Bolstered by surging demand for its premium bond-building hair-care products, which had risen to fame through endorsements from celebrities and influencers over the prior two years, Olaplex’s (OLPX) stock debuted well above its IPO price of $21 in September 2021 and climbed above $30 soon thereafter.
However, these gains quickly evaporated when, in early 2022, the European Union (EU) banned lilial (butylphenyl methylpropional) in personal care products due to possible links to infertility in women. Lilial, a common fragrance ingredient in products like OLPX’s No. 3 Hair Perfector, had already been removed by the company from all its products. Despite this, the misconception that No. 3 Hair Perfector (or any OLPX product) could cause infertility and was banned by the EU gained traction online. This, combined with the damage to OLPX’s reputation from a February 2023 lawsuit in the United States by 30 women (eventually about 100 plaintiffs) alleging that its products caused brittle hair, hair loss, scalp irritation and other serious injuries, led to a plunge in sales and a precipitous slide in its shares to as low as $1.19 by April 23 of this year, down more than 96% from their record high of $30.41 at the end of 2021.
I think this slaughtering belies the fact that the presiding judge in the case ruled that the individual experiences by these plaintiffs after using these products were varied enough to dismiss all claims except the initial plaintiff’s, and that the latter voluntarily dropped her case as well. When you also realize that these plaintiffs were initially only seeking $75,000 in total damages, this strongly suggests that this lawsuit never had any real merit to begin with in my view.
That doesn’t mean that there couldn’t be any copycat plaintiffs coming out of the woodwork in the future and doing further harm. It also doesn’t change the fact that OPLX might have missed the Q1 adjusted earnings consensus of 3 cents a share it reported on May 2 if not for faster-than expected shipments in its specialty retail channel.
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But OLPX still raked in $98.9 million of net sales during the latest quarter. Not only does this suggest that a lot of people continue to be very happy with its products and that the prior allegations were likely unfounded—or at least grossly exaggerated—but it was also $3.7 million better than what analysts had been expecting, driven in part by strong online sales at olaplex.com, which grew year-over-year for the fourth consecutive quarter. This solid operating performance also helped OLPX produce $42.6 million in free cash flow during the quarter, allowing it to reduce its net debt by about the same amount to $146.9 million.
More importantly, sales strength at OLPX’s key customers in Q1 was largely consistent with the improving trends they had been seeing in the second half of 2023, a sign that demand for its products is stabilizing. Indeed, following drops in net sales of 44% and adjusted earnings of 70% through the first half of 2023, the top and bottom-line attrition slowed to 23% and 56% in the second half and just 13% and 34% in the first quarter of this year. And with the midpoint of its reaffirmed outlook for 2024 net sales and adjusted net income of $435 million to $463 million and $87 million to $100 million indicating a return to top-line growth and a much more subdued earnings decline of just 5% over the remainder of the year even after accounting for the shipments that were shifted to Q1, things are clearly continuing to trend in the right direction. In my view, that’s the primary reason why OLPX’s shares have recovered over 30% from their late-April low.
Thus, when you also consider that according to market research firm Circana OLPX had four of the five bestselling prestige hair care products in the U.S. in Q1 and the company should reap increasingly greater benefits from its internal cost-saving program, it’s not hard to imagine that a return to bottom-line growth could be right around the corner as well. As this materializes, I think the stock will keep rebounding in kind.
Julius Juenemann, CFA is the equity analyst and associate editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. Olaplex (OLPX) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.
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