Does Adore Beauty (ASX:ABY) have a better future ahead of it? Perhaps, but not as investors previously imagined 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 results showing good signs – is a better future ahead of it? The short answer is yes: but perhaps not exactly as investors buying in at its IPO envisioned.

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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.

Things didn’t get better…

OK, enough about ancient history. The company struggled since then (for the most part). 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. Even while it remained profitable on a ‘gross basis’, these margins were low too.

…but they could be about to

Kate Morris stood down from executive duties in mid-2023. Tamalin Morton as CEO replaced her, but now she left after a year and was replaced by Sacha Laing, former CEO of youth fashion retailer of General Pants Co and a former David Jones executive.

About that time, the company spent $25m on beauty brand Ikou which had only made $8m in revenue in the previous year despite operating for 17 years. In fairness, it did have concept retail stores and the company thought it could be a chance to experiment with retail stores.

Adore Beauty gave a business update in mid-July 2024. 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 came a month later and they were the same.

Fast forward to FY25 and ABY boasted record revenue and EBITDA ($198.8m and $8.1m – the first figure was only up 2% but the second was up 68%). Adore Rewards members totalled 440,000, with more than half shopping by the company’s app. Its profit was a wafer-thin $761,000. Investors were told it has $12.7m cash on hand and to expect a 5-6% EBITDA margin in FY26.

In FY25, ABY had begun to open its own retail stores (the first two were Broadway in Sydney and Booragoo in Perth) and the company planning to open at least 25 by FY27. These would be in high foot-traffic locations with the first Queensland and South Australian stores would come in the months ahead. Early signs proved positive with trading in the first seven weeks up 9% over the prior corresponding period.

Conclusion

Adore Beauty’s life as a listed company has been poor, but there is potential for a better future. There’s some way to go, but perhaps having brick and mortar stores may be assets for the company, offsetting costs of having them. It seems investors prefer to see and feel products like ABY’s before buying them.