Olaplex is hit with a new lawsuit as the hair care brand faces mounting scrutiny
- Hair care brand Olaplex is facing a lawsuit over its stock price drop since its 2021 IPO.
- It's also facing a lawsuit in Canada about lilial, an ingredient banned in the EU earlier this year.
Last fall, hair care brand Olaplex was riding high. It had just gone public, and its products were favorites of many beauty influencers.
One year later, the brand is facing scrutiny from some consumers, lawyers, and equity analysts. The tumbling stock of Olaplex, a fixture on hair-care routine TikTok, also seems to have caught the attention of the plaintiffs' bar.
This month, the firm Pomerantz LLP, which specializes in representing shareholders in securities lawsuits, brought a stock-drop suit against Olaplex, alleging that the company hadn't properly warned investors about challenges in the industry.
The suit, filed in California federal court, targets Olaplex's fall from $21 a share when it went public in September 2021 to $4.24 a share last month. It is seeking to represent a potential class of as many as "thousands" of investors who bought Olaplex stock after it went public, according to the complaint.
The suit accused the company of "negligently" compiling IPO-related documents that it said painted a more optimistic picture of the company's revenue trajectory than warranted.
"Specifically, the offering documents made false/and or misleading statements and/or failed to disclose that macroeconomic pressures and competition in the hair care market were more robust than the company had presented to investors," the complaint said.
Such lawsuits are not uncommon, and often follow a similar pattern of citing a company's public SEC filings to bring allegations about purported misrepresentations of business prospects, attorneys told Insider.
These suits generally tend to be more notable if they contain other sources of independent allegations, like "some kind of whistleblower alleging there were misrepresentations in material information that led to the stock drop, or some type of government investigation that revealed misrepresentations that puffed the stock," said Omar Ochoa, who runs his own law firm in Texas.
A spokesperson for Olaplex told Insider: "We do not comment on going litigation."
Olaplex is also facing a lawsuit about lilial, an ingredient that the company used until this year
Olaplex was hit with a lawsuit in Canada in March, in a proposed customer class suit over its alleged use of a product ingredient that the European Union banned this year. The ingredient, known as "lilial," can harm reproductive health, the suit claimed, alleging violations of Canadian consumer protection laws. The suit is ongoing, according to Joey Zukran, an attorney representing plaintiffs in the suit.
Earlier this year, some Olaplex customers expressed worry about the presence of lilial in the brand's No. 3 Hair Perfector formula after the European Union ban on the substance in consumer products went into effect.
The ban, which started March 1, did not apply in the US. But on social media, Olaplex users around the world debated whether they should throw out Olaplex's products to avoid fertility issues.
The Olaplex spokesperson said that No. 3 contained a "trace amount of lilial" that had been used to add scent to the product. The amount included "isn't harmful," the spokesperson said.
Still, Olaplex "began the phase out of lilial in all markets from June 2021," before the EU ban began, according to the spokesperson. The company also disposed of inventory it had that contained the ingredient, the spokesperson said.
Olaplex's sales at salons, a key place where customers discover the product, have slowed
Olaplex's products are designed to strengthen hair damaged by bleaching, dying, and other salon services, according to the brand. Its treatments also restore bonds in hair damaged more gradually, such as by sunlight or aging, the company has said.
Its products include shampoo, conditioner, and oil. Treatments cost between $55 and $100.
Olaplex sells at retailers including Sephora. But the brand also sells through salons, where stylists can recommend the treatment to their clients.
Salons were Olaplex's biggest single source of sales by dollar value in its first earnings report last November, accounting for about 35% of total sales.
But since then, sales through salons have slowed and been eclipsed by those at retailers. In a survey of 150 US salons published in September by Piper Sandler analyst Korinne Wolfmeyer, 8% of salons said they stopped using Olaplex products due to reasons such as hair damage or preferences for other brands.
In October, Olaplex cut its sales estimates for 2022.
Since its September 2021 IPO, Olaplex's stock price has tumbled roughly 77% and is hovering near $5.
Olaplex is "implementing additional support for our professional stylist community and enhancing exposure with key retail partners," the company's spokesperson told Insider.
The brand recently relaunched a program in the US that pays stylists a commission if their clients purchase Olaplex products after an appointment, for example, the spokesperson said.
"The successful execution of these initiatives is expected to drive new customer acquisition and maintain our strong customer retention rates," the spokesperson said.
Olaplex faces multiple challenges, including new competitors, consumers opting for cheaper alternatives, and the company's increasing spending on marketing, Jefferies analyst Ashley Helgans wrote in a research note after Olaplex cut its guidance.
"We like the brand, but growth has peaked," Helgans wrote.
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