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The Ratings Game: Olaplex stock tanks 45% as company says salon-goers are spending less on hair-care services

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Hair-care company Olaplex Holdings Inc. hasn’t had an easy go of things on the public market.

Shares of the company, which makes products aimed at restoring damaged hair, were already down more than 50% from their September 2021 initial-public-offering price of $21 as of Tuesday’s close. The stock is on track for a further steep decline Wednesday, as it’s off more than 45% premarket after Olaplex’s
OLPX,
+1.98%

management team dramatically reduced its financial outlook for the full year in the face of competitive and economic pressures.

Olaplex executives now target $704 million to $711 million in net sales for the year, along with $425 million to $431 million in adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda). The company’s prior outlook, issued when Olaplex reported fiscal second-quarter results in early August, called for $796 million to $826 million in revenue and $504 million to $526 million in adjusted Ebitda.

In a release, the company chalked up the reduction in guidance mainly to “a slowdown in sales momentum that it attributes to macro-economic pressures, increased competitive activity including discounting, and a moderation in new customer acquisition.” Olaplex also called out that some customers have been “rebalancing” their inventory in what the company views as a response to the macroeconomic climate.

Stylist customers “are buying less and buying closer to need as they report clients lengthening the time between salon visits and spending less for services and take-home products,” Chief Executive JuE Wong said on a conference call.

Olaplex also announced on the call that Chief Operating Officer Tiffany Walden was stepping down from that post and moving into a “long-term advisory role” after seven years with the company.

Wong, the company’s chief executive, added in the release that Olaplex was “disappointed” to cut its forecast but that the company has “already identified and put actions in place to accelerate demand.” She expressed confidence in Olaplex’s “competitive advantages,” including its “powerful brand, patent-protected science-based technology, proven innovation model, strong community of stylists and end-consumers, and synergistic omnichannel model.”

Some analysts seemed more concerned.

“While we can see the silver lining that this guidance reset will rebase expectations, we think it will be a relatively long process given the excess inventory of finished products at the trade and in OLPX’s hands, besides the risk that demand decelerates even further,” wrote JPMorgan’s Andrea Teixeira in double downgrading the stock to underweight from overweight.

Whereas investors once saw Olaplex as a growth story, she thinks they could come to view it more as a restructuring story, and that could weigh on the stock’s multiple.

Teixeira noted that though Olaplex executives, “clearly laid out their financial expectations for the remainder of the year, there is a lack of visibility into the first half of FY23.” In her view, the company could struggle with “depressed sales” moving “at least into the first half of next year,” while the company’s “final customer” could be more cautious.

She halved her price target on the stock, to $8.

Jefferies analyst Ashley Helgans wrote that while she likes Olaplex’s brand, “growth has peaked,” and the company could see more cuts to estimates in the next 12 months, especially “due to trade down and higher marketing spend to defend share.”

Helgans sees Olaplex’s competition “significantly intensifying”—and doing so more quickly than she anticipated—”with nearly a dozen competing brands & products on the market, taking aim directly at Olaplex’s lead in bonding & repair.” The company’s “patent for its bis-amino based bonding tech is locked through 2034,” but competitors using “alternative molecules” and “formulations with similar efficacy and claims” have products out currently.

Helgans downgraded the stock to hold from buy while taking over coverage of it late Tuesday.

Other analysts seemed more upbeat, including Cowen & Co.’s Jonna Kim, who slashed her price target on the stock to $10 from $22 but kept an outperform rating.

While Kim noted the company’s rising competition and marketing spending, she said that the company’s competitors seem “still much smaller in size,” with the market big enough for multiple companies to win share.

“The stock will likely be range-bound until there are clear signs of the business rebounding, but we believe there is a floor to valuation as Olaplex could be an attractive acquisition target in the beauty industry,” she wrote.

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