OLPX

Olaplex

$
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9
.
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
8
9

-$13.66 -55.76%
SLT Research's avatar
$17.3m follower assets
SLT Core Portfolio: Olaplex ($OLPX) - Long Version
OLPX was our pick for the September Idea Competition, and to thank everyone who upvoted or commented our contribution, we decided to post a longer version of our analysis of the company. We also wanted to take advantage of this post to congratulate the finalists and all participants for their great work.

Without further ado, below is the full analysis we have performed and used to write our contribution to the competition.

Thesis

  • Unique brand with relatively low awareness, supported by loyal stylists and customers.
  • Growth driven by increased penetration and "premiumization" of the market. Significant whitespace to fill with adjacencies and new geographies.
  • Unique combination of robust top-line growth and solid profitability, fueled by an asset-light operating model and experienced management.
  • Attractive absolute/relative valuation.

Company Description

OLPX was founded in 2014 after two chemists, Eric Presley and Craig Hawker, discovered its patent-protected active ingredient: bis-aminopropyl diglycol dimaleate (“bis-amino”). It works on a molecular level to dramatically improve hair from within by protecting, strengthening
and repairing disulfide bonds in hair that break when damaged.

Through a concentrated network of third-party manufacturers and suppliers, OLPX produces and retails a suite of premium hair care products (11 in total) that are designed to promote hair health through a regimen of treatment, maintenance and protection.

Since OLPX products are relatively new and not very well-known to the general investor, we thought it would be interesting to explain briefly the technology behind each product, which is one of the main reasons why OLPX is disrupting its industry. Our hair contains millions of disulfide bonds and these bonds give the hair its structure, strength and stability. When disulfide bonds are broken, it results in damage and generates an unstable sulfate group, which usually pairs with three oxygen molecules and causes a negative reaction. OLPX’s key ingredient works to prevent the latter scenario, as it pairs with the single sulfur hydrogen molecule faster than the three oxygen molecules in order to prevent the negative reaction.

The company sells its products via three channels:
  • Professional (43% of 2021 sales): first channel launched in 2014 using external distributors such as SalonCentric and Beauty Systems.
  • Specialty Retail (29% of 2021 sales): sales through Sephora, SpaceNK, Douglas, and ULTA.
  • Direct-to-Consumer “DTC” (28% of 2021 sales): sales generated on OLPX own website and Amazon.

With regard to geographic exposure, the company derived 58% of 2021 sales from the US.

One of the most unique features of the OLPX business model is the company's asset-light operating model. As mentioned above, the distribution is mainly performed by third-party distributors. From a production standpoint, the company sources its key inputs of bis-amino
(developed by a contract manufacturer using OLPX’s patented formula), essential oils and specialty chemicals from third-party suppliers. From there, OLPX enlists third-party contract manufacturers to produce, label and bottle all products and utilizes third-party logistics providers for warehousing and distribution.

Competitive Moat

Patent-Protected Technology: OLPX is the only company offering a product able to repair hair on a molecule level and not simply mask hair damage. The company currently has a portfolio of 100+ patents, with c.80 protecting current OLPX’s key ingredient. Interestingly it includes not only hair but applications to new segments like nails and skin care. Remaining patents cover an alternative formulation to bis-amino that holds further opportunity for OLPX existing and future products.

Community: Loyal stylist community is an underappreciated asset and contributes to the competitive moat. Over a short period of time OLPX created a strong community and what we believe is a smart overlooked strategy. Since the beginning, the company focused on and turned to the professional stylists. The community consists of more than 262k stylists in OLPX-led communities on Facebook. Its TikTok videos count more than 1.1bn views. The company has more than 2.3m followers on Instagram where almost 14m posts referring to OLPX products have been published.
  • Where the competitive advantage stands is that, to the question “what sources do you rely on for information about hair products and tips?”, more than 60% of the respondents said that recommendations from stylists are a leading factor in haircare purchasing decision.

To summarize, the company strategically gathered professional stylists in order to create an unpaid network of advertisers that increase awareness and build credibility for the brand.

Asset-light operating model: compared to most of competitors, OLPX operating structure gives it a competitive advantage, especially at its stage of the business cycle. Here are the reasons why:
  • Focus on R&D and Customer: the business model is created in such a way that the company can focus on developing new products after having collected customer and professional feedbacks. The execution part of the business is then passed on to other service providers.
  • Financial Flexibility: another important feature of the asset-light business model is the relentless focus on de-risking the business model by reducing operating leverage. Asset light businesses are famous for turning every fixed cost into a variable cost. Even if hair care is pretty stable, OLPX is operating solely in the premium end of the market, hence financial flexibility might turn out to be a nice feature to have.
  • Faster Response Times: one of the most important characteristic features of asset-light business models is the ability to quickly respond to customer requests and changing demands.

Sustainable Growth

Global hair care represented a $82bn opportunity in 2021, but OLPX operates only (at the moment) in a subset of the hair care market which is prestige hair care. It represents a $13bn category and accounts for just 16% of the overall hair care market globally, but this is expected to change with OLPX being a driving force behind the “premiumization” of the market, a phenomenon already observed within the makeup and skincare segments for example.

Taking a look at the current per capita spend on prestige hair care compared to prestige skin care demonstrates a strong market potential. Simplistically, the global prestige hair care market today is $13 bn in size and per capita spend is $1.70 (only 24% the spend of skin care),
In other words, if per capita spend for prestige hair care shift toward the one observed in skincare, it would significantly increase the prestige hair care TAM. In addition, this market is pretty fragmented with the top 3 players representing less than one third of retail sales. Consumers have been looking for more differentiated products and given OLPX unique products, coupled with their ability to digitally engage with stylists and final user, the company is exceptionally well-positioned to consistently grow its share of the market.

More interestingly, the company still has a lot of room to grow, as its penetration of specialty retailers and professional distributors, and aided awareness are still very low.

Source: company data

Accordingly, the company estimates that 45% of prestige hair consumers have aided awareness of the OLPX brand, which compares to the median 69% for its competitors. We expect brand awareness to rise, and given strong conversion rate (8% penetration at Sephora with just 11% of aided awareness), its represents OLPX greatest near-term upside opportunity, especially given OLPX impressive repeat sales rate of 17%, way higher than hair care peers (4-6%).

Longer-term, the company has multiple options to support sustainable double digits growth:
  • International: new avenues for growth derived from entering markets where the company does not currently have a presence. OLPX mentioned that it expects roughly half of its growth to come from outside of the US in the medium- long-term. At this stage, the developed markets should offer the most tangible near-term international opportunity. European countries accounted for six of the top ten countries by per capita spend in the premium hair care category in 2020. However, China and Latin America are expected to be the main long-term growth drivers.

  • New products: Despite having a suite of 11 products, there are still plenty of premium hair care sub-segments the company does not address currently. The main one being hair color where OLPX is completely absent. Another opportunity resides in adjacent products. As already mentioned, the company’s patents portfolio includes application of its key ingredient to skin and nail care. Regarding the major beauty sub-categories in the premium segment, skin care has generally been the fastest growing sub-category in recent years and is expected to maintain its growth leadership through 2025. Global skin care represents a $155bn opportunity and it’s worth mentioning that an OLPX’s survey showed that 82% of consumers familiar with the brand would like to see a skin care line from OLPX and 51% would switch out their current skin care brand for an OLPX skincare line.

Financials

Since the company is pretty recent and only IPO'd a year ago or so, we will focus on 2021 numbers but mainly on the outlook.

Fiscal Year 2021 compared to Fiscal Year 2020:

Net sales increased 112.0% to $598.4 million
  • Net sales increased 131% in the United States and increased 91% internationally.
  • Professional increased 65.8% to $259.0 million, or 43.3% of net sales.
  • Specialty Retail grew 246.6% to $176.0 million, or 29.4% of net sales.
  • Direct-To-Consumer rose 117.1% to $163.0 million, or 27.3% of net sales.

Net income increased by 462.1% and adjusted net income increased by 110.2%. Diluted EPS was $0.32 for fiscal year 2021, compared to $0.06 for fiscal year 2020. Adjusted Diluted EPS was $0.40 for fiscal year 2021, compared to $0.21 for fiscal year 2020.

From a liquidity point of view, current assets represent 4.6x current liabilities, mainly due to IPO proceeds in 2021. As of Q2 2022, the company has enough cash to cover more than 2x total current liabilities. From a solvability perspective, OLPX level of debt is reasonable given its growth profile. As per latest earnings, the net debt represents 68.57% of total equity, down 141.5% YoY. Given the company’s ability to generate cash and high margin profile, we believe OLPX will quickly delever its balance sheet, and it is confirmed with the downward slopping gearing trend observed YoY. 2021 EBIT was at a level able to cover more than 5x the company’s interest expense. The Altman’s Z-Score way above 3 (17.6) shows that OLPX probability of bankruptcy is close to 0. Global solvability is good.

The company is FCF positive and stock based compensation represented only 2% of the 2021 FCF. The company went public a year ago and so logically, has not repurchased shares and has a retention ratio of 1.
Outlook:

Revenue grew exponentially over the last few years and is expected to reach $1.5bn by 2025,
growing at an implied c.25% CAGR from 2021 sales. As already explained in the above section and given OLPX multiple upside paths, we believe this growth rate is more than achievable.
OLPX currently operates with an attractive margin structure thanks to its asset-light business model (almost 80% of gross profit margin in 2021). OLPX is not expected to bring manufacturing in house however, consensus expects COGS to increase due to its international expansion (negative supplier mix) and inflation. When we couple OLPX's relatively leaner cost structure with the company's premium positioning allowing from strategic pricing across the portfolio and favorable channel mix shift impacts as the company grows (DTC exhibits
higher margins), we believe the company can maintain gross profit margins in the high 70s.

Even if gross profit margin is comparable (slightly higher) to competitors, OLPX differentiates
itself with relatively low operating expenses:
  • SG&A: OLPX operates an extremely lean organization of 100+ employees with no corporate headquarters. The company generated c.$6mn of revenue/employee (around 6x more productive than Estee Lauder or L'Oréal for example). Another interesting feature is the low sales expenses. As previously mentioned, community based marketing is at the core of OLPX low customer acquisition cost. With OLPX word of mouth advertising and combined with increased brand awareness, we believe the company will be able to maintain relatively low SG&A expenses, around 20% of revenue over time.
  • R&D: Research and Development costs were surprisingly (almost) non-existent during the last years. We expect, especially given OLPX attractive cost structure, the company to invest in R&D in order to stay ahead of the innovation curve. We would like to see R&D representing between 4-5% of total sales in the coming years.

The below graph is inspired from a Barclays Research report and, in our opinion, represents easily and visually, the company's unique margin profile. OLPX margins rival not just those seen across Consumer Staples, but likely place the company in the top tier of all companies in the S&P500. Even still, after assuming incremental investments as the business further scales, we can observe below that OLPX EBITDA margin is expected to be 2.5x higher than best-in-class beauty peer (Estee Lauder), and even further above the average Consumer Staples
company.

Source: SLT and Barclays Research estimates.

Management and ESG Considerations

OLPX scores average following our company’s management assessment checklist. However
it is important to note that the stock performance and buybacks items impacted negatively the score but are not really representative since the company went public only a year ago.

Management has strong industry experience. CEO Jue Wong joined OLPX almost three years ago after departing Moroccanoil, a competitor offering hair and body care products. CFO Eric Tiziani joined OLPX in August 2021 and previously occupied a similar position at Unilever North America. COO & Chief Legal Officer Tiffany Walden is part of OLPX since 2016 where she occupied different positions.

To support our words, below is a tweet from Justin B.

The company historically made smart strategic decisions and the one that stand out to us is
the decision to go from the professional channel to DTC. The professional channel is highly strategic for the company as it effectively serves as a customer acquisition tool given professional stylists help to build and reinforce the brand’s credibility with consumers. DTC is a critical channel for OLPX going forward as it commands the highest margin as the company is able to price at retail value, offers the company timely insights on consumer trends, and
positions the company well in light of the structural consumer shift to e-commerce. Ultimately management created a synergistic omnichannel distribution strategy to drive consumer engagement.

ESG: Across the broader beauty market, ESG characteristics are increasingly being factored in consumers’ purchase decisions, and ultimately becoming an important brand loyalty consideration. This trend can be particularly observed in the buying behaviors of younger consumers, which make up 56% of OLPX’s consumer base, per the company’s estimates.

Valuation

The company is trading at a more than 30% discount vs. average historical and well below -1
standard deviation. However, given OLPX short history as a publicly traded company, we believe it is more relevant to look at OLPX valuation on a relative basis compared to Beauty
peers, accounting for growth perspective differences:

Interestingly, when we take a closer look at the relationship between future growth expectations for these companies vs. current valuation, multiples suggest that OLPX’s valuation is very attractive vs. its Beauty peers. OLPX trades at a PE ratio similar to L’Oréal but has its expected growth is significantly higher. When we compare OLPX to Estee Lauder which can be considered as its closest competitor, we can see that currently the company trades at a significant discount, using both PE and EV/EBITDA, while as we have seen before, OLPX is expected to post EBITDA margins 2.5x higher and to grow at a 3.1x higher rate.

Risks
  • Competition: OLPX operates in the competitive beauty/hair care industry. We are confident with OLPX patents portfolio protecting its technology however, massive competitors like L'Oréal, Estee Lauder and Coty are investing massively in science-based products and if it reaches the same level of efficacity as OLPX products, it is likely to put downward pressure to OLPX margins.
  • Lack of business diversification: OLPX currently operates with one brand in one category.
  • Supplier concentration risk: OLPX's finished products are currently manufactured by just three third-party manufacturers. Cosway Company accounted for 70%+ of OLPX revenue.

As always, thanks for reading. We hope you have enjoyed this analysis. Please don't hesitate to upvote the post, and feel free to drop a comment if any further clarifications are needed.
post mediapost media
SLT Research's avatar
$17.3m follower assets
September Idea Competition: Olaplex ($OLPX)
For some reasons our contribution to the competition was not visible under the "Sept Idea Comp" tab despite having the tag. So in case you've missed it, here is our post. We hope you will enjoy reading it. Don't hesitate to upvote and/or to let us know what are your thoughts in a comment! Thanks.

That’s odd, i just double checked and i can see your post in the feed under the tag?

Did you observe this on iOS or web?
View 1 more comment
Sept Idea Comp: Olaplex ($OLPX) - unique investment story and financial profile across Consumer Staples.
  • Unique brand with relatively low awareness, supported by loyal stylists and customers.
  • Growth driven by increased penetration and "premiumization" of the market. Significant whitespace to fill with adjacencies and new geographies.
  • Unique combination of robust top-line growth and solid profitability, fueled by an asset-light operating model and experienced management.
  • Attractive absolute/relative valuation.

OLPX was founded in 2014 after two chemists discovered its patent-protected active ingredient: bis-amino. It works on a molecular level to improve hair from within by repairing disulfide bonds in hair that break when damaged. OLPX produces and retails a suite of premium hair care products, designed to promote hair health.

Competitive Moats

Patent-Protected-Disrupting Technology__: OLPX is the only company offering a product able to repair hair at a molecule level and not simply mask hair damage. The company has a portfolio of 100+ patents. Interestingly, it includes not only hair but applications to new segments like nails and skin care.

Community__: Loyal stylist community is an underappreciated asset and contributes to the competitive moat. Shortly, OLPX created a strong community. Since the beginning, OLPX opted for a smart overlooked strategy and gathered professional stylists to create an unpaid network of advertisers, which increases awareness and credibility (stylists recommendations are leading purchasing decision factor for 61% of consumer).

Sustainable Growth

Global hair care represented a $82bn opportunity in 2021, but OLPX operates only in a subset of the hair care market which is prestige hair care. It's a $13bn category and accounts for just 16% of the overall hair care market but expected to change with OLPX being a driving force behind the “premiumization” of the market, a phenomenon already observed within the makeup and skincare segments.

OLPX has a huge growth potential as both its penetration of specialty retailers and professional distributors and its aided awareness are low.

It represents OLPX greatest near-term upside opportunity, especially given OLPX impressive repeat sales rate of 17%, way higher than hair care peers (4-6%).

Longer-term, the company has multiple options to support sustainable double digits growth:
  • International: entering markets where the company does not currently have a presence. OLPX mentioned that roughly half of its growth is expected to come from outside the US in the mid-long-term.
  • New products: there are still plenty of sub-segments the company does not address currently (hair color...). Another opportunity resides in adjacent products. Global skin care represents a $155bn opportunity and 82% of consumers familiar with the brand would like to see a skin care line from OLPX.

Financials

Since the company is pretty recent and we only have 750 words, we'll focus on the outlook.

Revenue is expected to grow at an implied c.26% CAGR by 2025. OLPX currently operates with an attractive margin structure thanks to its asset-light business model. OLPX differentiates itself with its high operating profit margin :
  • SG&A: OLPX operates an extremely lean organization of 100+ employees with no corporate headquarters i.e. c.$6mn of revenue per employee (around 6x more productive than Estee Lauder or L'Oréal). As previously mentioned, community based marketing results in a low customer acquisition cost for OLPX.
  • R&D: It offers to the company the possibility to invest (more than competitors) in R&D to stay ahead of the innovation curve.

OLPX margins rival not just those seen across Consumer Staples, but place it in S&P 500 top tier. EBITDA margin is expected to be 2.5x higher than best-in-class beauty peer, and even further above the average Consumer Staples company.

Management and ESG Considerations

Management has strong industry experience and made smart strategic decisions, especially going from the professional (build brand credibility) to DTC (higher margins, shift to e-commerce) channel. Management created a synergistic omnichannel distribution strategy. CEO Jue Wong joined OLPX three years ago after departing Moroccanoil, a competitor offering hair/body care products. Across the broader beauty market, ESG characteristics are increasingly being factored in consumers’ purchase decisions, and ultimately becoming an important brand loyalty consideration.

Valuation

Given OLPX short history as a publicly traded company, it's more relevant to look at valuation on a relative basis:

Interestingly, when we look at the relationship between future growth expectations vs. current
valuation, the data suggests that OLPX valuation is very attractive vs. Beauty peers. OLPX trades at a PE ratio lower than Estee Lauder with an expected growth significantly higher.

We have enjoyed this volatile period to initiate a position.
post mediapost media
I only know this because I see the name in my shower everyday! Haha my wife and her friends talk about it. Must be a sign I should look into shares for her account!

Net income margins look increasingly strong for consumer products. Are they maintainable do you think?
View 20 more comments
Revisiting This Forgotten (and Highly Profitable) IPO
One of my favorite areas to check when looking for new positions is recently public companies that now have a few earnings calls under their belt.

Often new companies are roughed up by the market in their first year as a publicly traded company (or are highly volatile at a minimum) -- yet their investment thesis often remains intact.

That appears to be the case with $OLPX and its patent-protected hair rejuvenation products.

Down around 50% from its IPO highs, here are a few things that make Olaplex interesting:

  • Net Promoter Score of +71
  • 100+ patents averaging 13 years of protection remaining
  • 2.3M Instagram followers (compared to 28.1M for Apple) -- highest of its peers
  • #1 hair care brand in the US with 7 of the top 10 Prestige hair products
  • Brand awareness grew 22% in Q2 2022 while recording 1B views on TikTok
  • FY 2021 sales grew 112% -- 1H22 +47% -- Q2 2022 +39%
  • A profit margin of 42%, FCF margin of 35%
  • Trades at 34x FCF and 31x earnings

Growth is decelerating but still very promising. So at these valuations, I can't help but start to get interested.

What do you all think?
Thoughts on Olaplex?
37%I'm buying this.
12%Watchlist and learn.
12%Gross, consumer discretionary.
37%Other, comment below.
8 VotesPoll ended on: 09/06/22
Other: It just doesn’t interest me. I need to be interested in what the company does to attract my attention to reading press releases and 10-Q/Ks, etc. I need to get excited and hair rejuvenation just doesn’t tickle my fancy.

Note: I’m losing my hair and this still doesn’t interest me lol
View 5 more comments
Irish Born Investor's avatar
$23.3m follower assets
9th June 2022 - Trading Journal
Today's trading journal is brought to you by IBKR. I use them as my main brokerage for both investing and trading. As a European investor I have tried several different platforms and I can safely say they have the most comprehensive platform available to any EU based investor. In terms of platform power, safety and products (Stocks, Options, Futures etc.) You can check out the platform here.

Situational awareness:
Note: No trades were made yesterday 8th June 2022.

Still optimistic going into today. Market still in a tight formation with plenty of setups looking decent. CPI Numbers tomorrow will likely move the market one way or another.
Pre Market Work:
Reviewed some charts this morning. Nothing too taxing. Added $OLPX to my focus list with a nice setup on a recent IPO. In Stan Weinstein's book he describes recent IPO's being different in terms of analysis. Overhead resistance is not as important. I like the accumulation here as pointed out and the volume dry up the past few days.

I also had an interesting discussion with @europeandgi today about one of his holdings, $XOM. The stock has advanced quite a lot and we were discussing whether it would be a good idea to sell some calls against the position as a form of hedge. The stock is right at the cusp of All Time Highs. Despite being somewhat extended (Up almost 240% from Oct 2020) it is showing phenomenal RS (Relative Strength). I crudely drew what I would like to see it do to be very bullish. Essentially what I drew is a VCP Pattern (Volatility Contraction Pattern) coined Minervini but a pattern of supply vs demand that has been visible in stocks going back 100 years. It is quite noticeable in the highlighted area from 2021.

Long story short, to me, the stock is still very bullish technically and with some healthy consolidation could easily push much higher. Figuring out tops perfectly is impossible but one can use the weight of evidence to ride their winners as long as they can.

Lastly I identified $SPOT as a nice looking short setup if the market turns sour. I would consider getting short on a break below around $110. With a target of $90.

------------

Trading Day:
I bought $OLPX about an hour into the market today. After a soft open I saw it advancing. I have posted the Hourly chart below for some context on where I bought. Unfortunately we pulled back but it remained relatively strong until late in the day when everything really pulled back. My stop is at $13.80 so there is still plenty of space for it to gyrate.

End of day Thoughts:
The market dumped into the close. I have moved to caution. My positions held up relatively well but if the market is on not on my side then my positions will go nowhere. Tomorrow the CPI print will likely decide a direction. If we continue to dump tomorrow I will cut my positions and go back to cash.

I will be reviewing my trades somewhat. I think I might be jumping in that bit too early at the moment in terms of entry. Trying to gain that extra few cents when I should probably be waiting for more proof that the breakout isn't failing. I don't want to read too much into it considering conditions and only a few trades as sample size but it's something I am aware of.
Notes & Open Trades:
  • $SHLX - 5% Stock Position - Entry $14.39 - Stop: $13.80
  • $ASH - 5% Stock Position - Entry $111.20 - Stop: $104
  • $OLPX - 5% Stock Position - Entry $16.80 - Stop $15.80

  • $ZM - August 19th $150/$170 Bull Call Spread - Cost $1.49 per contract

Please note I operate my risk with options that I can lose 100% of the premium. This is the safest way to trade them in my opinion. Even if I cut at 50% once I am setup to lose 100% within my risk threshold then I will stay ahead of my required R:R.
post mediapost media
Paul Cerro's avatar
$36.5m follower assets
SBC is a scam to adj. EBITDA and you're getting diluted
Stock-based compensation (SBC_ has gotten out of control with some companies that utilize the line item top boost adj. EBITDA for profitability but can also dilute you.

Prime example is $TWTR. Market Cap >1.5x since IPO while price only up ~2% in the same time

The link below shows this weeks "Chart of the Week" for the following names


The numbers are quite shocking. If you're interested in receiving content like this, hit the subscribe button (it's free!).

post media
Next

Longest holders

Commonstock is a social network that amplifies the knowledge of the best investors, verified by actual track records for signal over noise. Community members can link their existing brokerage accounts and share their real time portfolio, performance and trades (by percent only, dollar amounts never shared). Commonstock is not a brokerage, but a social layer on top of existing brokerages helping to create more engaged and informed investors.