Research report: ODDITY Tech Limited (NASDAQ: ODD)

We are short ODDITY Tech Limited (NASDAQ: ODD), because, our three-month on-the-ground investigation, supported by dozens of interviews and thousands of documents, revealed that Israeli company ODDITY Tech completely misled investors about every critical aspect of its business, concealing a large brick-and-mortar business and sales generated by dishonest marketing tactics.

What The Bulls Believe

The cosmetics company’s bull case is founded upon its alleged revenue growth of 57 percent while posting a 70 percent gross margin and a 21 percent EBITDA margin in 2023. These numbers, along with ODDITY’s supposedly 100 percent digital business model, have formed the basis for a growth story the market appreciates. Just last month, Evercore initiated its coverage by praising the company’s “differentiated Online-only strategy powered by AI-optimized product personalization.” 

Reality Unmasked

Perhaps the most striking of ODDITY’s lies is the notion that the company is a “pure-play digitally branded platform.” We uncovered that, entirely to the contrary, ODDITY owns and operates a completely undisclosed, yet material, brick-and-mortar business in Israel.

Based on our extensive evidence of accounting irregularities, selectively audited subsidiaries in breach of Israeli law, and hundreds of undisclosed lawsuits, it is our opinion, that ODDITY concealed its brick-and-mortar operations to inflate its earnings and boost its IPO valuation. 

ODDITY’s insiders and backers have egregiously sold over $400 million of stock to investors at IPO who were under the impression that it is a totally digital business. As one former employee explained, these stores likely “didn’t feed into his [CEO] narrative very well.” 

In our report, we outline how, like its public market image, ODDITY’s business is based on an Al façade and deceptive sales tactics. ODDITY’s co-founder described its product-matching AI as “simple questions with four possible answers,” with no mention of AI, and a former executive “wouldn’t necessarily call AI.” 

Consumers on BBB and social media allege fraud. As one former employee put it, “like the consumer’s actually not his [CEO] priority.” We believe ODDITY’s business model will prove unsustainable and is at risk of a possible FTC action. 

Our Findings

  • In our opinion, ODDITY has, at best, misrepresented itself as an “online-only” company. In reality, and contrary to this claim, we found extensive evidence that ODDITY owns and operates 43 stores, and six beauty schools which have never been disclosed to investors in SEC filings.
    • We called all 43 stores and even visited a number of locations in Israel where we discovered that these retail stores are not franchisees but owned by ODDITY. Meanwhile, ODDITY’s beauty schools have thousands of enrolled students for year-round studies. In our opinion, the brick-and-mortar operations are likely a material contributor to ODDITY’s DTC earnings.
    • The brick-and-mortar stores are operated by an ODDITY subsidiary called ‘Il Makiage Beauty I.L. Ltd.’ that remains unaudited to date. In April 2024, we purchased two of Il Makiage’s best-selling products at different stores in Israel and the receipts as well as the products’ packages list the unaudited ‘Il Makiage Beauty I.L. Ltd.’ as the selling entity.  
    • In general, we found that the undisclosed Israeli operations are run by subsidiaries that haven’t completed an audit, despite Israeli law requiring every company to be audited (irrespective of any parent company audit). Notably, these companies were audited until 2021. Only ODDITY’s disclosed R&D centers, located in Tel Aviv, are currently audited by E&Y.
  • ODDITY’s profitability is misleading, as most of its profit comes from Israel. How are ODDITY’s R&D operations – usually a cost center for most companies – generating 87 percent of its net profit yet only 18.6 percent of global sales? Large parts of the company’s Israeli operations remain undisclosed and unaudited, as highlighted above. We consider ODDITY’s SEC disclosures to be unreliable. 
  • In addition to the undisclosed retail footprint, the company quietly restated its revenue contribution for 2022 and 2021 by $26.2 million, its 2020 revenue by $5.4 million, and identified a material weakness in its internal controls over financial reporting. They also used a loophole in the SOX Act to delay its next assessment of its internal controls until 2025.
  • Given these details, it is natural that the finance department at ODDITY is full of red flags. Of the department’s nine employees, two are CFOs (one from the US as a front for investors and secret one from Israel actually running the business). No employee on the US accounting team lasts longer than 18 months, with the latest hire leaving after 10 months. In Israel, the entire accounting team is outsourced. How is possible that ODDITY’s accounting team is in such disarray, even though the CEO is an accountant by trade?
  • We suspect ODDITY’s employee count is understated. ODDITY’s SEC filings disclosed that it had 342 employees at year-end 2023, well below the 400 employees in Israel alone (or 520 globally) disclosed in an interview with an Israeli newspaper in 2020. ODDITY’s store count and the undisclosed Israeli business have even expanded since then. We believe the true head count to be between 600 and 700.
  • ODDITY mentioned “AI” more than 40 times in its F-1 prospectus and has claimed to be leveraging technologies to develop products and interact with customers. However, a former employee explained to us that ODDITY’s product-matching technology is akin to “a normal questionnaire,” which he “wouldn’t necessarily call AI.” In an interview with an Israeli newspaper in 2020, ODDITY’s co-founder described the product quizzes as “simple questions with four possible answers.”
  • In our opinion, the secret to ODDITY’s digital growth is its non-cancelable subscriptions, which customers are lured into via bogus AI quizzes. The sell-side touts ODDITY’s “impressively high” repeat purchase rates of 100 percent, but we don’t buy that. Our research indicates that customers unknowingly enter into non-cancelable plans, allowing ODDITY to recognize repeat purchases in the following quarters even though the customers don’t want the product.
  • Better Business Bureau (BBB) and social media are flooded with complaints from customers who accuse ODDITY of deceptive behavior. We believe these complaints are worse than regular negative feedback posted on such websites due to their scale, nature, and persistence over the last three years. It appears ODDITY doesn’t fix the root causes. A former employee told us that holds placed on customers’ credit cards during the “Try before you buy”-program “are not made clear to the customer,” and that “it is deliberate that it is not clear.” In the past, the FTC has cracked down on other consumer companies that sold personal care products through similar sales tactics. 
  • We believe the acceleration in new users is due to questionable methods. Complainants constantly report that their accounts were charged, despite never purchasing a product or hearing about the company before. Other customers reported that their banks stopped processing Il Makiage’s charges, and one customer even received a call from their bank’s fraud department in connection with Il Makiage’s repeated attempts to charge them.
  • The complaints online are contrary to the reviews on ODDITY’s web shops, but we were told by a former employee that “the reviews you are seeing on their site are moderated by them. That is why it is like 4,000 five-star reviews.” Our month-long monitoring of customer reviews of ODDITY’s best-selling products supports that statement. We found that ODDITY actively moderates and prevents low-star reviews from appearing, with two-star and one-star reviews being suppressed for weeks. All low-star reviews stopped appearing on the same day.
  • We found hundreds of undisclosed lawsuits filed against ODDITY and its subsidiaries in the US and Israel, frequently alleging unpaid bills and violations of consumer protection laws. There are at least 218 complaints (incl. seven class action lawsuits) directly connected to the company, filed by landlords, suppliers, customers, and insurers. There is also currently a warrant out against ODDITY for unpaid taxes for the second time (previous warrant in 2019).
  • Even though ODDITY’s CEO Oran Holtzman brags that the company is “playing a completely different game,” we think investors should check how much stock he sold at ODDITY’s IPO ten months ago: $232 million. These sales on the public market followed another $128 million Holtzman already sold in a private secondary pre-IPO. L. Catterton, previously ODDITY’s largest investor, has dumped more than $385 million of stock since the IPO.
  • Insiders have also sold aggressively since the IPO lock-up expired in January and have consistently opted for cash over stock awards:
    • ODDITY’s CFO Drucker Mann chose a $6 million cash bonus,
    • its General Counsel received a $1 million payout, and
    • the Holtzman siblings received $30 million as a cash award.

If insiders don’t believe the hype, why should investors? We are short ODDITY Tech Limited (NASDAQ: ODD).

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