Shares of Beauty Health Co. (SKIN) have sunk 30% following the release of quarterly results on May 9. The expected softness of equipment revenue stemming from customer caution over its flagship Syndeo 3.0 delivery system and higher interest rates led to net sales for Q1 falling 5.7% from the prior year to $81.4 million. But this was still better than the 6.6% decline projected by the Street, thanks to steady growth in consumables sales across all of its regions. Together with cost cuts, this also helped the company eke out $400,000 in adjusted Ebitda versus the loss of $7.6 million feared by analysts.
I think the real culprit for the marked weakness in SKIN’s stock is that customer-service teams are still finding technical issues with Syndeo 3.0, which was released 11 months ago. That’s the last thing you want to hear from a company that has just spent over $60 million on replacing all earlier-generation devices with this newest model in an effort to eliminate the issues customers were experiencing with the older machines. And with this certainly not helping customers gain more confidence with this newest device, SKIN is forecasting net sales of $96 million to $102 million and adjusted Ebitda of $4 million to $7 million that fall short of the $107.2 million and $10.8 million expected by the Street.
Fortunately, most of these newer problems are primarily related to noise, inconsistent flow and cosmetic issues that can generally be quickly diagnosed and solved over the phone. This indicates that the scope of these new issues is modest and won’t involve anything near the level of resources or support to resolve as had been the case with previous versions, some of which required full replacements. That’s why even SKIN’s softer outlook indicates a return to sequential top-line growth of 22% (following three straight quarters of declines) and a more than 13-fold increase in adjusted Ebitda even as it continues to invest in its supply-chain and inventory controls in order to minimize further problems.
Combined with the strength in demand it continues to enjoy for its consumables and the additional cost savings expected from its business transformation program aimed at reducing costs and enhance the efficiency of its operations, SKIN still asserts it can achieve its goal for net sales to be flat to up low-single digits and to generate more than $40 million in adjusted Ebitda for the full year.
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This represents a return to solid year-over-year sales growth of at least 12% and a more than quadrupling in adjusted Ebitda in the second half of the year. It’s also worth noting that despite it burning through $18.7 million of free cash in Q1, SKIN’s net debt position has actually improved by about $13 million so far this year as it has been able to repurchase $192.3 million in principal amount of its convertible notes for just $156.3 million—a discount of nearly 19%. If the company comes anywhere near achieving its targets and sees additional improvements to its balance sheet as a result, the stock should recover well from its latest slide.
Julius Juenemann, CFA is the equity analyst and associate editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. Beauty Health Co. (SKIN) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.
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