Olaplex - Q1 2023

Transcript

Operator (participant)

Greetings, welcome to the Olaplex Holdings Q1 2023 Earnings Conference Call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. A reminder this conference is being recorded. It is now my pleasure to introduce your host Patrick Flaherty, Vice President of Investor Relations. Thank you, Patrick. You may begin.

Patrick Flaherty (VP of Investor Relations)

Thank you and good morning. Joining me today are JuE Wong, President and Chief Executive Officer and Eric Tiziani, Chief Financial Officer. Before we start, I'd like to remind you that management will make certain statements today which are forward-looking, including statements about the outlook of Olaplex's business and other matters referenced in the company's earnings release issued today. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected in or implied by such statements. Additional information regarding these factors appears under the heading Cautionary Note regarding forward-looking statements in the company's earnings release and in the filings the company makes with the Securities and Exchange Commission that are available at www.sec.gov and on the investor relations section of the company's website at ir.olaplex.com.

The forward-looking statements on this call speak only as of the original date of this call and we undertake no obligation to update or revise any of these statements. Also, during this call, management will discuss certain non-GAAP financial measures which management believes can be useful in evaluating the company's performance. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company's earnings release. A live broadcast of this call is also available on the investor relations section of the company's website at ir.olaplex.com.

Additionally, during this call, management will refer to certain data points, estimates and forecasts that are based on industry publications or other publicly available information as well as our internal sources. The company has not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. Furthermore, this information involves assumptions and limitations and you are cautioned not to give undue weight to these estimates. With that, I will turn the call over to JuE Wong.

JuE Wong (President and CEO)

Thank you, Patrick. Good morning, everyone. Thank you for joining us today. This morning we announced results for the Q1 of 2023 that were ahead of our expectations. While we made progress we know we have work to do to return the business to stronger growth. As discussed on our last earnings call, we view 2023 as a reset year during which we are taking actions intended to build a stronger and more resilient Olaplex. As I will explain in more detail shortly during the quarter, we made progress on our priorities for the year and we believe that we are implementing the appropriate actions for resetting the business. We also recognize that there is still important work ahead of us.

Shifting market dynamics and macro uncertainties continue to reduce our visibility and we remain in the early stages of this plan achieving its intended results. That being said, we believe the fundamental strengths of our business and the category remain and our confidence in our patent-protected technology and the long-term potential for Olaplex are unchanged. Turning to a brief overview of the Q1. Net sales of $113.8 million was slightly better than our guidance. As we previously communicated, our sales decline reflected a lower baseline level of consumer demand, the continued negative impact of customer inventory rebalancing efforts from certain pro and specialty retail customers and a difficult comparison as we lapped the sell-in of the successful launch into Ulta Beauty a year ago. Overall, all three channels were essentially in line with our outlook.

Lower sales, coupled with our strategic decision to spend in support of our future growth with important investments in sales and marketing, R&D and workforce and expansion, led to adjusted EBITDA of approximately $50 million in the Q1 for an adjusted EBITDA margin of 44%. Notably, we believe the Olaplex brand remains healthy with consumers and stylists alike as our third-party external brand tracker showed consistently robust metrics through March. According to respondents of the survey, we continue to lead in premium haircare equity attributes, ranking number 1 or tied for number 1 in 9 of the top 10 15 equity statements, while metrics on overall sentiment and trust in the Olaplex brand remained strong. Similarly, as evidence that our brand and technology differentiators continue to resonate with our communities, our product introductions launched during the Q1 are off to a strong start.

In late January, we launched No. 4D Clean Volume Detox Dry Shampoo on olaplex.com in our pro channel and with Sephora. 4D detoxifies the scalp without clogging pores and neutralizes odor-causing pollutants without a trace of white residue. 4D is performing well and has quickly become the number 1 dry shampoo at Sephora and launches with our other specialty retail and DTC partners in early May. In late March, we entered our first haircare adjacency with the launch of LASHBOND, an eyelash-enhancing serum universally formulated to promote the appearance of thicker, longer, stronger, full volume lashes. Formulated with a next generation OLAPLEX Peptide Complex, LASHBOND is prostaglandin-free and ophthalmologist tested.

Lashbond is our first product to launch simultaneously across channels and the launch is off to a strong start, with notable performance at Sephora in the U.S. as well as Space NK in the U.K., where Lashbond has already become a top 10 beauty SKU for the retailer. Before I discuss the progress made so far on our priorities, I think it's important to revisit why we are pursuing a reset year and the benefits we expect from the activities and initiatives we are implementing. Following several years of significant growth, we are pursuing this reset as we recognize the need to invest and expand our marketing and educational outreach and ensure we have the necessary tactics, talent and platform to realize the significant opportunity we see ahead for the Olaplex brand. Ultimately, we expect the benefits will be multifaceted and realized across the organization.

At the heart of it all, we think our actions will enable continued growth in brand awareness and identity and ensure stylists and consumers are properly educated on the superior benefits of our technology. From an operations perspective, we expect the year will see us evolve our capabilities to enhance our agility, recalibrate and right-size our inventory levels and continue executing against our new product development pipeline. Importantly, we will continue to invest in our people, further building out our team and enhancing our culture. On our last earnings call, we introduced the priorities for our reset year that we believe will position us on a more solid footing. They include accelerating investments in sales and marketing, increasing and evolving our educational assets, reasserting our position with our pro and retail partners and improving our approach to PR.

Let me now walk you through the progress we made on these initiatives during the Q1. Starting with sales and marketing. We continue to expect marketing, inclusive of sampling and sales and marketing payroll, to increase to $70 million in 2023 from $40 million in 2022. During the Q1, we spent approximately $17 million. We are implementing a full funnel marketing approach this year with an increase of marketing investments in strategies to generate awareness and support brand health and brand love. We have also allocated investments and deployed resources to convert customers to our brand. To that end, we are launching a new full funnel creative campaign intended to not only amplify our scientific authority and feature the transformative results from using our outstanding products but also highlight emotional connections with our professional and consumer communities.

The campaign kicks off later this month and includes digital, social and out-of-home activations. We intend to measure the impact of this program as we go in order to optimize mix and spending as we progress through the year. We also continue to execute an enhanced sampling program designed to expand trial, whereby we expect to deliver roughly 10 million samples in 2023. Strategic programs this year include distributing samples via olaplex.com, sampling in Sephora's buy online pickup in-store offerings and providing a No. 3 sample with any Olaplex service at Ulta Beauty salons. Additionally, we intend to implement sampling programs with international partners, including Sephora Europe and Douglas, making our first foray into sampling internationally.

We are still in the early stages with this enhanced program but remain confident in our ability to acquire new users to the brand, given how successful sampling has been with conversion in the past. As it relates to education, our refreshed educational assets behind the core of our assortment with a focus around No. 3 are now being deployed and we are pleased with the early feedback on the campaign. As a reminder, the goal of this work is to better educate stylists and consumers about how to use our core products, reinforce the benefits of our products with versatile usage and tips and introduce new claims and testimonials about the superiority of the results we deliver. Work is also underway to evolve and revamp our core educational curriculum for use across all channels and enhance the education content on our pro website and app.

From a leadership perspective, we are excited to announce that John Barone has joined us as our new Vice President of Global Education and Customer Experience. With over 35 years of experience in the professional stylist industry, John is highly regarded in the stylist community with deep expertise in beauty education, having served in various education roles with Aveda, Sebastian, Wella and Cole's Salon. Turning to our efforts to reassert our standing with our professional and specialty retail partners. For our pro business, we continue to build our team in order to increase our frequency of contact with distributors, their sales teams and salons. We have accelerated planning with key distributors, creating joint business plans that include new initiatives and program and working together to identify and pursue new business development opportunities and to enhance our partnership with prestige and opinion leading salons.

We have continued to enter new and nurture existing partnerships through our dedicated program, collaborating on digital and social content, as well as high-profile events such as New York Fashion Week. Within specialty retail, we rolled out a third-party field sales and education team trained by Olaplex into approximately 400 Sephora and Ulta Beauty retail stores to directly engage with consumers and educate in-store beauty advisors. We are pleased with the program so far, which has shown a meaningful uplift in sales in participating doors and demonstrates the importance and influence Olaplex can have in driving in-person education. Internationally, we are happy with our continued expansion. We recently anniversaried our full fleet rollout with Sephora Europe and have partnered with the team to develop strategic marketing and education campaigns to drive further penetration with shoppers.

With Douglas, a specialty retailer in Europe, we are rolling out into approximately 280 additional doors across Germany and the Netherlands. We have partnered with Dufry to launch our travel retail presence in 12 UK airports and expect to launch in additional countries over time. Our fourth priority this year is building out our PR capabilities. By leveraging our social channels, we have been proactively distributing content focused on correcting misinformation about Olaplex in the market. We launched a section on our website entitled Hair Health, which acts as a hub and a resource for consumers and stylists to assess accurate information about the science behind our products, our ingredients and tips for usage. Similarly, we are creating educational toolkits for our pro and specialty retail channels to supply their employees with the necessary information and details to respond to and correct misperceptions about our brand.

Lastly, we are engaging a group of leaders in dermatology to form the Olaplex Scientific Advisory Board, comprised of medical and scientific experts. The Olaplex Scientific Advisory Board, in partnership with our own internal team members, will help Olaplex accomplish our mission of improving hair health through products and education for all of our customers. Underpinning our assets this year is our continued focus on building upon our strong corporate culture with highly talented and passionate team members. To that end, we are excited to announce two new additions to our senior leadership team. John Keppler has been appointed Chief Revenue Officer, leading and overseeing the sales organization across all three of our channels. Prior to joining Olaplex, John served as the Head of U.S. and Global Sales at several consumer products companies across multiple categories.

After several sales roles at the Pillsbury Company, John was the head of global sales for 9 years at the Consumer Healthcare Products company, CNS. In addition, Nabanita Choudhury has joined us as senior vice president, Global DTC. Nabanita has over 15 years of experience in e-commerce, digital marketing and loyalty, most recently serving as the head of e-commerce at Nestlé Nespresso USA. As I have shared our path forward for this year, it's important to restate our focus on our core mission of making people feel more confident with healthier, more beautiful hair. With our science-based technology and our patented Bis-Aminopropyl Diglycol Dimaleate ingredient, we are uniquely positioned to improve the hair health of millions of consumers around the world.

We are powered by the trust and passion we have built with communities around us. The professional stylist community has been the foundation of our brand and continues to be our biggest advocates. We are committed to the professional stylist community, supporting them with education and the tools to enable them to grow their business and deepen connections with the clients. In conclusion, although we had a challenging start to the year, our Q1 performance was in line with our expectations and we made progress on the priorities we laid out for our reset year. Encouragingly, Olaplex remains the category leader with proven patented technology, one of a kind engagement with stylists and consumers and an innovation platform poised to continue disrupting the industry.

We are confident that the actions we are taking this year will allow Olaplex to resume consistent and sustained sales growth at continued top-tier profitability in the future. I will now turn the call over to Eric to cover our Q1 results in more detail and provide additional information on our outlook for 2023. Eric?

Eric Tiziani (CFO)

Thank you, JuE. Good morning, everyone. In the Q1 of 2023, net sales declined 38.9% to $113.8 million, versus $186.2 million last year. We believe that the quarter was negatively impacted by approximately $21 million of year-over-year inventory rebalancing at certain key professional and specialty retail customers. We faced a difficult comparison relative to the Q1 of 2022, when we shipped an additional $10 million of inventory pipeline to support our strong launch in Ulta. By channel, professional channel sales were slightly ahead of our expectations and declined 37.2% to $48.4 million, versus a 62.6% increase last year.

Specialty retail sales decreased 45.8% to $34.9 million, following 102.5% growth in the prior year period. Our direct-to-consumer channel sales were down 31.9% to $30.5 million, compared to a 15.1% increase last year. Geographically, international sales were flat for the quarter, while the US was down 60.3%, with the impacts of customer inventory rebalancing and the lapping of the Ulta Beauty launch, specifically impacting the US. Moving down the income statement. Adjusted gross profit margin was 72.6%, declining 650 basis points from 79.1% in the Q1 of 2022. Approximately 250 basis points of this contraction reflects deleverage and inflation in our warehousing and distribution costs.

230 basis points related to higher inventory obsolescence reserve and 110 basis points from inflation on product costs, with the remainder from increased sampling and unfavorable customer mix. These more than offset the benefit of the price increase we took from July 1st, 2022 and favorable channel mix. Adjusted SG&A increased 59.6% to $32.9 million from $20.6 million in Q1 2022. The $12.3 million increase in adjusted SG&A from prior year is primarily the result of an $8.6 million increase in sales and marketing expense to drive demand, as well as an increase in payroll attributable to workforce expansion and other related expenses. Adjusted EBITDA declined 60.4% to $50 million, versus $126.4 million in the Q1 of 2022.

Adjusted EBITDA margin was 44% compared to 67.9% a year ago. Adjusted net income decreased 65.7% year-over-year to $31.4 million or $0.05 per diluted share from $91.4 million or $0.13 per diluted share in the 2022 Q1. Adjusted net income benefited from lower interest expense year-over-year due to our debt pay down and refinance in the Q1 of 2022 and higher interest income. Turning to our balance sheet. Inventory at the end of the Q1 was $132 million, down from $144.4 million at the end of the fourth quarter.

The reduction in inventory levels was a result of our focus on aligning production levels to the new sales forecast, which more than offset building inventory of new SKUs as we prepared for product launches this year. Turning to cash flow. During the Q1, we generated $48.1 million in cash from operations. As we shared in past calls, we anticipate another year of healthy cash generation as we maintain a high level of profitability and improve our working capital position, primarily through lower inventory. We ended the quarter with $369.3 million in cash and equivalents, which is generating interest income at a rate of 4%-5%. Long-term debt, net of current portion and deferred fees was $653 million. Turning to our financial outlook.

The fiscal year 2023 guidance that we provided on our last earnings call is unchanged. Although we continue to operate in a dynamic environment with underlying macroeconomic uncertainty, our team delivered during the Q1 and we are moving forward with the continued deployment of strategic investments to strengthen our market position. Let me walk you through our assumptions for the remainder of the year. Beginning with the Q2, we now currently expect net sales will only modestly improve sequentially in absolute dollars compared to Q1 and remain down significantly compared to the year ago period. As a reminder, we are lapping two challenging comparators from Q2 2022.

First, we will be lapping an approximately $22 million net sales impact in Q2 2022 from the introduction of 1 liter size offerings in the North America professional channel, which we do not expect to offset in 2023. Second, in Q2 last year, we experienced some pull forward in demand as some professional customers chose to buy ahead of our announced price increases a year ago. Although the impact of this pull forward reverts in Q3, this results in a $10 million growth headwind in Q2 2023. Also, we anticipate that Q2 will continue to be impacted by the continuation of a lower baseline level of demand.

Our increased investments in education, sales and marketing have recently been deployed and we expect it take time for these investments, particularly those in the upper funnel and other awareness building activities, to generate improved consumer takeaway and have an impact on our shipments to customers. We expect the professional channel to be most challenged, partially due to facing a difficult comparison from last year's one liter launch and the pull forward impact from the price increases a year ago, followed by specialty retail. We believe the DTC channel will be the least impacted. In terms of profitability, due to timing shifts of sales and marketing spend into the Q2, we expect that the Q2 will be a heavier marketing investment quarter. Therefore, we now believe the most adjusted EBITDA margin contraction of the year will occur in Q2.

As we move into the second half of the year, we expect both net sales and profit trends to improve as we expect to more fully benefit from the net impact of new product introductions and additional distribution gains that are strategic and build brand equity. We also expect to benefit from an improvement in baseline demand as our increased investments in education, sales and marketing begin to yield returns. You will see that this implies improvement in the back half compared to the first half, ultimately leading to growth in the fourth quarter and as we enter 2024. Taken together, for fiscal year 2023, we expect net sales in the range of $563 million-$634 million. Adjusted net income in the range of $176 million-$224 million.

Adjusted EBITDA in the range of $261 million-$322 million. Turning to adjusted gross margin, we continue to anticipate a 300-400 basis point decline in gross margin for the year due to inflation in warehousing and distribution costs and deleverage from lower sales volumes. This more than offsets the positive impacts of cost savings and price increases implemented in the second half of 2022. In the medium term, we believe that we can return closer to our historical adjusted gross margin levels in the mid 70% range as we work through higher costs, inventory obsolescence impacts and as baseline demand improves. Given the confidence in our long-term strategy, we are continuing to invest for the long-term health of the business.

We expect adjusted EBITDA margin in the range of 46.4%-50.8% for 2023, down from 16.9% last year. As I mentioned earlier, we now believe the most adjusted EBITDA margin contraction will occur in Q2. We believe adjusted EBITDA margin rate will improve in the second half relative to the first half as an improvement in the top line drives operating leverage. We continue to expect interest expense to be $40 million and adjusted effective tax rate of approximately 20% for the year. As I mentioned last quarter, we anticipate another year of healthy cash generation in 2023 as profitability levels remain high and we improve our working capital position.

In summary, we are in the early stages of our reset year but remain committed to improving the business and taking the necessary action to enable the next phase of growth for Olaplex. We are deploying initiatives that have been successful for us in the past. While we believe it may take time for investments to have an impact, we are confident we have the right strategies in place for improving demand. With our competitive differentiators, execution of our priorities, a solid balance sheet, high profitability and strong cash generation, we believe we are well positioned to navigate the near term headwinds and emerge in an even stronger position. This concludes our prepared remarks. We will now turn the call back over to the operator for questions. Operator?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions. Our first questions come from the line of Olivia Tong with Raymond James. Please proceed with your questions.

Olivia Tong (Managing Director)

Great. Good morning. Thank you. I wanted to ask you, two questions. First, on promotion. Clearly promotion's been picking up, so can you talk about to what extent this has been driven by you versus the retailers? As we saw, we've seen some products ending up in channels you probably didn't intend. Can you talk about what actions you're taking to control that? You mentioned getting gross margin back to somewhere in the mid-seventies. If you could talk about the drivers to get back there, that would be helpful too. Thank you.

JuE Wong (President and CEO)

Thanks, Olivia, for the question. What I will do is I'll take the promotion question and then, you know, have Eric comment on the diversion and the gross margin question. I just want to be very clear. When we participate in promotion, we have said it before, that we do promotions to really acquire new customers to the brand, as well as allowing our loyal customers to buy deeper into the brand. As such, we partner with retailers on some of their promotions that really drive those goals that we have with them. You've seen us in participation with Sephora in BI. We don't do anything that is off the cuff that doesn't drive those kind of programming.

Hopefully that answers your question, because what we want to be very clear, again, to double down, is that we just don't do promotions indiscriminately for the sake of just driving sales.

Eric Tiziani (CFO)

Thanks, JuE. Hi, Olivia. I'll take your question on diversion first. Just to be clear, you know, Olaplex has not changed its selling model. We do not sell our products into grocery stores or other mass retailers. When we find products in unauthorized channels, we thoroughly investigate who supplied those products and take commercial and legal actions to prevent further diversion. We use, you know, tools on our products like QR codes. I would just say that sadly, diversion is a problem that all consumer product manufacturers face, especially in beauty and fashion. We're striving to minimize those opportunities for diversion. Based on the tracking we've been able to monitor, we believe the overall diverted volume in these channels remains relatively small.

Your next question was on gross margin and getting to that mid-70s% adjusted gross margin and what are the drivers of that. I would just say, as we return to growth, we expect volume leverage to help on the fixed cost component of that, specifically our fixed warehousing costs. Also, as we continue to work our own inventory levels down to our target levels, that lowers those warehousing costs and enables us to actually work through some of the higher cost inventory in our system and realize some of the benefits we're seeing in a more stable supply chain environment with costs coming down. The last thing and the last driver there is the savings initiatives that we're putting in forward through our Fuel for Growth program.

We see efficiency opportunities that we think can support adjusted gross margin at that level in the medium term.

Olivia Tong (Managing Director)

Great, thanks. If I could just follow up one quick question, just early read through on the lash serum product and how that influences your decision-making around your expanding beyond care. Thank you.

JuE Wong (President and CEO)

Thanks, Olivia. Lash is off to a great start, as you have heard from our call just now. What is encouraging is it validates that our technology can actually play in adjacency. We will continue to monitor the success of it and how it's doing. As we have said before, our technology has cross-category benefits and opportunities, whether it's in skincare or nail care. This is a great example of us having permission to play in an adjacency category, already been, you know, the top 10 beauty SKU at Space NK in the UK and also a, you know, a strong seller at Sephora.

Operator (participant)

Thank you. Our next questions come from the line of Rob Ottenstein with Evercore. Please proceed with your questions.

Rob Ottenstein (Senior Managing Director)

Great. Thank you very much. Couple of questions. First and perhaps most important, you know, obviously the, you know, the demand for the core products, the repeat purchases there is an issue. You know, there's a lot of possibilities, right? There's been, you know, the misinformation in social media that's been horrible. You know, you've cited in the past competition. You know, you did a price increase. We don't know, you know, to what extent that had an impact. So just, you know, I know it's really hard to be precise on this. But if you could kind of give us your best sense of kind of the two or three drivers that have been most impactful on, you know, this, the base level of demand of the core products?

Whether, you know, over the quarter and into April now, if you're starting to see any abatement in any of those negative factors. That would be my first question?

JuE Wong (President and CEO)

Okay. Thanks, Robert, you know, for that question. Let me take that and then, you know, Eric, if you want to add any or build on it, please do so. First and foremost, you know, we don't believe that price increase is, you know, a driver. Inside, we believe that it's a combination of factors, whether it's the macro environment, you know, in some, you know, more entrants into the space, higher level of discounting in the industry and some of the misinformation about our brand. From the data we have seen in terms of sell out trends, we have seen a stability since we reported last quarter and we expect it to continue to do so.

That is because of all, you know, the execution that we are putting through in both sales and marketing, you know, that includes people in store, the education, the sampling. To answer your question as to what is the reason, that is a combination of factors, as I've mentioned but we are addressing that, you know, with the education, with the people in store, with the sampling program, with our more assertive PR program to correct the narrative that you are hearing that is a misinformation in the marketplace. Eric, do you want to build on anything?

Eric Tiziani (CFO)

No, you said it, JuE. I would just echo. We're assuming improvement in that trend based on our actions and investments into the second half of the year.

Rob Ottenstein (Senior Managing Director)

Great. You're seeing some traction there. That's great. Shifting over to the international, can you just give me a little bit more detail in terms of your ability to get more distribution internationally? I know you mentioned you're going into some more Douglas stores. When I was in Europe, you know, your product was just selling off the shelf in Sephora and it, you know, it was incredibly well placed and well positioned. In that context, it's, you know, a little surprising that you're not up and doing better internationally, given, you know, the still low levels of distribution and, you know, the more earlier stage in the brand's development.

If perhaps you could give us a little bit more sense of what's going on in Europe?

JuE Wong (President and CEO)

Let me just take that. You know, we have said that in 2023 is our reset year. What we want to do is to really go deeper with our existing distribution and therefore anniversarying Sephora in Europe, adding, you know, 280 doors to Douglas are part of that strategy so that we can be an anchor brand and a brand that truly delivers performance when it comes to not only in the products but also in the revenue driving for those retailers. In terms of international, again, you can see there are other geographies that we have not gotten ourselves into in a meaningful way, whether it's in Asia, in the Middle East, in Latin America.

Those are really ripe for the picking because when they see how the brand penetrates and delivers in North America, in Western Europe, it really drives brand awareness, brand recognition and brand desire. International is definitely a huge opportunity for Olaplex but we want to continue to build that foundation to make our brand more resilient and stronger for now and for the future.

Rob Ottenstein (Senior Managing Director)

Great. Thank you very much.

JuE Wong (President and CEO)

Thanks, Robert.

Operator (participant)

Thank you. Our next question comes from the line of Ashley Helgans with Jefferies. Please proceed with your questions.

Blake Anderson (Equity Research Associate)

Hi, this is Blake on for Ashley. Wanted to ask on the professional channel, if you could comment any more on how that trended throughout the quarter and just how those customers, how are they buying their inventory in terms of closer to need? Also maybe comment on time between salon visits, if you've seen a change there from the end consumer as well? That's the first question. Thanks.

Eric Tiziani (CFO)

Hey, Blake. Yeah, we've seen a consistent trend in the professional channel as what we've said in the previous quarter, which is that we do believe the current macro environment is impacting the professional channel and the stylist community a little bit more than what we've seen in other channels. That is, increasing the time, you know, between visits. We see that in data like what we get from Kline measuring front of salon sales, which in the fourth quarter of last year was actually down, the market was down 9%. We've seen that continue and we expect that to continue in 2023. That's balanced by the other channels. I'll just put it in that context.

We've always said that this is a category that is strong and resilient in the face of macro challenges. We expect that to continue but not immune. Our expectation, at least as we aggregate what we see in retail and direct to consumer and pro, it is more a category growth this year that would be in the mid to single digit growth. A slowdown, like I said, resilient but not immune to the macro uncertainty.

Blake Anderson (Equity Research Associate)

That's helpful. Thanks. On the guidance, I think I might have missed it but I heard you say, you expect positive growth year-over-year in Q4. Did you mention, your expectations for Q3 at all versus Q4? Just trying to think about the magnitude of difference in growth between Q3 and Q4.

Eric Tiziani (CFO)

We didn't comment specifically on Q3. We've said that we expect to return to growth in the fourth quarter of this year as, you know, we believe the actions, the investments that we're taking, we're gonna test, learn and optimize those impacts are gonna build gradually quarter by quarter as we get through the year. As we exit the year and as we have some more favorable laps admittedly as well in the fourth quarter, we expect growth to return in the fourth quarter as we enter 2024.

Blake Anderson (Equity Research Associate)

Got it. Thanks so much.

Operator (participant)

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please proceed with your questions.

Jason English (Managing Director and Senior Equity Analyst)

Hey, folks. Thanks for letting me in. Let's pick up where you just left off. Growth or sales returning to growth by the fourth quarter. What gives you confidence in that? How much is distribution related? What do you expect from accounts where you're currently distributed, like Sephora or the pro channel in the US? What are the demand indicators you're seeing today that gives you confidence that you found a level that you can grow off of?

JuE Wong (President and CEO)

Thanks, Jason, for that question. Let me start. As usual, you know, Eric can definitely build on it. I think first and foremost is the data that we have seen. You know, our sellout trends have been stable since we reported last quarter and we expect that to continue to do so for the rest of the year. Why is that? Because we've been executing, as we've mentioned, on proven high return on investment, performance-based marketing that has been successful in the past. We have shared that. We are going even further this year and given that it's also our reset year.

While it's too early on certain of our activations but so far what we have seen is our educational marketing support around our core that we just launched is showing really good signs of positive feedback, both on the digital ROAS perspective as well as sales stability in our current and even new distribution that we have started late last year. With that said, the third party field people in store continues to help us generate the ability to educate and to really get feedback as to what the consumer are misunderstanding so that we can really double-click on our education content and material. There are other things that we are now going to expand on, such as the out-of-home campaign and out-of-home advertising.

We have taken learnings, very recently at late last year, early parts of this year, where we had a Times Square billboard. It really directed traffic to the near-in locations, which really showed that people were paying attention, our consumers were paying attention. We do believe that sampling will continue to be successful. That is early days. Retailers have come back and told us that they are going to give us feedback, probably in Q3 or so because people who get their samples will take time to try and then go back in store to convert.

We are also starting more frequency contacts with our pro community, where it is not only about selling product knowledge information but also helping them in their business so that they can actually benefit from us, not only as a brand with products but a brand with a purpose.

Jason English (Managing Director and Senior Equity Analyst)

Okay. You mentioned, in your prepared remarks, I heard you say your core mission and I'm gonna paraphrase because there was more different words around it but core mission is to make people feel more confident with healthy hair. We've talked in the past about the potential to maybe diversify into skin. Does this focus core mission just imply just that, like, you're really just gonna focus on hair and we should ignore those type of adjacencies?

JuE Wong (President and CEO)

Well, the good news is you've seen us launch an adjacency in LASHBOND, right? It has done well and continues to capture the imagination of the consumers, our retail partners, including our professional beauty supply locations where they are actually asking more for the products. We believe that our technology now validates the fact that it can be outside of where hair is. We want to focus on hair in this reset year because it is going deeper, not wider. Technology play is a big one in the marketplace. When the time is right where we have an intersection of cutting-edge technology and in a new segment that we can play in, then that is time for us to consider, you know, an adjacency of that nature.

We have always said it is not, you know, a question of needing to do it's a question of wanting to do something that is groundbreaking.

Jason English (Managing Director and Senior Equity Analyst)

Got it. That's helpful. Thank you.

JuE Wong (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your questions.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Hey, good morning and thanks for taking the questions. First, I'd like to just touch on the guidance. I mean, you left it unchanged and it's still a pretty, you know, wide range for the year and I understand it's a reset year and we're still trying to figure out where things will settle out. What would give you more confidence, say, in the coming quarters to start tightening that guidance?

Eric Tiziani (CFO)

Corinne, I'll take that one. As you just said, you know, we're only one quarter into the reset year. We're in the early stages of implementing our plan, these actions and these investments. As we've said, you know, we're pleased with the progress thus far and we're assuming that we're gonna yield the benefits of those actions and investments in the back half of the year. You know, to answer your question, as we traverse through the year, as we test, learn and optimize, you know, as we see the impacts of those take hold, that's what would lead us to a position to tighten our range. We didn't feel like that was appropriate at this point.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Got it. Thank you. Just touching on some of the newer products and I know you don't really disclose sales by product but is there any color you could provide us on how much some of the newer products like, say, 4D have been contributing to sales? As we think about as you launch more adjacent products like LASHBOND that come at kind of different price points than that kind of $30 range that you typically sell at, how should we be thinking about the margin differential of those products? If those become a bigger part of the mix, how should we be thinking about the margin impact there? Thank you.

Eric Tiziani (CFO)

Korinne, I'll take that one as well. We've just launched 4D. We've just launched Lash. You know, I would just characterize these as similar type launches as what we've had in the past. Every sub-segment of the Lash and adjacent category is, you know, those market sizes are different and we'd say that the Lash serum category, based on the numbers that we have, is a smaller category, of course, relative to hair but a meaningful opportunity and completely incremental to us. Similar size type launches. From a margin perspective, you know, it's not just the premium pricing but it's the costs that go into that. Lash is a good example of something that has the potential to help gross margins from an accretive gross margin impact.

You know, that one is a bit higher than our normal category margins and that's gonna continue to be an opportunity for us in the future as we evaluate with every launch that we put out into the market, what's the appropriate price.

Korinne Wolfmeyer (VP and Senior Equity Research Analyst)

Awesome. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jonna Kim with TD Cowen. Please proceed with your questions.

Jonna Kim (VP and Senior Equity Research Analyst)

Thank you for taking my question. Just curious if you can elaborate a little bit more on how the sales progressed in specialty retail on a sort of a like for like basis. Are you seeing any sort of progress there? If you can comment on sort of the marketing spend over the medium term. Do you continue to spend the elevated level that you are investing now, or how should we think about that? Thank you.

Eric Tiziani (CFO)

Hi, Jonna. I'll take that on specialty retail trends and then marketing as well. You know, you've seen our specialty retail results in the Q1. Those were particularly depressed again by the lapping of the very successful launch that we had in Ulta in the Q1 of last year, as well as some of this customer inventory balancing that we've said we also experienced in the Q1. Specialty retail sellout trends have been stable since our last call. You know, you see the results in the Q1 that performance has been behind the category in the Q1, again, as we lap that very, very successful launch in Ulta.

Stable since our last call and very much, we assume that that trend will improve in the back half on the back of our actions and investments. You also asked about the marketing investments we're making. As we said, you know, Q2 has some additional investment against this upper funnel campaign that we're very excited about to build the brand, to build equity and to build awareness around the brand. We've consistently said, we're gonna test, learn and optimize and that's gonna be part of it. We're excited about that campaign.

Jonna Kim (VP and Senior Equity Research Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Our final questions come from the line of Jonathan Keypour with Bank of America. Please proceed with your questions.

Jonathan Keypour (Senior Equity Research Analyst)

Hi, all. Thank you and good morning. I'm just wondering, in terms of how Olaplex goes to market, it seemed like maybe 2 years ago or a year ago, to rely very heavily on the salon professional channel. Now that has slowed understandably, I'm just wondering if there is a kind of high level shift in how Olaplex is attempting to reach new consumers.

Eric Tiziani (CFO)

Hey, Jonathan. Thank you for the question and I'll take that. One of the things that we want to be really clear about is our stylist community is the bedrock of Olaplex.

JuE Wong (President and CEO)

Continuous independent studies shows that the number 1 source of truth for consumers is recommendations by their hairstylists. We continue to enjoy their support. They standing by us and we continue to really develop relationships, business benefits for them. We are a brand, you know, with purpose for them, as I mentioned earlier. We are gonna be where our consumers are. Our consumers are taking recommendations from their stylists. They are listening to their own family and friends, so verified product reviews are very important. That's where we are going to double-click on, making sure that our purchase verified product reviews are strong and that is through sampling. We can actually give people samples. They can try the product and they can go on and buy the product and then leave a product review. The other one is family and friends.

This is why the social media aspect is so important because people go to social media platforms to really consume a lot of their product learnings and understanding. That's why we double-click on addressing narratives, on educating about our products, helping people understand what are the, you know, the benefits and the usage and tips. All this will add to the value of our brand and the receptiveness and the responsiveness to the brand. In short, we are not making a change but instead we are investing more behind the brand to a full funnel marketing approach.

Jonathan Keypour (Senior Equity Research Analyst)

Great. Switching topics a bit, in terms of the inventory rebalancing. You guys called out $21 million this quarter. I mean, I'm assuming that it gets, you know, that difference between sell-through and sell-in narrows over the course of the year. I'm just wondering if you could give us any kind of directional ideas about maybe what the full year rebalancing impact will be, maybe how to sequence that through our models. If you can, I guess, where that impact is most pronounced by channel. That, that should be good.

Eric Tiziani (CFO)

Hey, hey, Jonathan. Absolutely. I'll take that. Let me just start by saying, we have good visibility into inventory levels at most of our major U.S. accounts by item and we're tracking sell out versus sell in for the majority of our global business. You mentioned the $21 million year-over-year impact that we believe we experienced in the Q1. We also on our last call talked about you know, the impacts that we expect to lap in the fourth quarter of this year, which should be positive. Look, what is customer inventory rebalancing? All it is it relates to customers adjusting orders to align with sellout trends, with macro conditions and their own decisions on month-on-hand levels. You know, we're tracking and monitoring that closely.

It's dynamic. It happens every quarter to some extent on various items at various accounts. We're factoring all of that into our current outlook into the guidance that we've provided. As we've said, we've seen the sellout trend stabilize since our last call and assuming improvement in the back half.

Jonathan Keypour (Senior Equity Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. That is all the time we have for questions today. I would now like to hand the call back over to JuE Wong for any closing comments.

JuE Wong (President and CEO)

Thank you. Thank you, everyone. We look forward to seeing everyone again at our next earnings call. Thanks. Bye.

Operator (participant)

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.