Beauty Health: Skincare Today & Alpha Tomorrow (NASDAQ:SKIN)

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Beauty Health (NASDAQ:SKIN) emerged from the pandemic with material momentum behind it as global demand for HydraFacial, its patented non-invasive skincare treatment, ramped up. This meant the company’s run to a 52-week high of $30.17 had real legs as it was built on the back of sound financials, most notably the generation of positive adjusted EBITDA.

SKIN price chart
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With the price of its common shares dropping by 64.8% from these highs, Beauty Health has since become part of the great collapse of growth stocks. What does this mean for a company that continues to grow its HydraFacial footprint? With the high-end facial treatment solution now available in over 90 countries and the development of a new delivery system, Beauty Health is signalling to more prudent long-term shareholders that its current stock price malaise is likely temporary.

Strong First Quarter Results Push Upward Guidance Revision

The company reported earnings for its fiscal 2022 first quarter after the market closed on Tuesday. This saw revenue come in at $75.42 million, a 58.6% increase from the comparable year-ago quarter and a $7.27 million beat on consensus estimates. Beauty Health sold 1,849 delivery systems during the quarter to grow its installed base to 21,719 with an average selling price of $21,462.

Beauty Health First Quarter 2022 Financial Results

Beauty Health

Sales in EMEA saw the largest percentage increase at 139.7%. Gross margins also grew on both a GAAP and adjusted basis with the latter reaching 72.7%, up 50 basis points from the comparable year-ago quarter.

However, adjusted EBITDA was down to $2.2 million from $7 million in the year-ago period due to what management described as continued headwinds from global supply chain challenges and inflationary pressures. This saw adjusted EBITDA margins fall materially to 2.9% from 14.8%. The company, unfortunately, expects higher shipping costs to continue to weigh down on margins through 2022. Whilst this is not welcome news for Beauty Health bulls, there was a salve with the company increasing its fiscal 2022 revenue guidance. Net sales are now expected to be in the range of $330 million to $340 million, up from the previous outlook for $320 million to $330 million. The company also reaffirmed its guidance for adjusted EBITDA of not less than $50 million during the year.

The immediate negative reaction of the common shares came on the back of three brokerages lowering their price targets on the company. Most notably was Piper Sandler which flagged weakening GDP and consumer sentiment across the globe as a reason to lower its multiple on the company to 7x estimated fiscal 2023 sales versus 9x previously. This brought the price target down to $24 from $26.

Using the low end of Beauty Health’s fiscal 2022 revenue guidance, the company currently trades on a 4.85x sales multiple with its market cap at $1.60 billion. This provides room for upside if the multiple rises to Piper’s already lowered multiple. Further, Beauty Health held a material $859.2 million in cash and equivalents on its balance sheet, mostly from a $750 million 1.25% convertible note due in 2026. It also retained an undrawn revolving credit facility of $50 million which the company states will provide them with flexibility for future acquisitions.

Beauty Health Master Plan

Beauty Health

At the core of Beauty Health’s market strategy is its master plan, a string of ambitious statements to deliver on innovation, invest in its brand, and nurture direct consumer relationships. The company also expects acquisitions to play a significant role to make its strategy move faster. The most salient development on this was the March release of Syndeo, a new digitally connected HydraFacial delivery system. This platform offers a significant technology upgrade from the existing HydraFacial delivery system as it brings data collection capabilities for a personalized and connected experience. I expect the new system will help drive sales from Beauty Health’s existing customer base as well as new customers entering the HydraFacial community.

Skincare Today And Alpha Tomorrow

Beauty Health is a victim of a great crash whose chapters are still being written as central banks around the world move to aggressively crush runaway inflation. The crash now supersedes the peak fear we had back in March 2020 when the world quite literally shut itself down and with it the business models of companies like Beauty Health. The focus now shifts to the longer-term potential of a high-quality company beset by short-term headwinds to its business model. The fundamentals matter and Beauty Health has proved itself to be a prudently run company able to grow revenue whilst still generating positive adjusted EBITDA. The company’s global expansion will help to maintain its revenue ramp and diversify its revenue base. This is especially true as Europe continues to see intense sales growth. In this regard, this was an outstanding quarter of growth as the company executed masterfully on its master plan.

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