3 things plaguing Olaplex that have nothing to do with the hair loss lawsuit

• Olaplex is facing a lawsuit from users claiming the products made their hair fall out.
• But the hair care brand faces challenges growing its business, analysts say.
• From fending off rivals to expanding distribution, here are other challenges that the brand faces.

Olaplex is facing a lot of challenges — and not just legal ones.

The hair care brand is defending itself against a lawsuit from a growing number of users who claim that the company's bond-building products damaged their hair. In some cases, they say, it even fell off in clumps. Olaplex maintains that its products are safe, and CEO JuE Wong has said that the complaints are "a fact of life" in the hair care industry.

But even if the company successfully stands its ground, Olaplex has other things to worry about.

Analysts at TD Cowen downgraded Olaplex's stock in a note Thursday to "market perform" from "outperform." The change happened roughly two weeks after Olaplex posted earnings below analysts' expectations and cut its sales outlook for 2023.

"We remain positive on the prospect of [Olaplex] building a brand with a full suite of products in haircare and the potential to venture into skincare," the TD analysts, led by Joanna Kim, wrote.

"However, in the near term, the business is being reset, and we believe it will likely take some time for management's turn-around strategies to take hold," they added.

Here are the three biggest challenges that Olaplex faces going forward, according to the analysts:

Consumers are using less Olaplex — and more rival products are popping up

Hair salons are a key source of Olaplex purchases. Many people encounter the product for the first time when their stylist recommends it or uses it during an appointment.

But in its latest earnings report, Olaplex said that many customers are spacing out their visits, leading to lower sales of the product through salons. The TD Cowen analysts said sales growth through salons is unlikely to match the 44% growth rate that the company posted last year.

When customers are in the market for a treatment or product, they also have a wider range of bond-building products to choose from than they did a year or two ago, the analysts wrote. Alternatives to Olaplex include Redken's Acidic Bonding Concentrate Kit and L'Oréal Paris EverPure.

"We also think there are more choices in hair care now, and consumers' spend is spread across more options than last year."

Olaplex is investing in sales and marketing campaigns to boost sales — a move that risks disappointing investors focused on the company's profit

As a young brand, Olaplex kept its marketing and sales budgets slim. "However, [Olaplex] is now recognizing the need to invest in marketing and sales to support growth," the TD Cowen analysts said.

That investment could take multiple forms, from educating stylists and retailers about what each Olaplex product does, to bolstering its public relations team to respond to press coverage, CEO Wong said during the earnings call in February.

The move could increase Olaplex's sales in the long run, the analysts said. But in the short term, the company will spend more on marketing, translating into a thinner profit margin.

Olaplex needs to get into high-end salons to reach new customers

Olaplex products are in about 15% of all US salons, the TD Cowen analysts write. That leaves the brand plenty of room to expand, including into high-end salons with clients willing to spend more.

Olaplex's products are "prestige," a term the beauty industry uses to describe items that sell for more than drugstore brands. A full set of Olaplex products costs $240 on the company's website.

With that high pricepoint, "we think the next leg of growth in salons will likely come from penetrating premium salons," the analysts wrote.