The Beauty Health Co.: Still Worried About FY23 Guidance (SKIN)

Investment thesis

The Beauty Health Company (NASDAQ:SKIN) hopes to capitalize on the growing trend of consumers seeking healthy skin through treatments rather than concealing flaws with makeup. Despite management sounding confident and increasing their FY23 guidance, I am reiterating my hold recommendation until at least 2Q23 results are out to get a better sense of growth trends. If 2Q23 results are in line with expectations and the underlying supports are from recovery in China and the Syndeo launched, then I think the path to achieving FY23 guide is assuring. If it’s otherwise, I think many investors will start to derisk their position as 2H23 will need to majorly outperform, something is hard to be confident about if 2Q is not positive. That said, so far, management did note that the promising trends in April and May, so that is good news. Viewed altogether, I am still positioning myself on the conservative side of things given the uncertain recovery cadence for FY23, although management has been executing well thus far.

Thoughts on demand trends

Despite consumer inflationary pressures and general macro uncertainty, I believe that the underlying demand for SKIN solutions is still stable and likely growing. Recall that as millennials age, they become more concerned with skin care and are more willing to spend money on upscale options. Similarly, they value experiences over material possessions when making purchases. As the millennial population continues to rise, so too must the methods used to effectively advertise to this demographic. One of the trending treatments is non-invasive procedures, and this trend is especially visible in the United States, as shown by the strong underlying demand for Hydrafacial treatments as consumers continue to value self-care and treatments that improve self-esteem. Therefore, I continue to have a positive outlook on fundamental demand, especially in light of the fact that management has commented about the demand pipeline, in which growth is constraint by capacity (labor).

Thoughts on Syndeo and China

Since it is highly unlikely that a global Syndeo launch would achieve the same heights as the US launch, I believe it is best to moderate expectations. At the outset, keep in mind that the 1Q23 international launch did not gain any traction from the trade-ups program, in contrast to the previous US launch. Consequently, the difference in installed base between the US and the rest of the world suggests that international demand for Syndeo will unlikely grow at the same pace as the US in 2Q23. But, what could cause me to change my view is how much delivery systems are being sold to international providers as the weak 1Q23 might be due to international providers delaying their purchase as they await the new launch in 2Q23.

In contrast, I believe the Chinese economic recovery may result in a pleasant surprise. Now that SKIN’s entire commercial team is operating in China, I anticipate expansion as they aggressively pursue new demand. Importantly, I expect this group to also help with account management for reactivated customers, which should increase demand for consumables as stock is depleted in 1H23.

Thoughts on guidance

Although I believe management’s history of top-line outperformance bodes well against guidance of $460 million to $480 million, given the uncertain operating environment, I would not place my bets on that alone. Putting things into perspective, in order for SKIN to meet the mid-point of guidance, the remaining 3 quarters revenue needs a total of $383.7 million which equates to around ~$128 million per quarter over the 3 quarters. This is a very tall expectation as SKIN revenue has never gone past $120 million before. Furthermore, it is unlikely for all 3 quarters to see an even distribution as international ramp and China recovery will likely be back-end loaded. As such, the expectations for 3Q and 4Q is higher than the $128 million mentioned earlier. Looking at consensus figures, they are expecting revenue to accelerate for $/$115/$121/$135 million in 2Q/3Q/4Q, respectively. If 2Q were to disappoint, the risk to hitting the remaining will be even higher. Let’s also not forget that a deep recession will absolutely kill a ton of this demand no matter how stable I think the demand is as it is still a “want” and not a “need”.

Risks

Competition from larger peers that could pressure pricing

HydraFacial can’t compete with the likes of many major consumer goods conglomerates in terms of size and fame. When there is little to differentiate one company’s offerings from another, competitors may try to steal market share by offering products at prices that are on par with or lower than the typical prices of the first company. These market forces could force HydraFacial to lower its prices, hurting profits and possibly costing the company some sales.

Past success in innovation is not representative of those in the future

The cosmetics and skincare market is highly responsive to shifting consumer preferences. The success of HydraFacial is dependent on its ability to accurately predict consumer tastes and adapt accordingly. If HydraFacial misses an opportunity, it might have to work harder in the short term to “catch up” to competitors who are already ahead.

Conclusion

I maintain my hold recommendation due to concerns surrounding the FY23 guidance. While management has expressed confidence and increased their guidance, I believe it is prudent to wait for 2Q23 results to better gauge growth trends. If the results align with expectations and are supported by a recovery in China and the success of Syndeo, the path to achieving the FY23 guide becomes more promising. However, if 2Q23 does not show positive results, many investors may choose to derisk their positions as the second half of the year would need significant outperformance, which is uncertain at this point.