Q2 2023 Olaplex Holdings Inc Earnings Call
Greetings and welcome to all of the Flex Holdings, Inc. Second quarter 2023 earnings results Conference call.
At this time all participants are in a listen only mode. A 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. Please note. This conference is being recorded I will now turn the conference over to Patrick Flaherty, Vice President of Investor relation.
Thank you you may begin.
Thank you and good morning, joining me today are Julie Wong, President and Chief Executive Officer, and Eric to the Ani Chief Financial Officer.
Before we start I would like to remind you that management will make certain statements today, which are forward looking including statements about the outlook of all the flex 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 our filings. The company makes with the Securities and Exchange Commission that are available at Www Dot FCC Dot Gov.
And on the Investor Relations section of the company's website at IR cut all blacks dotcom.
The forward looking statements on this call speak only as of the original date of this call.
Undertakes 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 it can be helpful. 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 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 Dot all Plex dotcom.
Additionally, during this call management will refer to certain data points estimates and forecasts that are based on industry publications.
Other publicly available information.
As well as our internal sources.
The company has not independently verify the accuracy or completeness of the data contained in these industry publications.
And any other publicly available information.
Furthermore, this information with all the assumptions and limitations and you are cautioned not to get on to weight to it.
With that I will turn the call over to Julie wants.
Thank you Patrick and good morning, everyone as outlined in our press release issued this morning, we had a challenging second quarter net sales of $109 million well below our expectations of modest.
Sharp improvement from the first quarter.
And adjusted EBITDA was $36 $7 million or a margin of 33, 6%.
With weaker than expected result in the second quarter, coupled with our updated assumptions for the remainder of the year, we are reducing our guidance for fiscal 'twenty to 'twenty three expecting net sales in the range of 445 million to 465.
Dollars.
Overall, our business continues to be negatively impacted by competition.
More promotional environment.
And Miss information related to our brand.
Despite these headwinds we are continuing to invest by increasing assets on upper funnel marketing designed to build brand equity.
And expanding our focus and support in.
Portland professional community.
Let me take a step back and walk through the perspective of what drove the revision to our full year outlook.
Earlier this year, we are now.
That we are approaching 2023, as a reset year and built a stronger and more resilient foundation to position <unk> for.
Our long term growth.
The prestige hair care category, which all low plex Revolutionised in 2014 has evolved into a healthy and vibrant category, but with more competition.
In order to support our future growth, we must continue to amplify our investment.
Expand our marketing and education capabilities and to that end, we initiated an integrated full funnel marketing approach this year built.
Built brand awareness.
Increased consideration and drive conversion.
And beginning in the second quarter, we invested heavily in upper funnel and other creative marketing activity aimed at building long term equity around the sign and emotional connection associated with the old types Brac.
When we introduced annual guidance earlier this year.
Our visibility was limited.
Uncertainty regarding how shifting market dynamics will impact the business.
We anticipate it that trends would stabilize in the second quarter and sales demand will rebound in the second half of the year.
Our increased investment in sales marketing and education begin to yield returns.
We also expect to benefit from new product introductions and new distribution gains.
However, we have now seen a weaker sales trend persist since.
Our first quarter earnings call in May to June .
While our loyal customers remain highly engaged with all of plaques.
Believe a continuation of negative factors have impacted the business.
We recognize that these factors are having a particularly negative impact on the performance of our professional channel and use of the brand with some members of the stylist.
City.
As a result, we are revising our forecast for the balance of the year using this recent trend as the run rate for the business.
We recognize that it will take a sustained and balanced approach to investing in marketing.
Education.
And novation and brand building activations to grow the business.
Several key assumptions have changed in this new outlook.
But.
He meant float as trends weakened in our professional and specialty retail channels due to slower sell out and some customer right sizing that inventory positions.
Second while we are beginning to see some positive early indicators from our upper funnel market and pain.
We're not yet experiencing the list that we were anticipating across the business.
We expect that these activities will begin to deliver stabilization on an absolute basis.
Other than growth during the second half of the year.
And third given our updated view of our trend line. We believe it is prudent to lower our expectation, but consumer demand associated with new product introductions and new distribution gains.
Eric will provide more detail on our outlook later on in the call.
Yeah.
We believe we made progress towards achieving stabilization.
Based on data from a third party, we have seen a lift in awareness and positive opinion of older plants. Following the start of our upper funnel marketing campaign in June .
Similarly.
<unk> Dot com has experienced increased traffic and improved conversion after the campaign launch and because that channel tends to act as a leading indicator given its close proximity to the end consumer we believe the messaging.
Content and creative asset off the campaign are resonating.
Yeah.
And as we balance sell in activities with demand we believe the months on hand inventory position at our major accounts on our core items in a much better place relative to that target.
We have worked to normalized inventory levels with this partners in response to slower than originally planned sales and dispositions from this partner to lower overall months on hand levels than previously carried.
To put this in context.
In the first half of 'twenty to 'twenty three.
Net sales.
All sell in declined 44% overall, while sell out at key accounts was down approximately 26%.
Some of this difference can be attributed to the lapping of previously communicated prior year, one offs, namely.
Our one liter pipeline launch.
The pipeline in Q1 of 2022 and the impact of our July 1st 2022 price increase.
The remainder of the difference between sell in and sell out can be attributed primarily to discontinue customer destocking actions in response to our lower demand.
Our team is focused on executing and improving our sales trend through brand building and education Activations that we believe are the strongest levers to engage loyal users and great new and lapsed customers through all the plants.
Yeah.
We are increasing the amount of investment this year.
Adjusting the mix of that investment as we test.
Learn and optimize our initiatives.
We are raising our expectation for marketing inclusive of sampling and certain sales and marketing payroll to.
To increase to a range of 80 million to $85 million in 'twenty two 'twenty three.
Compared to our previous expectation of 17 million and up from $40 million in 2022.
With this change we are increasing aspects of our new brand campaign.
Repurposing some of the upper funnel out of home Activations.
Media and connected TV and focusing more efforts on improving our standing with the pro community.
Yeah.
As we adjust our plan for the year, we continue to make progress against our four key priority.
This all.
Salaried and investments in sales and marketing.
Increasing and evolving our educational assets.
Asserting our position with our pro and specialty retail partners.
And improving our approach to P. R.
Let me now walk you through the progress we made on these initiatives during the second quarter.
Beginning with sales and marketing year to date, we invested approximately $40 million of the planned 80 million to $85 million investment.
A year.
In May we kicked off an integrated full funnel creative campaign titled train starts inside <unk>.
Featuring eight media digital.
Social connected television audio and out of home activation.
With this campaign, we intend to amplify our scientific authority by highlighting how all opex built strengths on the insight without Hudson said this amino technology as well as strengthening emotional connections with our community, our pros and customers well.
Aspire to bring out their own and our strengths.
And in June we generated excitement of our 90 year anniversary as a company by celebrating national all attacks day.
Celebrate this milestone we hosted events with our professional ambassadors and activate it fully branded Gorilla Street sampling teams and their local Sephora and Ulta beauty doors in New York, Los Angeles and Chicago.
Yeah.
Turning to education.
We continuously look for new and better ways to inform stylist.
And consumer about the superior performance of our iconic products.
In that vein, we are implementing a more active and engaged approach to feel education, and establishing our own internal retail field sales team.
You may recall that during the fourth quarter of last year, we deployed a pilot of a third party field sales team trained by Autoplay and following positive results expanded the program to 400, Sephora and Ulta beauty doors during the first quarter.
This program has demonstrated the impact we can have in driving in person education with consumers and beauty advisors.
And in turn up retail field team is not only more cost efficient than engaging with a third party, but we believe that we will have even better control of training on the old Opex right.
Yeah.
Our third priority is to re assert our position with our professional and specialty retail partners.
The professional community remains at the foundation of our brand and it's core to maintaining our credibility in the category.
We know it is critical to address and solve the issue we are facing in that triangle by increasing our visibility and investing more to deepen engagement with stylus.
So that's been the team is implementing new and incremental food 360, Activations to show our support for the pro audience, driven primarily by participating in high visibility distributor events.
This appreciation days and in store activity.
In addition.
We continue to increase in person and virtual sales contests, and trainings without new field sales managers and expanded education team.
Both in North America and internationally.
We piloted.
And expanded data driven programs to help our distributor partners pocket and secure new auto plants, the locked and advancing our key opinion leader program by adding new salons and cultivating relationships with existing partner so long.
Well specialty retail we are continuing to partner with our key accounts to expand.
And campaign and education content.
We also introduced new visual Merchandizing reflective of our new brand campaign and make progress on international expansion.
Our fourth priority this year is to build out and enhance our key our capabilities.
With a focus on strengthening our global reputation.
Scaling influencer marketing and delivering growth in earned media value.
Our PR assets.
And telling the story of our brand and educating consumers about our technology.
We are broadly distributing content in partnership with our brand ambassadors.
Focus on older plants and handheld.
Digital and social channels.
We intend to continue to develop the low Plex scientific Advisory Board program.
Which consists of a group of medical and scientific experts, who will help guide us on ways to develop educational content that underscores the safety and scientific capabilities of our products.
We also continue to actively defend our brand against allegations that clean all opex product cost has.
In July the court granted all of plexus motion.
And dismissed the claims.
As a result, all 101 plaintiffs are currently dismissed without prejudice.
Turning to our progress on investing in our people and building out our team.
I am pleased at J P. Bilbrey has joined our board in the newly created role of Executive Chair.
J P joined us about a month ago, bringing extensive experience, but growing and evolving global consumer brands. After having served as the president and Chief Executive Officer of the Hershey Company.
Currently serving on the board of directors of tapestry, Alanco animal health and Colgate Palmolive.
It is a testament to the opportunities ahead of solar plants that we could attract a leader of his caliber and credentials.
J P will be valuable addition to the older class team and we are thrilled to welcome him to the board I look forward to partnering with him and receiving his guidance on ways to implement best practices and processes as the company scales.
In summary, while.
Well it is a challenging period for all of that.
We continue to be confident in the long term opportunities for this business.
The prestige had cat category is in its early stages of growth and we are an industry leader offering truly differentiated sign without Hudson took this immuno technology.
Believe we can reach new customers and reclaim used us as we invest in our marketing model and develop within the international market.
And we believe we have a compelling multiyear innovation pipeline that enables us to expand our product offering.
With that I will now pass it over to Aric to cover our second quarter results in more detail and provide additional information on our revised outlook for 2023.
Alright.
Thank you Joey and good morning, everyone.
Net sales in the second quarter declined 48, 2% to $109 2 million.
This was below our expectation of modest sequential improvement in absolute dollars from $113 8 million in the first quarter as our professional and specialty retail channels experienced slower demand and some customers further rightsize their inventory positions in response to current trends.
We also lapped two challenging comparator from Q2 2022.
First we lapped an approximately 22 million net sales impact in the second quarter of 2022 from the introduction of one liter size offerings in the North America professional channel.
Second in the second quarter of last year, we experienced some pull forward in demand of approximately $10 million as some professional customers chose to buy ahead of our announced price increase which took effect on July one last year.
By channel the professional channel sales declined 61, 2% to $40 9 million versus 32, 7% increase last year.
Our direct to consumer channel sales were down six 4% to $38 5 million compared to growth of 19, 3% a year ago.
And specialty retail sales decreased 53, 7% to $29 8 million following an increase of 68, 5% in the prior year period.
Moving down the P&L.
Adjusted gross profit margin was 72, 7%.
Down 250 basis points from 75, 2% in the second quarter of 2022.
Approximately 320 basis points is related to higher inventory obsolescence reserve.
230 basis points related to promotional allowance.
And 110 basis points from inflation on product costs with the remainder from deleverage and inflation in our warehousing and distribution costs.
These more than offset the benefit of favorable channel mix as the overall mix shift to direct to consumer drove plus 350 basis points as.
As well as the price increase we took from July one 2022, which contributed 100 basis points of favorability.
Adjusted SG&A grew 73, 4% to $42 2 million.
From $24 4 million in Q2 2022.
The $17 8 million increase in adjusted SG&A from prior year is primarily the result of a $14 1 million increase in sales and marketing expense, including the upper funnel marketing campaign that launched during the second quarter.
As well as an increase in payroll attributable to work force expansion and other related expenses.
Adjusted SG&A excludes $3 5 million related to a onetime settlement with a former distributor in the United Arab Emirates, which allowed us to establish a partnership with another distributor in the country.
For the first half of 2023, we have spent $40 million in sales and marketing against our updated 80 million to $85 million full year investment.
Adjusted EBITDA declined 72, 4% to $36 7 million versus $133 1 million in the second quarter of 2022.
Adjusted EBITDA margin was 33, 6%.
Third to 63, 1% a year ago.
Adjusted net income decreased 78, 5% year over year to $21 2 million or.
Three cents per diluted share.
From $98 8 million or 14 cents per diluted share in the 2022 second quarter.
Turning to our balance sheet inventory.
Inventory at the end of the first quarter was $128 5 million.
Down from $132 million at the end of the first quarter.
We continued to make progress on efforts to lower our inventory levels as the sequential reduction was driven by lower inventory levels of core skus to match lower sales forecast, which more than offset building inventory of news skus as we prepared for product launches this year.
Turning to cash flow.
During the first six months of 2023, we generated $71 1 million in cash from operations.
As we shared in past calls, we anticipate another year of healthy cash generation as we have a highly profitable business model and improve our working capital position primarily through lower inventory.
We ended the quarter with $378 4 million in cash and equivalents, which is generating interest income at around 5%.
Long term debt net of current portion of deferred fees was $651 7 million.
Now turning to our financial outlook.
As Julie mentioned earlier in the call, we're revising our guidance for 2023, let.
Let me walk you through our revised guidance and assumptions for the remainder of the year.
Starting with the topline.
For fiscal year 2023, we expect net sales in the range of 445 million to 465 billion down.
Down from the previous range.
$563 million to $634 million.
At the midpoint of both ranges this represents a reduction of approximately $144 million.
It can be broken down into three primary buckets.
First the combination of weaker than expected results in the second quarter and our assumption of lower baseline demand in the second half of the year amounts to approximately $60 million.
Second we are no longer assuming baseline demand improvement in the second half of the year and now believe the investments, we're making will first deliver stabilization of baseline sales on an absolute dollar run rate basis.
The removal of this lift amounts to approximately $50 million.
Third while we still expect to benefit from the impact of new product introductions and new distribution gains there.
We are lowering these assumptions by approximately 35 million.
Two our original assumptions given recent sales trends.
With this new outlook.
Half of 2023 net sales at the midpoint are now expected to be $232 million.
Versus $223 million in the first half of 2023.
We expect to experience. The addition of holiday kits in the second half of the year, which is a benefit relative to the first half 2023.
Given that our holiday kits are sold to professional and specialty retail customers primarily in the third quarter ahead of the winter holidays, we expect net sales in the third quarter to be higher than the fourth quarter of 2023 on an absolute basis.
For the same reason, we anticipate sequential improvement in sales on an absolute dollar basis in the third quarter versus the second quarter of 2023, both the professional and specialty retail channels.
Conversely, we expect our direct to consumer channel had declined sequentially on an absolute dollar sales basis in the third quarter due to timing as we shipped inventory in Q2 ahead of a major customer promotion in July .
In the third quarter from the perspective of year over year net sales growth rates and order of magnitude, we expect specialty retail to be the most pressured.
Followed by direct to consumer and professional.
Specialty retail faces the most difficult comparison from a year ago, when the channel experienced robust growth due to incremental distribution and higher selling of holiday kits.
We now anticipate 500 to 600 basis points decline in gross margin for the year compared to our initial assumption of 300 to 400 basis points of contraction.
The primary driver of this deleverage from lower sales volumes in our fixed warehousing costs as well as the actions we are taking to work through excess inventory.
This more than offset the positive impacts of cost savings and price increases implemented in the second half of 2022.
In the medium term as we work through higher cost inventory obsolescence impacts and as baseline demand improves we believe that we can return closer to our historical adjusted gross margin levels in the mid 70% range.
Given our lower net sales forecast against our expectations for increased operating expenses, which includes increasing our sales and marketing investment for the year as Joey previously discussed.
Now expect more adjusted EBITDA margin deleverage than our prior assumption.
For 2023.
We expect adjusted EBITDA in the range of 161 million.
$176 million.
Our margin of 36, 2%.
The 37, 8%.
This compares to our previous range of 261 million to $322 million.
Our margin of 46, 4% to 58%.
We continue to expect interest expense to be $40 million and adjusted effective tax rate of approximately 20% for the year.
In conclusion.
Despite our disappointment with this weaker outlook.
We are reminded of the pillars that make <unk>, a unique brand and a great business.
We are a science led company with our commitment to making people feel more confident with healthier more beautiful hair.
We have built an industry, leading brand enjoys trust and credibility from a highly engaged community of professional stylists and consumers.
We are driving a synergistic omni channel strategy and have the support of our customers from the U S. As a strategic partner of choice for the future.
And our highly profitable model and strong cash generation afford us the opportunity to invest to improve our performance and capitalize on our long term growth opportunities ahead of us.
This concludes our prepared remarks, we will now turn the call back over to the operator for questions.
Operator.
Thank you if he 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 if he would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow up question and then re queue for additional questions.
Yeah.
Our first question is from Susan Anderson with Canaccord Genuity. Please proceed.
Yeah.
I left leg on for Susan.
Just a question on your sellout comments, you said it was down about 26%.
The accounts how much do you think is driven due to misinformation driving demand down versus tougher comps.
And then also I believe there should be some headwinds from the sell ins. If there's one liter bottles, which extends the need for consumers to replenish just any details there. Thank you.
Yes, good morning, everyone, Eric Tiziana here I'll I'll take that so that's.
That's right when we disclose on the call that our net sales decline for the first half of the year was 44% against a minus 26% consumption decline at our key accounts.
And that difference is partly explained by the one offs from the prior year in selling so the one liter launch that you just mentioned.
In the first half of last year.
OTA pipeline shipments from Q1 of the prior year and some impact from pricing pull forward in Q2 of last year as well all of which we previously disclosed.
Well, there's some ins and outs the remainder of that difference between net sales decline in the consumption decline.
Can primarily be explained by what we've seen is further customer inventory right sizing.
And as Judy mentioned earlier, we believe that based on current sales our inventory position on core items and key accounts is in a much better place going into the second half of the year. This is of course dynamic.
You also asked of the minus 26% how much is being driven by these headwinds that we've talked about so competition.
Misinformation and a higher promotional environment, we're not really breaking that minus 26% out in that way just to say that those continue to be the primary headwinds that the business has been facing.
Yeah.
Thanks, and then a follow up on the marketing spend so you've been investing heavily in that this year I guess what type of Rois are you seeing and is it primarily.
Merrily top of funnel just to build awareness or are you also spending fairly equally or just how to think about spending on retention.
Okay. Thanks for that question. This is Julie and I will take that so we have always set right. The category that we have created if not more attractive and therefore in order for us to call Bill on the awareness for the category, we'd really need to step up on our investment in upper funnel.
As far as to support our pro community. So we will continue to test learn and optimize on our initiatives and it is an integrated full funnel investment approach. So we will look at the mix and as things work, we were sort of figure out what is best you know to count.
Increase whether it is in consideration, but there isn't conversion I'll continue with the upper funnel, which is building brand equity and brand awareness.
Yeah.
Thanks again.
Thank you.
Our next question is from Andrea Teixeira with Jpmorgan. Please proceed.
Oh. Thank you. Good morning. So we can you comment on the exit rate of the consumption number you quoted the consumption the kind of 26% I understand this is the first half against the first half of last year. So it was I'm, hoping to see if there is any improvement there in terms of consumption.
Firstly, if things got worse as you progressed a quarter.
And then related to your investments, especially in our kind of just how long and increase the awareness of the brand. How can you comment on a bit on at this point I think you've been through about eight months of the after.
The campaign, where you get you know a sample or samples at one number tree. After service like wondering if you can give us an idea how that converted in.
And lastly on the shelf space can you talk about I understand that part of the declining in guide.
As you know expectations for my modest shelf space to grow. So I was wondering if you can comment on how are you feeling about that for the back the back wall. If there is anything we should be aware of in terms of negotiating with with the Florida next year. Thank you.
Well thanks, Andrew for the question, it's a three parter so what I'm going to have is Eric to answer on the consumption first and I'll take the investment in the Salon and pro and the shelf space question, So Eric great thinking.
Thank you thanks Julie.
Good morning, Andrea so on the exit rate you're right. The number that we quoted the minus 26% was the consumption decline at key accounts for the first half of the year.
We did say on the call that you know.
We saw some deterioration in that number in the second quarter. So it was moderately worse in the second quarter than the first quarter.
And what you see in our outlook and our updated forecast is we've taken that second quarter absolute dollar sales run rate.
And use that to.
To project forward, a new baseline level of demand after the back half of the year, Yeah. That's a key assumption changed where now.
You know focused on using the investments we've put into the business to stabilize that sales trend in the back half of the year. So that we can get into a point, where we can rebound to growth in the future. So that's just a comment on the exit rate and I'll turn it back over to Julie.
Thanks, Eric and Andrew to answer your question on the investment in Salon professionals that sampling.
You know we have always stay true to the core and this is why you are seeing us.
Going into the field sales team with our own.
Team members, but it is not only more cost a person, but we can also really communicate our message much more directly and also train our own people in stores. We are seeing positive impact that's like that moving into this direction.
But it is too early for us to kind of say, where everything is tracking and we are working towards as you have heard us say on the back half towards stabilizing the business. So that we can look at you know continue as we go into the new year with a better foundation and a more resilient.
As we have mentioned.
The both the Salon channel and you know, which is the pro channel and our retail channel are very supportive of our integrated full funnel approach. So you have seen that in conjunction when we do all of this out of home activation that was also people in store to help support traffic that's being driven.
In there and that was also.
Visual merchandising that cause that conveys the same message. So that is a 360 approach when the customer see in out of home you know in the Billboard that they go into a store and dumping intercept it by sales beauty advisor that knows about the brand and then seeing the same vision being expressed.
And our shelf space you other question regarding shelf space, we obviously cannot speak on behalf of.
You know the retailers, but I can tell you we have top to top meetings, where we continue to be able to show them. The equities of total plans. We are stupid numerator the brands that drives the most new customers into the category.
In the top five ranking in terms of our hair care prestige brand in all the channels that we are in and we continue to score high on all the equities that is a brand that consumers trust that we are you know.
Damage and repair here that we are also.
Brenda is represented by science and technology.
All of that kind of equities and when you have meetings you know top to top these are considerations that they take you know and and my last my my point about driving new customers into the space into the category. That's a powerful kind of driver for both the.
Retailer and our professionals because awareness is primarily what they need from our brand so that passing into dawn will materialize into conversion.
Thank you I'll pass it on.
Our next question is from Bill Chapell with truly Securities. Please proceed.
Thanks, Good morning.
Okay.
One question on gross margin.
Just trying to understand I mean, I think some of the pressures that you've talked about R. R.
The near term or short term as you work out inventory obsolescence do you have a pretty good visibility when they will pop back or as we look to first quarter of 2024 should some of these things go away based on kind of your sales forecast.
To feel like that.
Some of the noncash a short term type stuff should go away pretty quickly so any color there.
Yeah, Hi, Bill I'll take that one.
We continue to believe that we can return to a normalized adjusted gross margin in the range of the mid 70, percents and as you point out some of the challenges we're facing in our gross margin in 2023, our near term and we believe more temporary issues are depressed.
In 2023 due to deleverage from lower sales on some of our fixed costs like warehousing.
As well as what we cited as impacts from working down our higher inventory levels that includes the impacts of.
Providing for inventory obsolescence risk as we have in the first half of the year. So when you normalize when we get through stabilization.
In the second half of the year and.
A return to growth, we see those tail winds, returning and and are confident in an adjusted gross margin range in that mid seventies, which of course, then it gives us the ability to continue investing it back into the business.
Got it just to clarify so margins gross margins will I guess trough next quarter and then maybe improve sequentially as you moved through the fourth quarter.
So you know as we mentioned in our guidance color, we now expected adjusted.
Adjusted gross margin for the full year to be that minus 500 to 600 basis points versus last year. So it's a similar trend in the second half of the year that we've seen in the first half of the year.
And as sales normalize and as we get through 2023, we believe will have less of these temporary headwinds and return into that adjusted gross margin level the mid seven Dcs.
And then just a follow up the question we're getting.
What gives you confidence that this is a good number in terms of sales for this year and I'm trying to understand kind of on consumer takeaway, where that yeah, where they fell this past quarter versus your expectations. I mean, we we all knew it was going to decline Theres a lot of noise out there, but just trying to understand how much worse.
And what you saw.
Intra quarter or if there's an even as we went into July .
Kind of gives you confidence in the updated guidance.
Yeah, So I'll take that one we thought it was important to share.
Quite specifically the changes in our key assumptions from our prior guidance to this guidance, which is as we mentioned were.
Number one the change in the assumption on baseline level of demand and this new approach to forecasting the back half based on just the run rate we've seen in absolute sales in the second quarter. The second one was a more prudent view around the fact that it's going to take time for our marketing investments.
Particularly those upper funnel investments too.
Yeah.
Show of left we believe it's going to.
Help us stabilize the trend in the back half of the year and we're very confident that it continues to be the right thing to do for the long term trajectory of the business.
And then the third change in the assumptions that we sided ware.
Around the impacts of our new innovation and new distribution in 2023, which we continue to be very proud of and believe we're gonna be drivers of growth into the future. It's really a call down that is more related to the overall headwinds that the brand is facing so we believe taking this run rate.
The second quarter into the second half of the year.
Assuming stabilization with the green shoots.
That Joey mentioned on the call about where we see our investments working particularly well flex dot com, which is where we're driving a lot of traffic from from our marketing investments, we believe could be a leading indicator for you.
You know for Q4 for that inflection point for the business.
And just just to clarify how July was shaping up or any improvement there.
But we're not commenting on any intra quarter trading would you say that all the trends we've seen to date have been reflected in the outlook that we've provided.
Okay, great. Thank you.
Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed.
Hi, Good morning, everyone. As you think about the hair care category any updates on the performance of the hair care category and how it's done how it's performed relative to your own performance and with the updated guidance are there any adjustments that are being made in terms of new product introductions.
Spectation some performance thank you.
Thanks, Dana this is Julie and I will take that question in terms of the hair care category, you know tusa condo that really looks at the distribution that we participate in it has shown that the category is up 14%.
Obviously, you'll have seen that we are reporting in Q2 that is that our Q2 is down you know from the last quarter, but what is.
Encouraging to see that is that that 14% is not.
An increase based on one or two brands.
A collection of brands because as we have mentioned we have seen a lot more competition coming into the space and then what happens is because one of the plants is the driver of new people coming into the category you have a lot of people who are not familiar with the prestige category exploring.
Fresh a hunting and this is where we believe through our increased investments I mean, we I emphasize again it is a category that we created in such a way that we know that the new normal here for us is to really focus on that.
The communication the investment and the support of the pro community and we have been doing that and then double clicking on it and we believe that as this category grows we are leading it and we can participate in it. Despite the current headwinds that we're seeing from the increased competition you know from.
The promotion Ality in the business as well as some of the misinformation that is circulating in the market space.
The other question that you have regarding new product innovation.
A very intentional.
In terms of how we innovate and support our R&D.
Sure.
That is because.
Any time, we launch something it has to meet two high box one it is definitely going to at.
To our technology in such a way that it depends on the technology that we have to really drive performance. The second is that we participate in segments that are large, but yet not cannibalizing the products that we have so a good example is when we launch a clarifying.
Shampoo or a pump or shampoo, it does not cannibalize, our existing shampoo and conditioner. So those are the the very intentional strategy that we put behind our launches and so innovation will continue to be a.
Part of our growth, but again, we emphasize it is not about <unk>.
Typing in innovation for revenue by typing in innovation that truly speaks to our technology and speaks to the segments, we participate and lead it.
Thank you and just one follow up on inventory levels. How are you thinking about inventory planning through the balance of the year given the levels of demand for Q3 and Q4. Thank you.
Hi, Dana I'll take that one so in terms of our own inventory levels.
We continue to make sequential progress quarter to quarter in terms of bringing those inventory levels.
Down to where we want them to be we're not there yet, but it's very much a high priority and key focus for the team.
So you know we're managing our production schedules, we're managing our inventory purchases are you know very closely with our strategic suppliers and we expect to continue making progress on bringing those inventory levels down through.
Through the year matched with our current forecast and an ongoing you know outlook for demand.
So our job is not done, but we're making good progress every quarter.
Thank you.
Yeah.
Our next question is from Rob I understand with Evercore ISI. Please proceed.
Great Robert Aten Stein from Evercore. Thank you.
A couple of follow up questions number one.
The D T C business I think you mentioned.
In the prepared remarks that that benefited from some shipments to a large customer if if I recall right.
Can you confirm that and then maybe if you could back out.
Those extraordinary shipments with the DTC business would've done.
Okay.
Hey, Rob I'll take that one so yes, we did mention that the direct to consumer channel.
Was benefiting in the second quarter from two primary things one strengthen our old flex dot com business I'll come back to that and the second was.
Shipments related to a key e-commerce customer related to a key promotion that was running in July so that that was normal course in terms of phasing of those shipments I'd say pass that on an underlying basis, the direct to consumer channel.
Is the one that performed actually better than our expectations in both sell in as well as sell out. So that's a channel where we've seen a stronger trends and it is a channel where we've actually been directing quite a lot of our investments.
Both in lower funnel activities and we're seeing a very good ROE as in those activities as well as our upper funnel activities driving to Oh flex Dot com as an example.
Okay, and then did so it was down six if it wasn't for the the the shipments would it had been down 15 down 20, just trying to get a an order of magnitude.
So you know, we're not supplying specific numbers on that but you're directionally in the right place I would say and I'll just reiterate there that that you know the sell out the consumption levels that direct to consumer.
We're strong in and this is not a channel where we've been dealing with.
Any material.
Inventory right sizing so what you see in telling is aside from this one.
Impact from August shipments related to this promotion is very representative of the sell out as well.
So so the sell out would have been minus six roughly.
And again, our sell in sell out and direct to consumer are staying very close to each other so we're not giving a number but directionally that's correct.
Oh, Okay. So that that is you know it sounds to me like are the strongest confirmation of the the health of the brand and the business.
Is that fair.
I think that's fair and Judy I don't know if you want to add to that but this is this is why we especially called out old flex dot com as a leading indicator and a green shoot that that we're continuing to support and invest behind.
Absolutely nothing more to add than the fact that.
It is gratifying to see that because they are the closest to the end consumer at <unk> Dot com. So you know that that content messaging all that creative is definitely resonating.
Terrific. Thank you very much.
Thank you.
Our next question is from John Kim with T. D. Cowen. Please proceed.
Thanks for taking my question I, just wanted to get a little bit more color on the on the professional channel I know you talked about it but do you think it's more of a function of stylus being more frugal or.
Competition, just what youre seeing in that channel and just another point you talked about it a little bit, but how does the muted demand change or not change on your product launches for the year. Thank you.
Thanks, John I'll take that question on the pro and the demand piece of it.
Yes.
Our prepared remarks, we did mention that you know our loyal customers in the approach channel continues to be highly engaged with us. They are the ones who continue to really support us talk to their clients about other stylists about that but we also believe has to be mentioned that the continuation of some of those negative factors have seen.
<unk> and especially to some stylus.
Oh, you know in the mix, whether you're hearing some of those misinformation.
What we have done as you have seen is that we believe that in order for us to continue to be.
Successful in this area, we need to continue to invest in our integrated full funnel marketing and as we have said before for the professionals. The number one thing. They want is for brands, who broke and built in awareness. So that you can drive clients do that studios some of them are single pay.
Many of them brought that a single payroll entity.
That really helps them to kind of look at new client acquisition on their part and they'll all clients, who see the Brent and basically say look I want to continue can you. Please continue having that all tax treatment in my services with you. So with the pro we are double double down on that.
Oh, so making sure education, helping them address.
Any cow product knowledge, how to use the product better how to really allows our clients to not you know.
Use our product because they feel like they need to cut some of the time and they need more time to use our product we have been able to secure information for them and how to use for them that you can still benefit from our products that are short of time and then just very quickly in tons on on the demand.
We are believing that.
Approach panel, while they will help them.
So the challenge of having felt that customers coming in between services, leading it a lot longer but the over.
Over the counter sales on retail is an area, where they can really improve on and we are spending athletes in terms of education and training to help them look at retail as part of <unk>.
Down revenue generated in stroke.
Yeah.
We have reached the end of our question and answer session I would like to turn the conference back to Joey Wang for closing comments.
Well. Thank you everyone for your time, we look forward to speaking with you at our next earnings call. Thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you again for your participation.
Okay.
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Okay.
Uh huh.
Okay.
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