OLPX - NASDAQ

Greetings. Welcome to Olaplex Holdings, Inc. Second Quarter 2023 Earnings Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Patrick Flaherty, Vice President of Investor Relations. Thank you. You may begin.

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 would 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 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.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 any other publicly available information. Furthermore, this information involve 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.

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 were below our expectations of modest sequential improvement from the first quarter and adjusted EBITDA was $36.7 million or a margin of 33.6%. With weaker-than-expected results in the second quarter coupled with our updated assumptions for the remainder of the year, we are reducing our guidance for fiscal 2023, expecting net sales in the range of $445 million to $465 million. Overall, our business continues to be negatively impacted by competition, a more promotional environment, and misinformation related to our brand. Despite these headwinds, we are continuing to invest by increasing efforts on upper funnel marketing designed to build brand equity and expanding our focus and support for the important 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 announced that we are approaching 2023 as a reset year to build a stronger and more resilient foundation to position Olaplex for long-term growth. The prestige haircare category which Olaplex revolutionized 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 and expand our marketing and educational capabilities. And to that end, we initiated an integrated full funnel marketing approach this year to build brand awareness, increase 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 connections associated with the Olaplex brand. When we introduced annual guidance earlier this year, our visibility was limited as there was uncertainty regarding how shifting market dynamics will impact the business. We anticipated that trends will stabilize in the second quarter and sales demand will rebound in the second half of the year as our increased investments in sales, marketing and education began to yield returns. We also expect it to benefit from new product introductions and new distribution gains. However, we have now seen a weaker sales trend persists since our first quarter earnings call in May through June. While our loyal customers remain highly engaged with Olaplex, we 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 views of the brand with some members of the stylist community. 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, innovation and brand-building activations to grow the business. Several key assumptions have changed in this new outlook. First, demand slowed as trends weakened in our Professional and Specialty Retail channels due to slower sellout and some customers rightsizing their inventory position. Second, while we are beginning to see some positive early indicators from our upper funnel market campaign, we are not yet experiencing the list that we were anticipating across the business, and we expect that this activity will begin to deliver stabilization on an absolute basis rather than growth during the second half of the year. And third, given our updated view on our trend line, we believe it is prudent to lower our expectations for consumer demand associated with new product introductions and new distribution gains. Eric will provide more details on our outlook later on in the call. 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 Olaplex following the start of our upper funnel marketing campaign in June. Similarly, olaplex.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 assets of the campaign are resonating. And as we balance selling activities with demand, we believe the months on hand inventory positions at our major accounts on our core items are in a much better place relative to their targets. We have worked to normalize inventory levels with this partners in response to slower than originally planned sales and decisions from this partners to lower overall month-on-hand levels than previously carried. To put this in context, in the first half of 2023, net sales, all selling declined 44% overall, while sell out at key accounts are down approximately 26%. Some of this difference can be attributed to the lapping of previously communicated prior year one-offs, namely our 1-liter pipeline launch, Ulta pipeline in Q1 of 2022, and the impact of our July 1, 2022 price increase. The remainder of the difference between sell-in and sell-out can be attributed primarily to discontinued 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 bring new and lapsed customers to Olaplex. We are increasing the amount of investment for this year and are 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 increase to a range of $80 million to $85 million in 2023 compared to our previous expectation of $70 million and up from $40 million in 2022. With this change, we are increasing aspects of our new brand campaign, re-purposing some of the upper funnel out-of-home activations towards media and connected TV and focusing more efforts on improving our standing with the Pro community. As we adjust our plans for the year, we continue to make progress against our 4 key priorities. These are accelerating investments in sales and marketing, increasing and evolving our educational assets, reasserting our position with our Pro and Specialty Retail partners and improving our approach to PR. Let me now walk you through the progress we made on this initiative 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 investments for the year. In May, we kicked off an integrated full funnel creative campaign titled Strength Starts Inside, featuring paid media, digital, social, connected TV, audio and out-of-home activations. With this campaign, we intend to amplify our scientific authority by highlighting how Olaplex build strength from the inside with our patented bisamino technology as well as strengthening emotional connections with our community of Pro's and customers who aspire to bring out their own inner strength. And in June, we generated excitement of our 9-year anniversary as a company by celebrating National Olaplex Day. To celebrate this milestone, we hosted events with our professional ambassadors and activated fully branded guerilla street sampling teams near local Sephora and also Ulta Beauty doors in New York, Los Angeles and Chicago. Turning to education. We continuously look for new and better ways to inform stylist and consumers about the superior performance of our iconic products. In that vein, we are implementing a more active and engaged approach to field education and are 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 Olaplex and following positive results, expanded the program to 400 Sephora and Ulta Beauty doors during the first quarter. This progress has demonstrated the impact we can have in driving in-person education with consumer and beauty advisers. An internal 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 Olaplex brand. Our third priority is to reassert our position with our Professional and Specialty Retail partners. The Professional community remains as the foundation of our brand and its core to maintaining our credibility in the category. We know it is critical to address and solve the issues we are facing in that channel by increasing our visibility and investing more to deepen engagement with stylists. To that end, the team is implementing new and incremental full 360 activations to show our support for the Pro audience driven primarily by participating in high visibility distributor-led events, stylist appreciation days and in-store activities. In addition, we continue to increase in-person and virtual sales contracts and training with our new field sales managers and expanded education team, both in North America and in internationally. We piloted and expanded data-driven programs to help our distributor partners target and secure new Olaplex salons and are advancing our key opinion leader program by adding new salons and cultivating relationships with existing partner salons. For Specialty Retail, we are continuing to partner with our key accounts to expand CRM campaign and education content. We also introduced new visual merchandising, reflective of our new brand campaign and made progress on international expansion. Our fourth priority this year is to build out and enhance our PR capabilities. With a focus on strengthening our global reputation, scaling influencer, marketing and delivering growth in earned media value, our PR assets are aimed at 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 Olaplex and hair health, via digital and social channels. We intend to continue to develop the Olaplex 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 capability of our products. We also continue to actively defend our brand against allegations that claim Olaplex product caused hair loss. In July, the court granted Olaplex's motion to sever and dismiss 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 that 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 with growing and evolving global consumer brands after having served as the President and Chief Executive Officer of The Hershey Company and currently serving on the Board of Directors of Tapestry, Elanco Animal Health and Colgate-Palmolive. It is a testament to the opportunities ahead of Olaplex that we could attract a leader of its callable and credentials. J.P. will be valuable in addition to the Olaplex 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 it is a challenging period for Olaplex, we continue to be confident in the long-term opportunities for this business. The prestige haircare category is in its early stages of growth, and we are an industry leader, offering fully differentiated sign with our patented bisamino technology. We believe we can reach new customers and reclaim users as we invest in our marketing model and develop within the international markets 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 Eric to cover our second quarter results in more detail and provide additional information on our revised outlook for 2023. Eric?

Thank you, JuE, 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 2 challenging comparators from Q2 2022. First, we lapped an approximately $22 million net sales impact in the second quarter of 2022 from the introduction of 1-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 1 last year. By channel, the Professional channel sales declined 61.2% to $40.9 million versus a 32.7% increase last year. Our Direct-to-Consumer channel sales were down 6.4% 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 well as the price increase we took from July 1, 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 workforce 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% compared to 63.1% a year ago. Adjusted net income decreased 78.5% year-over-year to $21.2 million or $0.03 per diluted share from $98.8 million or $0.14 per diluted share in the 2022 2nd quarter. Turning to our balance sheet. Inventory at the end of the first quarter was $128.5 million, down from $132 million at the end of the first quarter. We continue 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 a lower sales forecast, which more than offset building inventory of new SKUs as we prepare for product launches this year. Turning to cash flow. During the first 6 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 in deferred fees, was $651.7 million. Now turning to our financial outlook. As JuE mentioned earlier in the call, we are revising our guidance for 2023. Let me walk you through our revised guidance and assumptions for the remainder of the year, starting with the top line. For fiscal year 2023, we expect net sales in the range of $445 million to $465 million, down from the previous range of $563 million to $634 million. At the midpoint of both ranges, this represents a reduction of approximately $144 million, which can be broken down into 3 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, we are lowering these assumptions by approximately $35 million compared to our original assumptions given recent sales trends. With this new outlook, second half 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 of 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 for both the Professional and Specialty Retail channels. Conversely, we expect our Direct-to-Consumer channel to decline 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 in 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 a higher sell-in 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 is deleverage from lower sales volumes on our fixed warehousing costs as well as the actions we are taking to work through excess inventory. This more than offsets the positive impact of cost savings and price increases implemented in the second half of 2022. In the medium term, as we work through higher cost and 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 the lower net sales forecast against our expectations for increased operating expenses, which includes increasing our sales and marketing investment for the year, as JuE previously discussed, we now expect more adjusted EBITDA margin deleverage than our prior assumption. For 2023, we expect adjusted EBITDA in the range of $161 million to $176 million or a margin of 36.2% to 37.8%. This compares to our previous range of $261 million to $322 million or a margin of 46.4% to 50.8%. 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 Olaplex a unique brand and a great business. We are a science-led company, and with our commitment to making people feel more confident with healthier, more beautiful hair, we have built an industry-leading brand that enjoys trust and credibility from a highly engaged community of professional stylists and consumers. We are driving a synergistic omnichannel strategy and have the support of our customers who view us 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 the 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?

[Operator Instructions] Our first question is from Susan Anderson with Canaccord Genuity.

Alec Legg on for Susan. Just a question on your sellout comments. You said it was down about 26% at key 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 of those 1-liter bottles, which extends the need for consumers to replenish? Just any details there?

Eric Tiziani here. I'll take that. So that's right. What we disclosed 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 sell-in. So the 1-liter launch that you just mentioned in the first half of last year, Ulta 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. And while there's some ins and outs, the remainder of that difference between net sales decline and the consumption decline can primarily be explained by what we've seen as further customer inventory rightsizing and as JuE mentioned earlier, we believe that based on current sales, our inventory position on core items at 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.

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 then is it primarily top of funnel, just to build awareness or are you also spending fairly equally or just how to think about spending on retention?

This is JuE, and I will take that. So we have always said, right, the category that we have created is now more attractive. And therefore, in order for us -- you can't build on the awareness for the category. We really need to step up on our investment in upper funnel as well 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 will start to figure out what is best to count increase, whether it's in consideration, whether it's in conversion or continue with the upper funnel, which is building brand equity and brand awareness.

Our next question is from Andrea Teixeira with JPMorgan.

JuE, can you comment on the exit rate of the consumption number you quoted, the consumption decline of 26%. I understand this is the first half, I guess, first half of last year. So I was hoping to see if there is any improvement there in terms of consumption or conversely, if things go worse as you progress the quarter. And then related to your investments, especially [indiscernible] salons and increased awareness of the brand, how -- can you comment a bit on -- at this point, I think you've been through about 8 months of the campaign where you get a sample -- your samples -- number three after service. Like wondering if you can give us an idea how that converted? And lastly, on the shelf space, can you talk about -- I understand that part of the decline in guide was expectations for a modest shelf space growth. So I was wondering if you can comment on how are you feeling about before the back wall. If there is anything we should be aware of in terms of negotiating with the quarter next year.

Well, thanks, Andrea, for the question. It's a 3-parter. So what I'm going to have is Eric to answer on the consumption first and then I'll kick the investment in the salon and Pro and the shelf space question. So Eric?

Thanks, JuE. 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 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 project forward a new baseline level of demand for the back half of the year. That's a key assumption change. We're now focused on using the investments we put into the business to stabilize that sales trend in the back half of the year so that we can get them to 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 JuE.

Thanks, Eric. And Andrea, to answer your question on the investment in salon professional standpoint, as we have always stayed true to the course and this is why you are seeing us going into the field sales team with our own team members, where it's not only more cost efficient, 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 why we are moving into this direction. But it is still early for us to kind of say when everything is tracking, and we are working toward, as you have heard us say, on the back half towards stabilizing the business so that we can look at continue -- as we go into the new year with a better foundation and a more resilient Olaplex, as we have mentioned. These -- both the salon channel and 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, there is also people in store that help support traffic that's being driven in there, and there's also visual merchandising that conveys the same message. So that is a 360 approach when the customers see it in out-of-home, in the billboards, then they go into a store and are being intercepted by a sales beauty adviser that knows about the brand and then seeing the same visual being expressed at our shelf space. Your other question regarding shelf space, we obviously cannot speak on behalf of 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 Olaplex. We are still per numerator, the brand that drives the most new customers into the category. We are in the top 5 ranking in terms of haircare prestige brands 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 -- addresses damaged and repair hair, that we are also a brand that is represented by science and technology. When you have all that called equities and when you have meetings, top-to-top, these are considerations that they take and my last -- my point about driving new customers into the space, into the category, that's a powerful type of driver for both the retailers and our professionals because awareness is primarily what they need from a brand so that fit it into doors will materialize into conversion.

Our next question is from Bill Chappell with Truist Securities.

One question on gross margin. Just trying to understand, I mean, I think some of the pressures that you've talked about are in near term or short term as you work out inventory and obsolescence. Do you have a pretty good visibility? I mean when they will pop back? And as we look at the 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 or short-term type stuff should go away pretty quickly. So any color there?

Yes, 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% and as you point out, some of the challenges we're facing in our gross margin in 2023 are near term and we believe more temporary issues 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 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 return to growth, we see those tailwinds returning and are confident in an adjusted gross margin range in that mid-70s, which, of course, then gives us the ability to continue investing 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 move to the fourth quarter?

So as we mentioned in our guidance color, we now expect 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 we'll have less of these temporary headwinds and return into that adjusted gross margin level of the mid-70s.

And then just a follow-up to a question we're getting in, what gives you confidence that this is a good number in terms of sales for this year? I'm trying to understand kind of on consumer takeaway, where that fell this past quarter versus your expectations. I mean, we all knew it was going to decline. There's a lot of noise out there, but just trying to understand how much worse and what you saw intra-quarter and even as we went into July that kind of gives you confidence in the updated guidance.

Yes, Bill, 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, as we mentioned, we're, 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 to show a lift. 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 cited were around the impacts of our new innovation and new distribution in 2023, which we continue to be very proud of and believe are going to 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 from the second quarter into the second half of the year, assuming stabilization with the green shoots that JuE mentioned on the call about where we see our investments working, particularly olaplex.com, which is where we're driving a lot of traffic from our marketing investments, we believe, could be a leading indicator for that inflection point for the business.

And just to clear about how July were shaping up or any improvement there?

We're not commenting, Bill, on any intra-quarter trading. We'll just say that all the trends we've seen to date have been reflected in the outlook that we've provided.

Our next question is from Dana Telsey with Telsey Advisory Group.

As you think about the haircare category, any updates on the performance of the haircare 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 or expectations on performance?

Thanks, Dana. This is JuE, and I will take that question. In terms of the haircare category through [Circana], that really looks at the distribution that we participate in. It has shown that the category is up 14% and obviously, you have seen that. We are reporting in Q2 that is that our Q2 is down from the last quarter. But what is encouraging to see that is that, that 14% is not an increase based on 1 or 2 brands, but 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 Olaplex is the driver of new people coming into the category, you have a lot of people who are not familiar with the Prestige haircare category that is exploring and treasure hunting. And this is where we believe through our increased investment -- I mean, 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 the communication, the investment and the support of the Pro community, and we have been doing that and we are 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 are seeing from the increased competition, from the promotionality 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, we are very intentional in terms of how we innovate and support our R&D launches. And that is because any time we launch something, it has to meet 2 high box. One, it is definitely going to add 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 purple shampoo, it does not cannibalize our existing shampoo and conditioner. So those are 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's not about just piping in innovation for revenue but piping in innovation that truly speaks to our technology and speaks to the segment we participate and lead in.

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?

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 we're managing our production schedules. We're managing our inventory purchases very closely with our strategic suppliers and we expect to continue making progress on bringing those inventory levels down through the year, matched with our current forecast and ongoing outlook for demand. So job is not done, but we're making good progress every quarter.

Our next question is from Rob Ottenstein with Evercore ISI.

Robert Ottenstein from Evercore. A couple of follow-up questions. Number one, the DTC business, I think you mentioned in the prepared remarks that, that benefited from some shipments to a large customer, if I recall right. Can you confirm that? And then maybe if you could back out those extraordinary shipments what the DTC business would have done?

Rob, I'll take that one. So yes, we did mention that the Direct-to-Consumer channel was benefiting in the second quarter from 2 primary things. One, strength in our olaplex.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 was normal course in terms of phasing of those shipments. I'd say past 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 stronger trends. And it's a channel where we've actually been directing quite a lot of our investments both in lower funnel activities, and we're seeing very good rollouts in those activities as well as our upper funnel activities driving to olaplex.com as an example.

Okay. And then did -- so it was down 6% if it wasn't for the shipments, would it have been down 15%, down 20%? Just trying to get an order of magnitude.

So 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 the sell-out, the consumption levels at Direct-to-Consumer were strong, and this is not a channel where we've been dealing with any material customer inventory rightsizing. So what you see in selling is, aside from this one impact from the shipments related to this promotion is very representative of the sell-out as well.

So the sellout would have been minus 6% roughly?

Again, 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.

Okay. So that is -- it sounds to me like the strongest confirmation of the health of the brand and the business. Is that fair?

I think that's fair. And JuE, I don't know if you want to add to that. But this is why we especially called out olaplex.com as a leading indicator and a green shoot 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 olaplex.com. So that content, that messaging, all that creative is definitely resonating.

Our next question is from Jonna Kim with TD Cowen.

I just wanted to get a little bit more color on the Professional channel. I know you talked about it, but do you think it's more of a function of stylists being more frugal or competition? Just what you're 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 your new product launches for the year?

Jonna, I'll take that question on the Pro and the demand piece of it. Yes. In our prepared remarks, we did mention that our loyal customers in the Pro channel continues to be highly engaged with us. They are the ones who continue to really support us, talk to their clients about us and other stylists about us. But we also believe, as we mentioned, that the continuation of some of those negative factors have impacted them and especially to some stylists that are in the mix where they are hearing some of those misinformation. So 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 an integrated full funnel marketing. And as we have said before, for the professionals, the #1 thing they want is for brand to grow and build an awareness so that it can drive clients do their studios. Some of them are single -- many of them rather are single payroll entity. So that really helps them to kind of look at new client acquisition on their part and their own clients who see the brand and basically said, "Look, I want to continue, can you please continue having the Olaplex treatment in my services with you." So with the Pro, we are double downing on that. We are also making sure education, helping them address any kind of product knowledge, how to use the product better, how to really allow their clients to not use a product because they feel like they need to cut some of the time and they need more time, rather to use our product, we have been able to secure information for them and how to use for them that we can still benefit from our products in a shorter time? And then just very quickly, in terms on the demand, we are believing that the Pro channel, while they will have the challenge of having some of their customers coming in between services, leading it a lot longer, but the over-the-counter sales on retail, it's an area where they can really improve on and we are spending efforts in terms of education, training to help them look at retail as part of their revenue generating short.

We have reached the end of our question-and-answer session. I would like to turn the conference back to JuE Wong for closing comments.

Well, thank you, everyone, for your time. We look forward to speaking with you at our next earnings call. Thank you.