The Beauty Health Company: Long-Term Bet (NASDAQ:SKIN)

investment paper

Growing awareness of skin health has benefited The Beauty Health Company (NASDAQ: SKIN) in the last few years. Looking ahead, the healthy demand for HydraFacial treatments around the world and Expanding footprint to new locations, retail stores and medical spas around the world. Margins should benefit from normalized investment levels and more volume generation in 2023 and beyond. SKIN has a compelling multi-year growth story and given its good growth prospects, I give the stock a buy rating.

Earnings outlook

Beauty health companies around the world are experiencing healthy demand for their HydraFacial delivery system as consumers become more conscious and prioritize skin health. The company has quickly recovered from his COVID-related decline in sales in 2020, surpassing pre-pandemic levels in fiscal 2021.

Growth momentum continues in 2022.of The company benefited from its omnichannel presence and increased brand awareness through digital and influencer marketing. The company has sold about 6,500 delivery systems in its first three quarters of 2022. This surpassed his full-year 2021 sales figures. Third-quarter sales were driven by increased global consumer demand in medical spas, sales momentum at Syndeo (new delivery system launched in March 2022), and retail expansion. Healthy demand was partially offset by currency headwinds.

Looking ahead, I believe the company should continue to benefit from healthy demand and an expanding global footprint. Hotel opened and expanded into iconic hotels such as the Mandarin Oriental in Hong Kong and The Addition in Miami Beach. The company also launched HydraFacial at Sephora’s “first store of the future” in Singapore. again, Douglas’ A luxury flagship in Düsseldorf, Germany’s beauty and lifestyle capital. In addition, SKIN has expanded into new locations with existing retail partners such as John Lewis across the UK and Galeries His Lafayette in France. This expanded global footprint should help the company reach new consumers and grow sales.

Additionally, the company’s estheticians and skin healthcare providers are its greatest asset, helping to spread consumer awareness and deliver a superior HydraFacial experience. The skincare specialist job is one of the fastest growing occupations in the US, he is projected to grow 17% from 2021 to 2031. The growth in this job reflects the accelerating consumer demand for skincare.

Over the last few years, skin health and wellness have become a higher priority, and society has expanded the definition of beauty beyond one size and one skin type. Consumers are embracing their own vision of beauty and want products that deliver health and confidence. With over 20 skin health boosters (consumables) to choose from with every HydraFacial treatment, HydraFacial offers customizable, personalized skincare solutions for all skin types. SKIN has a Net Promoter Score (NPS) of 44, reflecting high consumer loyalty and satisfaction with the brand. In addition, the growing interest in men’s cosmetics is also a tailwind for the company’s sales growth. Moreover, in this era of increased video calling and hybrid work models, people are paying more attention to their facial appearance, which should continue to increase demand.

Now, some readers may also be concerned about the weakening economy and the consumer spending environment. It may come as a surprise to them, but the health, beauty and skincare categories are much more resilient in times of economic slowdown as they prioritize spending on modest luxuries that make them feel good. The use of beauty products, tracked by the “Lipstick Index,” increased during the dot-com recession and the massive housing recession of the early 2000s. Therefore, we expect demand to remain strong despite the inflationary environment and price increases by the company. This healthy demand should be further supported by the reopening of the Chinese economy as the company expands its footprint in Asia Pacific. Therefore, I am optimistic about the company’s earnings growth prospects.

Profit outlook

Since its September 2021 IPO, SKIN’s adjusted gross margin has benefited from fixed-cost leverage and higher delivery system selling prices. Meanwhile, his adjusted EBITDA margin has become more volatile over the past two years as he invested heavily in his early years as a publicly traded company. The company expanded its experience centers (where it provides training and education to estheticians related to HydraFacial), built a global office infrastructure, optimized its distribution network with local manufacturing, implemented ERP, and built brand awareness. We are increasing our marketing investment to improve our performance.

However, adjusted EBITDA margins have improved over the last few quarters. This is because we have started to benefit from the leverage of these investments and the fixed costs associated with higher volumes and better price realization in both our delivery system and consumables. In the third quarter of 2022, partially offset by problems in his supply chain, inflationary pressures and exchange rates, these tailwinds pushed the company’s adjusted gross and his EBITDA margins to 350 each. bps and 980 bps increased.

After increasing investment over the past few years to build a scalable infrastructure, management plans to shift focus to increasing margins in the next few years, with a 25% to 30% range of profitability by 2025. Target adjusted EBITDA margin. In addition to normalized investments, the company’s profit margins should benefit from network optimization, increased sales volume, and mitigating headwinds in its supply chain.

Initial costs from Syndeo’s international launch are a minor headwind in the first half of 2023, but I am optimistic about the full-year 2023 margin outlook and should see margin improvement in 2023 and beyond. I think so.

Evaluation and conclusion

SKIN is currently trading at an expected P/E of 45.33 times the FY2023 consensus EPS estimate of $0.26. The company has an interesting razor/razor blade model and generates recurring revenue from selling consumables for its installed HydraFacial equipment. I think the company is still in the early stages of a multi-year growth story. While the company’s P/E to its FY23 consensus EPS estimate may seem expensive, its P/E multiple of 25.94 times its FY24 consensus EPS estimate of 0.45 and 16.03 times its FY25 consensus EPS estimate of 0.73 is: looks much more reasonable. Given SKIN’s revenue and margin growth prospects driven by healthy demand, increased footprint, volume leverage, and normalized investment levels, I believe it’s a good long-term buy.