Does Adore Beauty (ASX:ABY) have a better future ahead of it?

Let’s take a look at Adore Beauty (ASX:ABY). We know the IPO was horrible and the ghosts of it still plague the company today. But with its founder long gone, and a recent trading update showing positive signs – is a better future ahead of it?

Adore Beauty has never recovered from its IPO

Adore Beauty is an online beauty products retailer. It was founded back in 1999 and listed in the ASX in October 2020. The company had recorded substantial growth during its existence, but it particularly grew during the pandemic when people were locked down and shopping online.

The bankers who priced the float, the company and investors who backed the company overestimated the loyalty of those COVID customers. They also priced the float at a ridiculously high price – at 96x of its FY21 EV/EBITDA. In fairness, all but $40m of the $269.5m in proceeds raised went to cash out existing shareholders so…at least as then AFR Rear Window columnist Joe Aston pointed out, you can bet Kate Morris was telling the truth when she tweeted she ‘bloody love[d] it’ – it alluding to the women that bought the IPO and had reached out to tell her it was their first time investing in shares. The fact is, they were buying shares from her instead of with her. After listing at $6.75, shares are barely over $1 – a decline of nearly 85%. If it is any consolation, it is not the first private equity IPO that flopped.

Adore Beauty (ASX:ABY) share price chart, log scale (Source: TradingView)

Things haven’t gotten better

OK, enough about ancient history. The company struggled since then. Arguably the most notable thing that happened was a takeover bid that happened in last 2023 – THG (formerly the Hut Group) was willing to pay $1.25-1.30 per share. Although it caused a short-term climb in the share price, the company rejected it, arguing it undervalued the company. With Kate Morris and her husband James Height owning about 20% and Quadrant owning 32.5%, it was not getting up.

It is true that company was managing to grow its revenues. Consider that in FY19 it made $73m in revenue but made $180m in revenue just 4 years later. But customer acquisitions costs were high, not just for new customers but return ones. The percentage of sales spent on revenues has jumped from 9% to 15% during this time. And while the company was profitable prior to the pandemic, it has been in the red ever since.

Kate Morris stood down from executive duties in mid-2023. Tamalin Morton as CEO replaced her, but now she’s departed too and the company is on the lookout for a new executive again.

Could last month’s business update be a turning point?

Adore Beauty gave a business update in mid-July. It told investors it achieved $195.7m in revenue, up 7.4% and would make a 2.2-2.5% EBITDA margin. It boasted 814,000 customers (up 1.6%) and 519,000 returning customers (up 5.8%). Full results are due on August 26.

The company had purchased competitor iKOU for $32.3m, all funded from its own balance sheet. $20m would be paid upfront with the balance in 18 months time. This deal is now complete with first products available next month. Shareholders have been told Adore Beauty claimed the acquisition was profitable and debt-free and be bottom-line accretive in FY25. In FY24, iKOU is estimated to have made $8.1m in revenue and $2m in EBITDA. While the company is still on the lookout for a new CEO, whoever is hired could be a game changer for the company. There have been plenty of cases on the ASX where the hiring of a new CEO has proven to be a pivotal point in the history of an underperforming country, and can alter its course altogether.

Conclusion

Adore Beauty’s life as a listed company has been poor, but there is potential for a future. The company just needs to hire the right CEO, and find a way to reduce customer acquisition costs without losing customers.

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