Company Overview: Adore Beauty Group Limited (ASX: ABY) is a beauty focused e-commerce website. It was launched in 2000 with a vision to make women feel more confident by delivering an engaging beauty shopping experience as per their needs. The company has evolved over time to be an integrated marketing and e-commerce retail platform and partners with a diverse portfolio of elite brands. It has a presence in the markets of Australia and New Zealand.

ABY Details

Revenue Growth Aided by Increasing Customer Base: Adore Beauty Group Limited (ASX: ABY) is an online retailer of beauty products. The market capitalisation of the company as on 04 May 2021, stood at ~$438.62 million. The company has delivered impressive performance during H1FY21, with revenue tracking ahead of prospectus forecast by 8%. The increased traction in sales have been aided by record trading days, including Afterpay Day in August and Cyber Weekend in November 2020.

During H1FY21, revenue grew by ~85% to $96.2 million when compared to the pcp. The growth has been aided by decent customer growth and continued high customer retention. The average order value (AOV) was higher compared to the pcp at $101.26, and Average Order Frequency (AOF) was in line with the prior corresponding period at 2.1. There has also been improvement in the margin performance of the company with gross profit margin at 32.5% and EBITDA margin at 5.4% during the period, on the back of improved supplier terms and brand funding. The number of active customers grew by over 82% on the pcp to ~777k, and the new customers grew by over 84% to 276k. It ended the period with a cash position of $25.9 million as of 31 December 2020, with the absence of debt on the balance sheet.

H1FY21 Financial Performance (Source: Company Reports)

Premium Portfolio of Elite Brands: The company was founded in 2000 with the objective of becoming a pure-play online beauty retailer in Australia. It entered the New Zealand market in 2019 and got listed on the ASX in October 2020. It has helped in the transformation of the online beauty shopping landscape in the country and has been a preferred destination for customers. It has a rich portfolio of over 260 brands and more than 10,800 products on its platform.

Portfolio Brands (Source: Company Reports)

Unique Customer Value Proposition: The company provides an integrated marketing and e-commerce retail platform. It provides customers with instant solutions to queries through live expert chat, and also provides free delivery of its products over the range of $50, along with 90 days’ hassle-free returns. It has a reputation for fast dispatch of orders along with a 99.9% pick accuracy. All these features, when factored in, makes the company the preferred online retailer of choice and drives high repeat purchases from the customers.

Presence of Large Addressable Market: The total market size of the Australian Beauty and personal care market stood at $11.2 billion as of 2020, of which online space shares a market of $1.3 billion. The impact of the COVID-19 pandemic has accelerated the use of online retail, and the company has witnessed a surge in demand for its products. It has access to a highly engaged customer base, driven by strong content and social platform.

Top 10 Shareholders: The top 10 shareholders together form around 75.33% of the total shareholding, while the top 4 constitute the maximum holding. QPE Growth, LP and Morris (Katy Ann) are holding a maximum stake in the company at 32.49% and 10.83%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company delivered decent margin performance in H1FY21 with an increase in gross margin to 32.5%, from a level of 31.1% in the previous corresponding period. EBITDA margin also improved to 4.6% during the period. It delivered profitability during the period, and the net margin stood at 2.6%, compared to negative 6.1% in the prior corresponding period.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company’s website, databases and management systems are important for the smooth function of the business and for the retention of the customers. If there is any issue with the functioning of any of the key processes, the company may face the risk of business disruption, which might have an impact on its profitability. The onset of the COVID-19 pandemic has given rise to increased activity in online retail and has given a push to the company’s sale of products. However, it will remain a challenge for the companies across this sector to maintain the same momentum of growth in the post-COVID phase. In this regard, ABY has to look to build a sustainable business model with repeat purchase orders in the long term. The company also depends on third-party suppliers for its product sourcing, and any deterioration in the relationship between them could limit the company’s access to a diverse product base.

Outlook: The company continues to focus on increasing its share in core categories, and also looks to expand its offerings into new markets and adjacent categories. It plans to launch its own private label in the near future, which will further augment the revenue of the company. It seems to be well-positioned to capture the structural shift of customers to online retail, as Australia begins to witness the penetration levels close to other international countries. It has launched ‘Adore Society’ in March 2021, a loyalty program to increase loyalty and lifetime value. This is the first phase of launch, with additional features and benefits to be rolled out to members throughout 2021.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company expects to provide FY21 revenue growth above the pre-COVID levels, aided by the continued structural shift to online retail. As per ASX, the stock of ABY is trading below its average 52-weeks’ levels of $4.520-$7.420. The stock of ABY gave a negative return of ~19.99% in the past three months and a negative return of ~9.34% in the past one month. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer average EV/Sales (NTM trading multiple), considering the robust growth in revenue and customers, and optimistic sector outlook. For the purpose, we have taken peers such as Temple & Webster Group Limited, (ASX: TPW) Redbubble Limited (ASX: RBL), Kogan.com Limited (ASX: KGN), to name a few. Considering the expected upside in valuation and current trading levels, impressive revenue performance, decent margin levels and bullish trends in the online retail industry, we recommend a ‘Buy’ rating on the stock at the current market price of $4.560, down by 2.146% as on May 04, 2021.

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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