Beauty Health Co. (SKIN) shares opened Aug. 9 with a nearly 30% drop to a new low of $0.91 after posting disappointing quarterly results. Second-quarter net sales fell 22.9% year over year to $90.6 million, missing both the consensus estimate of $98.5 million and the low end of its own forecast of $96 million to $102 million. Adjusted EBITDA came in at a loss of $5.2 million, down significantly from a profit of $12.4 million in the prior-year quarter and well below the expected profit of $6.2 million. Worse, SKIN’s third-quarter guidance for net sales of $70 million to $80 million and an adjusted EBITDA loss of $1 million to $6 million fell well short of the consensus estimate of $100.4 million and a positive $13.8 million. The company also lowered its full-year outlook and now projects net sales of $325 million to $345 million, down from its prior guidance of at least $398 million, and an adjusted EBITDA loss of $0 million to $10 million, in stark contrast to the $40 million profit forecasted just three months ago.

Despite SKIN’s ongoing struggles, the market reaction seems overly punitive. While the slower-than-expected recovery in device sales — which was driven by supplier caution in the face of macroeconomic uncertainty and tight credit conditions — is concerning, it’s important to note that SKIN incurred $17 million of unforeseen inventory-related write-offs in the most recent quarter. Excluding this, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) would have been positive and well above the company’s guidance of $4 million to $7 million, supported by continued growth in consumables sales and strong cost management. This is also evidenced by significantly improved cash results, with SKIN able to generate positive free cash flow of $4.2 million in the second quarter.

To combat the weakness in equipment sales, SKIN has implemented several strategic actions to turn the business around. In particular, the company has expanded its product offering, reintroducing the lower-priced Elite and Allegro models along with the more expensive Syndeo system, which I expect will better meet the demands of smaller suppliers who are sensitive to price and financial constraints. In addition, SKIN has hired an outside consulting firm to help restructure its sales strategy, focusing on improving lead targeting, segmentation, and pipeline forecasting. The company is also improving its financing options to reduce upfront costs for new and smaller suppliers, making it easier for them to invest in Hydrafacial systems.

While these initiatives, along with ongoing investments in supply chain management and controls, may impact near-term results, they are expected to lead to improved results in subsequent quarters. Therefore, even the lower end of the company’s revised guidance suggests a return to at least adjusted EBITDA profitability in Q4, while the upper end leaves the door open for profitable year-over-year sales growth to end the year. Therefore, I am not surprised to see the stock quickly rebound more than 20% from its initial lows and believe that the potential for a much larger recovery remains.

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