Company Overview: Adore Beauty Group Limited (ASX: ABY) is engaged in online retailing third-party beauty and personal care products in Australia and New Zealand. The company’s product categories include skincare, make-up, haircare, fragrance, and wellness, etc. The company was listed on ASX in 2000 with a distinct and varied portfolio of ~260 brands and 10,800 products.

ABY Details

Solid Fundamentals & Decent Liquidity Position Aids ABY: The company remains on track to implement its growth strategy to bolster its online market leadership, and ramp up its native mobile app, loyalty program, and range extension.

Spotlight on 1QFY22 Results:

• Robust Top Line Performance: During the quarter, the company reported revenues of $63.8 million, depicting an increase of 25% year over year, mainly owing to a rise in active customers, which rose ~24% year over year. It is worth mentioning that ABY witnessed a CAGR of 60% from Q1FY20 to Q1FY22.
• Robust Customer Base: The company witnessed robust customer retention with 63% growth in returning customers. ABY continues to gain from the ongoing structural shift to online, which have been further enhanced in multiple Australian states due to COVID-19 led lockdowns.
• Debt-Free Position: The company has a strong balance sheet and remains well-financed with a debt-free financial position, delivering flexibility to sustain a growing business.
• Key Developments: During the quarter, the company’s Beauty IQ podcast exceeded three million downloads. ABY also unveiled the Bite-Sized Beauty podcast and hosted multiple sold-out virtual loyalty events in 1QFY22. It expects to launch its first private label brand in Q3FY22 and remains well equipped to build its own marketing channels & community and expand its loyalty program.

The below picture depicts a continuous growth trajectory in ABY’s Active Customers.

Trend in Active Customers; Analysis by Kalkine Group 

What Should Investors Know About FY21 & the AGM Update?

• In FY21, the company witnessed an active customer retention rate of 61%, driven by the best-in-class customer experience. In addition to improved revenue contribution from its current customer base, new customers offer an enhanced prospect to create more assured, loyal, and repeat customers.
• The company is expanding its media network of podcasts, videos, and blog posts. ABY’s Beauty IQ Uncensored podcast witnessed tremendous growth of 273% in FY21. The company also unveiled three new podcasts and have three of the top 10 podcasts in the Australian fashion and beauty category during the year.
• In order to boost brand awareness to 58%, the company invested in its first-ever national TV campaign and enhanced its own marketing channels in FY21. This, in turn, supported new customer discovery and acquisition, along with higher customer retention.
• In FY21, the company’s revenue increased 48% on pcp and came in at $179.3 million. In FY21, EBITDA stood at $7.6 million, depicting an increase of 53% year over year.
• The company exited FY21 with a cash balance of $29 million, up ~75% on pcp, and negligible debt, thus laying the foundations for future growth.

Key Metrics: For FY21, the company reported a gross margin of 33.1%, higher than the year-ago figure of 31.8%. In FY21, the company recorded a current ratio of 2.27x compared to the FY20 figure of 1.50x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 75.41% of the total shareholdings, while the top 4 constitute the maximum holding. QPE Growth, LP Limited held the maximum number of shares with a percentage holding of 32.51%, followed by Morris (Katy Ann) holding 10.84%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis: The company’s financial performance might get impacted by the change in customer preference and supplier concentration risk. Online platforms are extremely competitive and hence may result in price conflicts in the case of undifferentiated products. Further, industry players are encountering margin pressure owing to high COVID-related costs. This apart, companies’ constant attempts to strengthen online operations and expand supply-chain network involve heavy investments – which again comes at the expense of margins.

Outlook: The company remains on track to capitalise on the structural shift to online channels, rapidly adding new customers and offering ~260 leading brands combined with an exceptional customer experience. ABY expects to retain a 2% to 4% EBITDA margin during the short to medium term while adhering to reinvestment plans for market penetration. The company expects to scale benefits to boost operating leverage and deliver further EBITDA margin expansion in the long-term. Australia’s beauty and personal care market are valued at $11.2 billion, with the potential to grow at 3.8% CAGR until 2024. ABY accounts for a 13% market share in the online segment and has a long history of producing more rapidly than the market.

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

Source: 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 stock of the company has been corrected by ~15.51% in the past three-months. Currently, the stock is trading below the average of its 52-week high and low levels of $6.38 and $3.31, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering a structural shift, stiff competition, rising expenditure, COVID-19 led uncertainties, etc. For the purpose of valuation, peers such as Temple & Webster Group Ltd (ASX: TPW), Booktopia Group Ltd (ASX: BKG), Redbubble Ltd (ASX: RBL), and others have been considered. Considering decent liquidity position, rise in topline, positive outlook, rise in website users, robust customer base, product launches, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $4.10, up by ~0.985% as on 24 December 2021.

ABY Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: 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. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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