BeautyHealth (SKIN)

Skincare company BeautyHealth (NASDAQ:SKIN) reported Q1 CY2025 results exceeding the market’s revenue expectations, but sales fell by 14.5% year on year to $69.6 million. On the other hand, next quarter’s revenue guidance of $73.5 million was less impressive, coming in 2.9% below analysts’ estimates. Its GAAP loss of $0.08 per share was 37.6% above analysts’ consensus estimates.

Company Overview

Operating in the emerging beauty health category, the appropriately named BeautyHealth (NASDAQ:SKIN) is a skincare company best known for its Hydrafacial product that cleanses and hydrates skin.

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Competitors in the beauty health category that employ medical technology and personal care products include AbbVie (NYSE:ABBV) and Venus Concept (NASDAQ:VERO) as well as private companies Cartessa Aesthetics and DermaSweep.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $322.5 million in revenue over the past 12 months, BeautyHealth is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers.

As you can see below, BeautyHealth’s sales grew at a sluggish 3.8% compounded annual growth rate over the last three years. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

This quarter, BeautyHealth’s revenue fell by 14.5% year on year to $69.6 million but beat Wall Street’s estimates by 9.9%. Company management is currently guiding for a 18.9% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to decline by 9.1% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and indicates its products will face some demand challenges.

BeautyHealth has great unit economics for a consumer staples company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an excellent 46.4% gross margin over the last two years. That means for every $100 in revenue, only $53.62 went towards paying for raw materials, production of goods, transportation, and distribution.

In Q1, BeautyHealth produced a 69.8% gross profit margin, up 10.4 percentage points year on year and easily exceeding analysts’ estimates. BeautyHealth’s full-year margin has also been trending up over the past 12 months, increasing by 18.6 percentage points. If this move continues, it could suggest an environment where the company has better pricing power and stable or shrinking input costs (such as raw materials).

Unprofitable public companies are rare in the defensive consumer staples industry. Unfortunately, BeautyHealth was one of them over the last two years as its high expenses contributed to an average operating margin of negative 27%.

On the plus side, BeautyHealth’s operating margin rose by 13.8 percentage points over the last year, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.

In Q1, BeautyHealth generated a negative 17.2% operating margin. The company's consistent lack of profits raise a flag.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although BeautyHealth’s full-year earnings are still negative, it reduced its losses and improved its EPS by 53.4% annually over the last three years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, BeautyHealth reported EPS at negative $0.08, up from negative $0.10 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast BeautyHealth’s full-year EPS of negative $0.31 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

BeautyHealth has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 5.4% over the last two years, slightly better than the broader consumer staples sector.

Taking a step back, we can see that BeautyHealth’s margin expanded by 7.6 percentage points over the last year. This is encouraging because it gives the company more optionality.

BeautyHealth’s free cash flow clocked in at $3 million in Q1, equivalent to a 4.3% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

BeautyHealth’s five-year average ROIC was negative 26.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

BeautyHealth’s $567.7 million of debt exceeds the $373 million of cash on its balance sheet. Furthermore, its 10× net-debt-to-EBITDA ratio (based on its EBITDA of $19.2 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. BeautyHealth could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope BeautyHealth can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly BeautyHealth blew past analysts’ gross margin expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its EBITDA guidance for next quarter missed significantly and its revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, we think this was still a decent quarter with some key metrics above expectations. The stock traded up 2.4% to $1.26 immediately after reporting.

Updated: May 18, 2025 at 10:41 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

BeautyHealth falls short of our quality standards. For starters, its revenue growth was a little slower over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its EPS growth over the last three years has been fantastic, the downside is its brand caters to a niche market. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

BeautyHealth’s EV-to-EBITDA ratio based on the next 12 months is 13.7x. This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $1.63 on the company (compared to the current share price of $1.80), implying they don’t see much short-term potential in BeautyHealth.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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