on and they’re worthwhile already. Loads of the totally different shopper tech names that we see are worthwhile, that is worthwhile and it is rising at a really excessive clip. But the revenue margins are actually what six out.
Emily Flippen: Well, I do not wish to be a Debbie Downer right here, however I’ll anyway, as a result of it is the present. What am I going to do? I’ll say, as I discussed, it is a 16 and a half billion greenback firm. While it is a worthwhile enterprise that’s rising very quickly, I actually hate the usage of adjusted figures on this case. Because as with most shopper items companies, the figures adjusted, particularly once you’re taking a look at issues like adjusted EBITDA metrics, takeaway a whole lot of actually essential facets about customers companies, and a type of is clearly taxes. But on this case one other side is curiosity expense. That solely signifies that round $185 million of that over $500 million in gross sales are hitting the underside line. That turns into rather a lot tougher to swallow when you concentrate on that 16 and a half billion greenback valuation. But let’s discuss this curiosity expense a bit. I’m going to caveat my emotions right here. I’ve been mistaken on these things up to now, however I’m a bit bit nervous. When I take a look at their debt load, they’ve slightly below $750 million in long-term debt, that borrow over $55 million in curiosity expense over the past 12 months. That was almost 20 p.c of their working revenue, greater than 30 p.c of their working money circulate and then you definitely add taxes on prime of it. It simply signifies that their precise web revenue margins, the precise GAAP degree of profitability is far decrease. Now, this debt was obtained as a result of Olaplex was acquired by a PE agency, Advent International earlier in 2020. They saddled Olaplex with a whole lot of debt, paid themselves a reasonably penny within the course of. Advent nonetheless owns 77 p.c of the shares excellent. That possession construction does make me a bit nervous. The caveat I’ll present is, I bear in mind as a comparatively new Fool, one of many first firms I checked out was Yeti. I’ve talked about Yeti a ton on the present up to now. But I bear in mind having this dialog with the opposite analysts the place I talked about just about the identical scenario, an organization whose co-founders had left, though on this case clearly co-founders not concerned. But co-founders had left tons of debt broadened by an out of doors PE agency. They had been managed entity. I did not prefer it. Yeti has carried out superb issues. This might nonetheless be nice. But that debt does make me nervous.
Sanmeet Deo: Yeah, I do know completely. Typically when a PE agency takes over an organization they usually saddle with debt, it is an organization that has regular money flows and revenues and they also’re counting on that steadiness of income and money flows to repay the debt, and so debt does not are typically involved. For all intents as a lot as I would sound so enthusiastic about this firm, I’m positively conscious there are lots of dangers of this firm. For all intents of functions, although it has 11 merchandise, it is a single product kind firm the place that is what they’re doing by way of the hair care merchandise and so they’re very reliant on that. They’re very reliant on a few of the prospects they’ve. They have buyer focus which you is likely to be speaking about later. They are reliant on this stuff and that does current some dangers, which given the heavy load of debt and curiosity bills, if they can not cowl that that turns into an issue. The one factor that does give me some consolation that it is in a class and product space that tends to have a whole lot of resilience and even a few of the stuff I’ve learn from some opponents, even post-pandemic. What’s occurred is it slowed as soon as the pandemic hit on this class, however post-pandemic it is jumped again proper to the expansion that it was in previous to the pandemic and the care class which incorporates share seems, remedies, oils, masks, stuff that Olaplex is in appears extra resilient to disaster. There is a few stability there or be it, take that with a grain of salt.
Emily Flippen: I wish to discuss their dangers. I assume I provides you with my naked case, as a result of I like enjoying satan’s advocates. But give me the bull case, if Olaplex is profitable over the following 3-5 years, what occurred? What is the enterprise seem like?
Sanmeet Deo: I see a number of merchandise in a hair care. They’re trying to develop 2-3 annually, so proceed to broaden that portfolio, broaden into skincare, which is that they have already got patents for merchandise in skincare. They’ve already mentioned that their prospects, in the event that they got here out with skincare merchandise, can be all in favour of. Another attention-grabbing factor I noticed specializing in another classes of progress. That could possibly be like underneath served shopper teams. Could be males who do use a high-frequency of hair care merchandise, exploring pet care phase, that is one thing that is additionally there. Taking totally different areas like that and increasing into these to broaden their product line after which additionally rising outdoors of the United States, which shall be a problem as a result of the stability between stylists and progress there and going retail is lot extra trickier and difficult internationally versus the United States. Recommendations from stylists in international locations like Germany, Japan are extra essential and it is an enormous barrier to entry, so they’ll have some trickier water to navigate overseas, however rising there and increasing there will certainly shall be a bull case for them.
Emily Flippen: Yeah, I believe the skincare trade specifically is de facto attention-grabbing. One the numbers that they identified was that it is a $140 billion a 12 months world trade, so almost double the dimensions of the hair care trade which is unusual to consider. To be actual they’ve even a bit little bit of success in skincare. It could possibly be good for them. Although I’ll say going again, after I take into consideration the dangers to this enterprise, I already talked about valuation as one which it hold my eye on, however much more so than that, I actually discover myself hitting this wall and I can not recover from it for some motive perhaps listeners can, perhaps you possibly can Sanmeet is simply with how fickle hair care and shopper merchandise could be generally. When I take into consideration Moroccanoil, or Argan oil, they had been this stuff that revolutionize the haircare trade. Everybody was actually enthusiastic about them, after which they fell off. They went to the following smartest thing. I believe proper now by way of hype, perhaps Olaplex is reaching a peak that in the event that they’re unable to develop any new product to succeed in that very same degree of hype, they find yourself falling off to regardless of the latest factor is in hair care. For that motive I discover myself simply, I assume, buying and selling cautiously in these waters. All the numbers are pointing in the correct route. Management’s executing, I wish to large imaginative and prescient that they’ve. But man, I simply cannot recover from that one side which is hair care. Am I simply by no means going to put money into the hair care firm? I won’t.
Sanmeet Deo: It’s attention-grabbing you talked about that and one of many factors I needed to make too is, given that there’s, fairly a little bit of threat as we have outlined for this enterprise. One factor for listeners and members to deal with and determine as properly is, would you need this as a broader a part of your portfolio, and given the dangers which might be there on this firm, how do you measurement that. You do not make, this is not a type of firms or shares that you just make an out sized place in your portfolio. This is a type of the place given the issues that we like, stability with the dangers concerned, valuation, increasing, focus of shoppers and possession and all of the belongings you’ve outlined, perhaps we make this a smaller portion of our portfolio. Maybe it is like a two and a half, three p.c, 4 p.c place for our portfolio that provides us publicity into this trade that we are able to really feel snug with and so, I would not simply for those who’re too involved with the remainder I would not simply throw it apart and say sure, I do not wish to put money into the world in any respect, or if it is too dangerous then you definitely wish to put money into like perhaps an even bigger magnificence care product firm or retailer, particularly retailer, the place are you continue to get publicity to this however you aren’t concentrating your guess. Like Sephora, I do not assume Sephora is public however like an Ulta or one thing. Definitely portfolio sizing and positioning is certainly key to for a reputation like this.
Emily Flippen: Yeah, super-interesting, you say that I’m truly an Ulta shareholder and if reminiscence serves of their most up-to-date name, they known as out Olaplex is considered one of their finest promoting merchandise. Definitely getting some publicity for those who’re a shareholder in Ulta and doubtless a handful of different companies in that side, retailers of magnificence merchandise. You’re most likely getting some ancillary publicity to Olaplex. The last item I’ll point out right here earlier than we pull out is that there’s some focus inside prospects, Sephora magnificence techniques group, which is the guardian firm of Sally Beauty and owns a community of different skilled consultants, in addition to Amazon, attain larger than 10 p.c of complete gross sales in the newest 12 months. Something to regulate. I’m not fearful about any of these channels to be frank with you, but when you’ll be an investor, make certain that you might be conscious, there’s some focus by way of the retailers with which they distribute merchandise.
Sanmeet Deo: Yeah completely.
Emily Flippen: Sanmeet, I’ve to say, I like you approaching and speaking about this firm, bringing it to our consideration. This might be one which in a 12 months from now, I’ll kick myself for being so bearish upon by way of simply the market itself however by way of execution, it is actually doing an exquisite job and I can not wait to look at what the longer term it hasn’t retailer.
Sanmeet Deo: Well, to be truthful, I could possibly be kicking myself for it as being a development that simply fizzled out. We’ll see the place it will find yourself within the years to come back.
Emily Flippen: We’ll flip the coin. [laughs] Well, once more, thanks a lot for becoming a member of, I admire it.
Sanmeet Deo: Absolutely. Thank you for having me on.
Emily Flippen: Listeners, that does it for this episode of Industry Focus, when you’ve got any questions simply wish to attain out and say, hey, shoot us an e-mail at [email protected], or tweet us @MFIndustryFocus. As at all times, folks on this system might personal firms mentioned on the present and the Motley Fool might have formal suggestions for/or in opposition to any shares talked about. So do not buy or promote something based mostly solely on what you hear. Thanks Tim Sparks for his work behind the display immediately, Sanmeet Deo, I’m Emily Flippen. Thanks for listening and Fool on!
This article represents the opinion of the author, who might disagree with the “official” suggestion place of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even considered one of our personal — helps us all assume critically about investing and make choices that assist us grow to be smarter, happier, and richer.
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