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.
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).
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.
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.
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.
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?
@beaver_cap Thanks for your comment, I am glad to read that your wife and friends participate to the OLPX "word of mouth" marketing strategy ;)
As the company scales and increases revenue, it will likely need more infrastructure and NI margin might slightly contract. However, given OLPX asset-light “future of work” business model, we expect roughly the same level of profitability in the medium-term.
I too am aware of $OLPX as a consumer. I am a huge fan of their products ever since I was introduced to them this year. Really interesting to have a breakdown of their financial profile. Thank you so much for sharing. Would be great to hear your thoughts on L'Oréal as a competitor?
@joeyhirendernath Thanks Joey, your feedback is always appreciated. As a fan of their products, would you also like to see new products in adjacent segments (e.g. skincare)?
L'Oréal is such a different company. €30bn+ in revenue with more than 30+ brands while OLPX is selling via one brand and has only 11 SKUs. L'Oréal is a leader in beauty but where OLPX really differs is in its ability to build a focused, large-scale company designed for the future compared to L'Oréal which is a multi-category global powerhouse working to adjust its legacy cost structure.
I am not a customer but while L'Oréal appears to me as a giant with strong brand and better pricing thanks to a luxury premium, OLPX more scientific approach might be the differentiator enabling the company to compete in this business.
Funnily enough, I first heard about this business via my partner when she bought some and I looked at the receipt and I was like (see meme). Fantastic work SLT!
Haven’t seen margins and NPS this good since yeti. Definitely adding to the watch list
@rpinvestments 100%, I have not seen a margin profile comparable to OLPX in the consumer staples space.
The efficiency is impressive. I expect this number to be slightly lower going forward due to increased sales. However, thanks to its business model, the company should be able to maintain higher than competition NI/employee.
Interesting pick @slt_research. Added to watchlist. It seems that it benefits from first mover advantage (Kim Kardashian used it as well) and thankfully, it has patents to protect its technology. Although it seems that competitors are introducing the so called Plex products. Do you consider this a significant risk?
@stockopine thanks guys! It is a very interesting question and since we had only 750 words, I have not detailed the potential risks.
To your question, OLPX’s success in disrupting the hair care category will likely continue to draw competitors with greater resources (e.g. L'Oréal, Coty, Estee Lauder) and some have already introduced science-backed products but none able to repair at a molecule level, thanks to the well patent-protected OLPX technology. I believe the stylists community also contributes heavily to the competitive moat.
Other risks include:
- 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.
However these other risks are likely to be less important as the company develop new adjacencies and scale up.
I hope it makes sense.
Beautifully done SLT 🙏
Cautiously optimistic about their move into skincare, as they seem to be crushing it in prestige hair right now and it’s always scary to move from what’s working.
That said, moving beyond this vertical could be transformational if done well.
That valuation chart paired with $OLPX’s margin profile is a thing of beauty.
@joryko Thanks Josh for the kind words, I know you follow closely this company.
I agree - they have the patents but have not rushed to launch other segments which makes me believe that (as for haircare), they will only introduce new segments when having the "perfect" products. And if done well, this can bring OLPX to another dimension.