Olaplex: Bankruptcy or Household name?

TL;DR

– Olaplex: Cut + run or go all-in?

– I don’t invest in my friends’ stock picks anymore

🧠 The Takeaways

Olaplex is one of the last DTC darlings to fall. Legal scandal + competition have turned this brand-icorn into a take-private target.

Crisis breeds opportunity. If you’ve done nothing wrong, a PR blitz is crucial to own the narrative.

Go where your most avid customers are. Invest deeply.

Bend over backwards for VIPs/🐋.

+ Why you shouldn’t listen to your friends for investing advice.

LBAB Community –  Don’t Take Investing Advice from Friends

I don’t take my friends’ investing advice anymore.

Over the past 15 years, I’ve constantly talked with friends/family about investing ideas and specific stocks we want to trade. Then, I’d usually allocate a test budget or make some trades against it.

Now, one of these has become my best investment of all time—my friend told me to buy Tesla back in ~2013. I’ve held it since then. The best returner in my entire portfolio.

But there’s also been a laundry list of investments and other things that haven’t worked out well.

Now, I only do my own research. Only invest against my own strategy. And don’t heavily research other’s stock ideas. I share my thoughts, and it’s still great to talk about the stuff with friends and learn about what they’re doing.

But everybody’s goals + strategies are different. At this point, I have such a specific investing philosophy/strategy it’s almost always a guarantee that whatever they’re investing in doesn’t fit for me. It might make them money. But I almost for sure will lose money on the strategy.

At the end of the day, I have to execute what I believe in and play the long game. Hot ideas/interesting strategies are great and may work for others. But I’m 15 years into this journey, and momentum is more important than chasing new ideas.

But I’m still interested in what strategies are. It’s become more of a hobby to talk about then research for what’s next.

The greatest value I’ve found is to dig a level deeper to learn about the underlying principles or concepts they’re pursuing and see how/if I can apply those insights to my strategy. 

The most important lesson I’ve learned throughout my entire investing career is to build your own philosophy and execute that consistently over the years. There are millions of ways to do it, and it’s valuable to learn from others, but you don’t get rich chasing others’ ideas or constantly testing. Eventually you have to stick and commit.

Let’s Examine This Biz

Olaplex, one go the few remaining DTC darlings didn’t survive the DTC-pocalypse. Although not for the usual reasons.

Trading at $1.57/share with a $1B market cap, it’s -93% since its Oct ‘21 IPO. This biz has fallen hard from grace, and if it doesn’t get its act together, it’s staring death in the face.

Financial Summary

TLDR Analysis: Falling topline crippled the P&L.

COGS, SG&A, and OPEX all rose while Rev declined. 😨

Net Income Margin fell like a stone. ☠️

OPEX as a % of Rev nearly tripled. 🚨🚨🚨

This is why public market investors don’t want to see negative topline growth. As all the other costs of a biz increase over time, decreases in Topline destroy profitability. 

The only reason we’re even considering this deal is that, despite this major decrease across the board, the biz still operates at a 13% Net Income Margin. Right in the sweet spot of best-in-class (~15%). 

Which shows that truly durable, sustaining bizs can withstand difficult headwinds. Assuming no major legal case is about to hit this biz like a ton of bricks.

Let’s Revisit This Biz!

My terrible Olaplex Trade Last July, I got so excited about Olaplex’s biz model from covering it that I actually bought some shares.

Let’s just say that didn’t work out for me. I lost $$ on that trade.

Since then…

The stock lost more than half its market cap.

Sales fell 35% YoY, and Net Income fell $61m.

Their class-action lawsuit was dismissed without prejudice in court on a legal process.

But the damage was done to their stock + brand. It didn’t have the continued growth, or profitability I was expecting.

It’s a great reminder that these breakdowns are educational & fun but definitely shouldn’t be taken for investing advice.

Let’s Fix This Biz!

Here are the 3 steps to repair this damaged hair care brand and restore its bonds with consumers, stakeholders & incredible 30% Net Income Margin.

1) Full Scale PR Blitz

While the lawsuit isn’t proceeding, the damage has been done. Sales are down 35% YoY mostly from: 

Professional: -40% YoY 

Specialty Retail: -43% YoY

These 2 channels account for 76% of Olaplex’s previous year sales. When you notice that DTC sales only dropped -15% YoY, 1 insight becomes obvious.

Consumers are concerned in general, but it isn’t a death blow. Resellers are the most concerned about potential legal action. 

This is a brand defining moment for Olaplex. If Olaplex’s product really doesn’t harm consumers then all the stops need to be pulled out to address concerns. 

I’m not talking about just sharing test results and the CEO answering some questions on an earnings call. They need to be loud and public about how they are doing everything for the customer to ensure their hair doesn’t break from using the product.

Which is important, considering the brand’s entire value prop is repairing broken hair.

The team needs to:

Build in Anti-breakage/Happiness guarantees for all products. Extend this to products bought from Professionals and Resellers.

Indemnify Professionals and Resellers in any future lawsuit for product-specific issues.

Launch full-scale media blitzes around how this product doesn’t cause breakage and all the incredible success stories it has.

Be clearer on what hair types it works with and which it doesn’t.

Collaborate with universities to study the effect of the product over time to prove the chemicals in the current formulation don’t cause hair issues.  

Will these steps cost money and be “expensive”? Yes. But are they more expensive than Sales continuing to shrink by 35% YoY?

The beauty of this biz model is that Professionals are both customers + resellers. Outsourcing that key Go To Market (GTM) function is what gives this biz the potential for 30%+ Net Income margins.

Rebuilding Consumers’ & Professionals’ trust is going to be time + capital intensive, but there isn’t a biz without it.

Takeaway: If you’ve done nothing wrong, convince everyone of the truth.

2)  Expand more Internationally

Currently, 55% of Olaplex’s sales comes from countries outside of the US. And this is for good reason. While Hair coloring seems like a popular activity, other countries see much higher % of their population that dye their hair.

Why does Hair dye matter? 

Because one of Olaplex’s primary use cases is to repair damaged hair from Hair dying. 

3 patterns become clear.

The US has a low % of Women who dye their hair.

Expansion opps in high population countries like China (1.4B) & Brazil (215m).

Expansion opps in smaller population, but high-dye frequency countries in Europe (Spain, France, Germany, UK).

The US is a massive market and great to gain initial traction. But once you get to the scale of $100m–$1B+, other markets become a must. And once the “American brand” is built, bringing it to countries where the habits are more ingrained means potentially more lucrative markets.

Currently, the only other country to account for more than 10% of Sales is the UK. That level of sales diversity is great, but also indicates a concentrated bet on certain countries will have outsized returns for the biz.

Adapting Olaplex’s GTM strategy for China/Brazil will unlock the next major wave of growth for Olaplex and will take them to a multi-billion dollar biz.

Takeaway: Focus on the biggest markets with the most avid customers.

3) Invest more in Hair Care Professionals

At the end of the day, this biz comes down to the Haircare professionals. The entire flywheel that makes this biz special is small hair salons + hair stylists building their biz around this product.

Olaplex needs to launch an all-out campaign to win back their hearts & minds:

Provide more resources to make their bizs more successful. 

Build on the Certified Stylist listing into marketplace listings where Stylists can show off their work. Similar to Google/Yelp Reviews but tailored to Olaplex.

Training on how to grow their biz and be more successful.

Ola-Con: Think Apple WWDC but for Stylists. 

Host Town Halls and connect Professionals with Sr. Leadership to air concerns/grievances. 

These investments will work a bunch of angles.

Short-Term:

Rebuild Trust with Professionals.

Long-term:

Build a community of professionals around Olaplex. Not just resellers.

Increase switching costs of using another provider because Olaplex will be so deeply weaved into their biz.

Build annual + quarterly events to set the cadence for the greater community to build their calendars around.

This is a perfect crisis moment to take the leap into an innovative tactic for a haircare brand, that has proven to work in other domains.

Don’t forget: this is also where Olaplex generates the majority of their Revenue. Making sure that this segment is happy, confident and ready to evangelize their product is the key to the holy grail: 30% Net Income Margins.

Without them, this biz has a shot at being an okay haircare biz, but it won’t be a generation-defining biz that throws off mountains of cash.

Takeaway: Who are your VIPs/Whales? Bend over backwards for them.

Final Thought

Why hasn’t Olaplex been more vocal about the claims against their product?

It seems weird to me. Maybe it’s because all of the class action lawsuits have recently been dismissed, but there’s still potential for future lawsuits, so their lawyers are clamping down on what they can say.

But at the same time, if the product really doesn’t cause the issues, you would think that they would be doing more press to convince customers there isn’t an issue here.

The whole biz hinges on this. 

Can they confidently prove that the product does not harm customers + that they’ve done nothing wrong?

That’s why it’s crucial in the acquisition process to have an incredibly thorough level of due diligence and having a ton of terms of the deal dependent on that diligence.

There are so many potential bodies buried under every deal. If there is a massive class action lawsuit pending here, we just paid $1.3B to bankrupt ourselves.

If we dig deeper and find the worst-case scenario is true, (the company is aware that there is a problem + they haven’t taken the proper steps)…

We’re running away faster than the speed of light.

It’s gonna be really interesting to see how this shakes out.

This brand truly has built something special. Hopefully the entire playbook wasn’t built on a bad product.