Funding Thesis

Elevated pores and skin well being consciousness has benefited The Magnificence Well being Firm (NASDAQ:SKIN) during the last couple of years. Trying ahead, I imagine the corporate ought to proceed to ship robust income development, benefiting from wholesome demand for its Hydrafacial therapy globally and enlargement of its footprint to new places, retail shops, and medical spas worldwide. Margins ought to profit from normalized funding ranges starting from 2023 and better quantity technology. SKIN is a lovely multi-year development story and given its good development outlook, I’ve a purchase score on the inventory.

Income Outlook

The Magnificence Well being Firm is experiencing wholesome demand for its Hydrafacial supply programs because of growing shopper consciousness and prioritization of pores and skin well being globally. The corporate shortly recovered from the 2020 COVID-related gross sales decline and surpassed pre-pandemic ranges in FY21.

The expansion momentum continued in 2022 as nicely. The firm benefitted from its omnichannel presence and growing model consciousness because of its digital and influencer advertising. The corporate bought ~6500 supply system models within the first three quarters of 2022, which was higher than the full-year unit bought in 2021. Within the third quarter, gross sales benefited from growing international shopper demand at medical spas, gross sales momentum for Syndeo (a brand new supply system launched in March 2022), and retail enlargement. The wholesome demand was partially offset by FX headwinds.

Trying ahead, I imagine the corporate ought to proceed to learn from wholesome demand and an growing footprint globally. Within the third quarter of 2022, SKIN entered its first One Lodge location in Kauai, Hawaii together with increasing to iconic lodges just like the Mandarin Oriental in Hong Kong, and The Addition in Miami Seashore. The corporate additionally launched Hydrafacial in Sephora’s ‘first retailer of the long run’ in Singapore. It additionally launched in Douglas’ luxurious flagship in Dusseldorf, a magnificence and way of life hub in Germany. As well as, SKIN expanded to new places with its present retail companions comparable to John Lewis all through the U.Okay. and Gallery Lafayette in France. This footprint enlargement throughout the globe ought to assist the corporate add new customers and ship gross sales development.

Moreover, the corporate’s estheticians and pores and skin healthcare suppliers are its largest asset, serving to in spreading shopper consciousness and offering a great Hydrafacial expertise. Skincare specialist jobs are among the many fastest-growing occupations within the U.S. and are projected to develop 17% from 2021 to 2031. This job development mirrors accelerating shopper skincare demand.

The prioritization of pores and skin well being and wellness has elevated over the previous few years, and society has broadened the definition of magnificence past one dimension or one-skin kind. Customers are embracing their very own distinctive visions of magnificence they usually search merchandise that present well being and self-confidence. Hydrafacial has greater than 20 pores and skin well being boosters (consumable merchandise) to select from for each Hydrafacial therapy, customizable for all pores and skin sorts, and customized skincare options. SKIN stands with a Web Promoter Rating (NPS) of 44, reflecting good shopper loyalty and satisfaction with the model. Furthermore, growing males’s attraction to beauty procedures and merchandise can be a tailwind for the corporate’s gross sales development. Additional, on this elevated video name period, and hybrid working mannequin, folks focus extra on their facial look, which ought to proceed to drive demand within the coming years.

Now some readers may additionally be nervous in regards to the weakening economic system and shopper spending surroundings. It would come as a shock to them however the wellness, magnificence, and skincare classes are far more resilient in durations of financial slowdowns as folks prioritize spending on small luxuries that make them really feel good. Using magnificence merchandise as tracked by the ‘Lipstick Index’ elevated in the course of the dot-com bust of the early 2000s in addition to the good housing recession. So, regardless of an inflationary surroundings and value will increase by the corporate, I anticipate demand to stay robust. This wholesome demand ought to be additional supported by the Chinese language economic system reopening as the corporate expands its footprint within the APAC area. Therefore, I’m optimistic in regards to the firm’s income development outlook.

Margin Outlook

Since its IPO in September 2021, SKIN’s adjusted gross margin is benefiting from fastened price leverage and the elevated promoting value of the supply system. Adjusted EBITDA margin, alternatively, has been extra risky up to now two years because of the firm’s heavy investments within the preliminary phases as a public firm. The corporate is increasing its expertise facilities (the place the corporate supplies coaching and training to estheticians associated to Hydrafacial), constructing international workplace infrastructure, optimizing distribution networks by native manufacturing, implementing ERP, and has elevated advertising investments to create model consciousness.

Nevertheless, during the last couple of quarters, the adjusted EBITDA margin has been enhancing as the corporate has began benefiting from these investments together with fastened price leverage related to larger quantity and higher value realization on each supply programs and consumables. Within the third quarter of 2022, the corporate’s adjusted gross and EBITDA margins elevated by 350 bps and 980 bps respectively because of these tailwinds, partially offset by provide chain points, inflationary strain, and FX charges.

Trying ahead, after the final couple of years of elevated investments to construct scalable infrastructure, administration intends to shift its focus towards margin enlargement over the subsequent few years and is focusing on an adjusted EBITDA margin within the 25%-30% vary by 2025. Along with normalized investments, the corporate’s margin ought to profit from community optimization, larger quantity development, and easing provide chain headwinds.

Whereas upfront prices from Syndeo’s worldwide launch are a slight headwind within the first half of FY23, I’m optimistic in regards to the full-year 2023 margin prospects and imagine the corporate ought to see margin enchancment in FY23 and past.

Valuation and Conclusion

SKIN is at present buying and selling at a ahead P/E of 45.33x FY23 consensus EPS estimate of $0.26. The corporate has an attention-grabbing razor/razor blade mannequin, the place it advantages from recurring income from promoting consumables for its put in base of Hydrafacial gear. I imagine the corporate continues to be within the preliminary part of its multiyear development story. Whereas the corporate’s P/E on FY23 consensus EPS estimates might look expensive, the P/E a number of of 25.94x on the FY24 consensus EPS estimate of 0.45 and 16.03x on the FY25 consensus EPS estimate of 0.73 seems to be far more cheap. Given SKIN’s income and margin development prospects pushed by wholesome demand, growing footprint, quantity leverage, and normalized funding ranges, I imagine it’s a good long-term purchase.