Declining Sales And Competitive Pressures Will Challenge Future Prospects

Key Takeaways

• Simplified international business model and direct distribution focus aim to boost long-term revenue growth.
  
• Product innovation and strategic promotions during peak periods expected to enhance market share and revenue stability.
  
• Olaplex faces challenges with declining sales, adjusted earnings guidance, competitive pressures, and distribution changes that may affect both short-term and long-term growth.

Catalysts

Develops, manufactures, and sells hair care products in the United States and internationally.

• Olaplex is working on simplifying its international business model by reducing the number of distributor partners and focusing on direct distribution approaches, which could ultimately better position the company for long-term international revenue growth.
  
• The company is enhancing its sales and marketing strategy with elevated content creation and a creator-led approach, which is expected to increase overall demand and positively impact revenue growth.
  
• Olaplex is focusing on innovation with new product launches, such as the No. 5 Leave-In Conditioner and Bond Shaper Curl Defining Gel, which have shown early success and could drive future revenue and expand market share.
  
• The company has strengthened its leadership team and is implementing an integrated business planning approach, expected to improve operational efficiencies and potentially enhance net margins over time.
  
• Continued investment in strategic promotions and marketing during peak periods, like the holiday season, is seen as essential to maintain brand health and customer acquisition, roles which could be crucial for future revenue stability and growth.

Olaplex Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Olaplex Holdings's revenue will decrease by -0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 9.8% today to 9.1% in 3 years time.
• Analysts expect earnings to reach $39.0 million (and earnings per share of $0.02) by about December 2027, down from $42.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $52.4 million in earnings, and the most bearish expecting $13.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 131.7x on those 2027 earnings, up from 33.9x today. This future PE is greater than the current PE for the US Personal Products industry at 30.5x.
• Analysts expect the number of shares outstanding to grow by 41.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Olaplex Holdings Future Earnings Per Share Growth

Risks

• Olaplex's third-quarter net sales declined by 3.6% year-over-year, with a notable underperformance in international markets due to complex issues, potentially impacting future revenue and margin expectations.
  
• The company's revision of its fiscal year 2024 guidance indicates a lowered expectation for net sales and adjusted EBITDA, reflecting challenges in achieving intended revenue and earnings improvements.
  
• Intense promotional activity anticipated during the holiday season suggests competitive pressures that might lead to margin compression, impacting profit margins.
  
• A slower-than-expected lift in overall demand from brand investments indicates potential challenges in improving sales momentum, possibly affecting long-term revenue forecasts.
  
• Ongoing distribution realignment efforts in international markets, meant to simplify the network, could reduce net sales in the near term, posing a risk to short-term revenue growth.

Valuation

• The analysts have a consensus price target of $2.21 for Olaplex Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $428.0 million, earnings will come to $39.0 million, and it would be trading on a PE ratio of 131.7x, assuming you use a discount rate of 7.8%.
• Given the current share price of $2.17, the analyst's price target of $2.21 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.