Assessing the Case for a Beauty IPO

To IPO or not to IPO? That is the multibillion-dollar question beauty companies increasingly ask themselves as the public markets have become a viable home for some in the sector, marking a big shift in exit options from past days.

And while interest in going public may have waned last year amid market volatility, the success of Il Makiage owner Oddity’s recent public debut, as well as other consumer-facing initial public offerings such as Greek-inspired restaurant chain Cava, will no doubt be food for thought for industry players looking to exit.

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“There are quite a few who are probably watching it,” said Olivia Tong, an equities analyst at Raymond James. “They’re thinking about their path, whether it’s an IPO, whether it’s M&A, whether they need a little bit more time.”

In the case of Oddity, shares in the company closed up 35 percent, or $12.53, to $47.54, valuing the company at about $2.7 billion on its first day of trading in July.

But as beauty companies contemplate a move to Wall Street, there also plenty of cautionary tales.

Cult hair brand Olaplex soared in its 2021 IPO at more than $24 per share, valuing the company at north of $15 billion. But this August, it cut its full-year forecasts, causing its share price to slide more than 20 percent, amid a lawsuit and increased competition. That was just the latest in what’s been a very tough stretch for the company, which now has a market capitalization of about $1.8 billion.

Other listings over the past couple of years include European Wax Center, Jessica Alba’s The Honest Co. and Waldencast Acquisition Corp., a special purpose acquisition company whose prize assets are Milk Makeup and Obagi Skin Care. At the time of going to press, Honest’s share price was down around 92 percent since its public debut, European Wax Center was down 20 percent and Waldencast 42 percent.

That hasn’t stopped others from reportedly considering the option. Names that have been thrown around in the beauty industry as potential future IPOs include Harry’s, Function of Beauty and even lifestyle brand Goop, which could follow in the path of Kim Kardashian’s Skims. As first reported by sister publication WWD, the mega-influencer’s Skims said it has snagged a $4 billion valuation by raising $270 million in a series C funding round, with speculation that it is setting the stage for an IPO. While this is not beauty, Kardashian is reportedly looking to buy back her beauty business from Coty Inc.

There are many benefits to going public: Early investors get a potentially lucrative exit and companies get a higher profile, brand exposure and a new source of capital — their own stock — that they can use to compensate executives and make acquisitions. Beauty companies and their chief executive officers can become players, not just in their niche world, but in the broader landscape of consumer-focused firms.

On the flip side, IPOs also shine an unforgiving spotlight on companies, with analysts and investors always wanting more, from faster growth to sweeter margins to continual newness in product and marketing. Businesses also have to be willing to go on the wild ride that is stock market volatility, which is more often than not out of their control. Then there is the quarterly reporting and being constantly beholden to shareholders.

As challenging as those factors are, it is an option an increasing number of brands are looking at, particularly because acquisitions by strategic giants like L’Oréal, Unilever or the Estée Lauder Cos. have slowed down considerably. Such companies are only doing a handful of deals each year and are becoming increasingly picky at the same time with beauty brands multiplying faster than ever.

So many companies will run what is sometimes referred to as a dual-track process, where they look to and IPO and a sale at the same time and see what works best — for management and investors. “It kind of depends on the time horizon and a lot of times there’ll be companies looking at multiple avenues trying to maximize value, but value is not just about money. It’s about many things sometimes to different people,” said Oliver Chen, an analyst at TD Cowen.

Other companies may simply not be a fit for strategics’ more traditional business models, and it’s fair to say that Oddity, digital only, falls into this bucket. Oddity’s global chief financial officer Lindsay Drucker Mann told Beauty Inc that it went public because it wants to build something huge.

“To have the full force of deep liquid efficient capital markets as another engine for us sets us up on a path of great success,” said Drucker Mann, a former investment banker at Goldman Sachs where she worked on numerous IPOs. “It’s easy to look at an IPO and how the stock trades and the price and that’s great, but we were able to recruit such amazingly high-quality shareholders to join us in this next leg of our journey as we build a future and look to transform this massive global market that’s just another really powerful asset for us.”

The markets also favor consistency and predictability, which is why guidance and communication is key. In particular, Tong stresses that Olaplex needs to improve the latter as it tries to recover losses in its share price. “Giving the market some visibility in terms of the path forward. How do you get there?”

As for what a beauty company needs to not only go public, but to be able to withstand the markets, most investment bankers have stated a company should have at least $50 million in earnings before interest, taxes, depreciation and amortization before they consider going public, although double this is preferable. More often that not, it is the companies that are backed by bigger players (think Olaplex and Advent) that take the plunge.

Avery Spear, senior data analyst at Renaissance Capital, a provider of institutional research and IPO-themed ETFs, said if they’re pitching the right story and they’re showing growth or improving margins, investors are going to possibly get on board.

“Broadly speaking, growth is important. For companies selling goods to consumers you want the demand to be there, not unprofitable in the sense of a tech company. Importantly, pitching a multiple that fits that business,” she continued, highlighting 2021, which saw a lot of companies — tech or not — coming up with tech bubble multiples.

“A lot of consumer beauty companies need to be mindful that investors are going to value them as a beauty company whether they’re like Oddity with their AI platform and subscription model,” she added. “They’re ultimately a consumer company that will be valued as such.”

Market conditions of course play a huge part on IPO timings, too, with Pat Healy, who runs IPO advisory service Issuer Network, stating that a company that has nothing to do with beauty will set the tone for how successful the IPO market can be in the consumer space in the next year. That’s Arm, the U.K.-based chip designer that is reportedly gearing up for a September IPO.

“That’s likely to be the biggest of the year,” he said. “Based on how that goes will determine the market environment, but all expectations are that that’s going to be the IPO that opens the market back up.”

And of course, just because a company had a successful IPO does not mean it will forever be a stock market darling, especially in the fickle public space. Just look at Olaplex.

But it should take some solace in the fact that the stock market journey is far from linear. At one point in 2019, E.l.f. Beauty’s shares fell below $8, but a WWD study of 104 global apparel, luxury, retail and beauty companies in 2022 found that only 26 firms in the space beat the Dow last year, with E.l.f. leading the way, rising 66.5 percent. As of press time, its share price was $132.69.

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