Solescence (SLSN) Q3 2025: Labor Cost Per Unit Down 25% Amid Margin Reset and Operational Overhaul
Solescence’s third quarter marked a turning point as operational restructuring delivered a 25% reduction in labor cost per unit, even as gross margin compressed and revenue declined year over year. Leadership transition, facility consolidation, and unified product innovation are reshaping the business model for future profitability. Investors should watch for margin normalization and execution on inventory and indirect cost controls as Solescence prepares to outline its multi-year growth plan.
Summary
- Labor Efficiency Drives Cost Relief: Automation and process changes cut average labor cost per unit by nearly a quarter.
- Margin Compression Signals Execution Risk: Gross margin fell sharply due to indirect costs and transition expenses.
- Strategic Reset Eyes Profit Recovery: Facility consolidation, leadership changes, and supply chain focus target a return to historical margin levels.
Performance Analysis
Solescence reported a 14% year-over-year revenue decline for Q3, breaking a nearly two-year streak of top-line growth. The drop was attributed to both tough prior-year comparisons and a broader softening in consumer demand, with brand partners adopting more conservative inventory strategies. Gross profit fell to $3.4 million, down from $6.1 million a year ago, with gross margin dropping to 23% from 36%, reflecting operational inefficiencies and the cost of facility improvements.
Operating expenses rose to $4.2 million, up from $2.9 million, driven by higher employee costs, legal fees, severance, and uplisting expenses. Notably, the quarter included a $1.2 million Employee Retention Credit (ERC) and related interest, which partially offset the net loss of $1.1 million. Adjusted EBITDA swung negative, underscoring the near-term impact of restructuring and transition costs. Despite these pressures, open orders (the value of customer orders shipped or awaiting fulfillment) rose to $64 million, up from $34 million last year, signaling sustained underlying demand.
- Labor Cost Reduction: Labor efficiency initiatives, including automation and OEE (overall equipment effectiveness, a manufacturing productivity metric), drove a 25% YoY drop in average labor cost per unit and a 10-point OEE improvement.
- Facility Consolidation: The shift from three to two facilities is expected to yield mid-six-figure annual operating cost savings.
- Inventory Complexity: Expansion from 40 to 300 SKUs and a tenfold increase in raw materials has strained supply chain management, but new oversight aims to tighten controls.
The company’s operational reset is beginning to yield cost benefits, but indirect costs and transition expenses weighed heavily on profitability. The leadership team is targeting margin normalization over the next several quarters, with a focus on both direct and indirect cost control.
Executive Commentary
"The third quarter of 2025 represented the first quarter in almost two years where we did not have a year-over-year revenue increase... However, we remain confident in our ability, both on a near-term and a longer-term basis, to continue to grow at a multiple of the industry's growth rate and remain highly profitable while doing so."
Kevin Curriton, President and Chief Executive Officer
"Gross margin was 23% compared to 36% for the same period last year. The decrease was related to manufacturing operating inefficiencies and facilities improvements... We made significant improvements to our business operations that will enable us to grow and deliver the highest quality products to our brand partners more efficiently and from a greater cost position."
Laura, Chief Financial Officer
Strategic Positioning
1. Operational Restructuring and Labor Efficiency
Solescence’s largest operational pivot is the consolidation of manufacturing facilities and investment in automation. By reducing the number of sites and leveraging OEE metrics, management cut labor cost per unit by 25% and improved manufacturing uptime. This move not only slashes overtime expenses but also increases flexibility and capacity, setting a new baseline for cost structure as demand returns.
2. Unified Product Innovation and Quality Control
The creation of the innovation and product integrity group, merging R&D and quality under one leader, aims to ensure products meet rigorous over-the-counter drug standards while remaining cost-effective and consumer-pleasing. This structural change is designed to prevent costly mistakes and rework, which previously impacted both margins and customer satisfaction.
3. Supply Chain and Inventory Management
The exponential increase in product and raw material complexity has exposed Solescence to inventory inefficiencies. The new focus on daily material surveillance and variance tracking is intended to plug profit leaks and drive corrective action. The company’s ability to manage this complexity will be a key determinant of future margin recovery and cash flow stability.
4. Leadership Transition and Talent Upgrade
With a new CEO and CFO in place, Solescence is signaling a reset in both strategy and execution discipline. The addition of industry veterans and the expansion of the leadership team are meant to address historical operational shortcomings and bring best practices from larger beauty and personal care peers.
5. Brand Partner Alignment and Channel Focus
Solescence’s products drive 30% to 60% of brand partner revenue, with strong exposure to specialty beauty retail and high-growth channels like TikTok and Amazon. The company’s success remains tightly linked to these partners’ performance and evolving consumer preferences, particularly in SPF-infused and mineral-based beauty segments.
Key Considerations
This quarter’s results reflect a business in transition, balancing near-term margin pain against long-term operational improvements. Investors should weigh the following:
Key Considerations:
- Margin Recovery Timeline: Management targets a return to 30%+ gross margin over the next few quarters, but indirect costs and transition expenses could persist near term.
- Open Orders Signal Underlying Demand: The $64 million open order book suggests the core business remains healthy despite Q3’s revenue dip.
- SG&A Reset: Operating expenses are likely to remain elevated in the near term, with some one-off severance and uplisting costs rolling off, but higher legal and leadership costs are expected to persist.
- Execution Risk on Inventory and Indirect Cost Controls: The ability to manage SKU and material complexity is critical for sustained profitability.
- Upcoming Investor Communication: A first-ever investor presentation is planned to clarify the multi-year outlook and address recent share price volatility.
Risks
Margin volatility remains the top risk, as indirect costs and supply chain complexity could delay profit recovery. The company’s expanded product and material footprint increases exposure to execution missteps, while broader beauty market softening may cap top-line upside. Regulatory scrutiny, legal costs, and potential customer order cancellations also remain material headwinds as flagged in the call’s forward-looking statements.
Forward Outlook
For Q4 2025, Solescence guided to:
- Continued top-line growth over prior year, with open orders expected to drive a full-year revenue increase of approximately $12 million.
- Margin normalization efforts, with a focus on regaining 30%+ gross margin “as a floor” over the next several quarters.
For full-year 2025, management maintained guidance for:
- Revenue growth outpacing the industry, despite macro softness in beauty and personal care.
Management highlighted several factors that will shape the coming quarters:
- Operational improvements in labor and indirect costs are expected to show up progressively.
- Further detail on 2026 and beyond will be provided in the upcoming investor presentation.
Takeaways
Investors face a business at an inflection point, with labor and facility gains offset by indirect cost drag and market headwinds.
- Cost Structure Reset: Automation and facility consolidation are driving meaningful labor cost relief, but indirect costs and inventory complexity still threaten margins.
- Leadership and Accountability: The new executive team is prioritizing operational discipline and transparency, but must prove execution on indirect cost and supply chain management.
- Near-Term Watchpoints: Margin normalization and SG&A discipline will be the key proof points for investor confidence as Solescence outlines its longer-term growth narrative.
Conclusion
Solescence’s Q3 underscores the challenges of operational transformation in a complex, innovation-driven beauty supply chain. The leadership team’s actions on labor, facility, and product design are delivering early cost wins, but full margin recovery will require sustained focus on inventory and indirect costs. The upcoming investor presentation will be a crucial moment for the company to reset expectations and restore credibility with the market.
Industry Read-Through
The margin and execution challenges at Solescence highlight broader risks for ingredient and formulation suppliers in beauty and personal care, as SKU proliferation and raw material complexity outpace legacy systems and processes. The shift toward SPF-infused and mineral-based products remains a secular growth driver, but operational excellence is increasingly the differentiator as consumer brands demand higher quality, lower cost, and faster turnarounds. Industry peers should note the importance of unified product development, automation, and supply chain discipline in navigating this environment. Investors should expect continued volatility for suppliers unable to match the pace of channel and consumer evolution.