Shine Comes Off Adore Beauty

Small Caps | Aug 31 2022

This story features ADORE BEAUTY GROUP LIMITED. For more info SHARE ANALYSIS: ABY

This story was originally published earlier this morning but contained a few factual inaccuracies, which have been corrected.

Cycling off lockdown benefits looks to prove challenging for Adore Beauty, with the online retailer reporting a -28% decline in sales in the first seven weeks of the new year.

-Adore Beauty's FY22 missed expectations, with the first seven weeks of FY23 equally disappointing
-Management does not anticipate meeting its 2-4% earnings margin guidance in the coming year
-Higher value return customers and expanded private label lines underpin longer-term growth potential

By Danielle Austin

Having largely missed market forecasts with its FY22 performance, Adore Beauty ((ABY)) added further disappointment with lower-than-anticipated margin guidance for the year ahead.

With management not anticipating the company can achieve its 2-4% earnings margin target in the coming year, analysts are assuming a margin of 1.7% for FY23 before anticipating a recovery to 2.6% in FY24. The online retailer cited inflation to freight and sales costs, as well as 45% inflation in cost per click marketing, as the driver for the downgrade.

Since its maiden listing on the ASX in October 2020, Adore Beauty has become the number one pureplay online beauty retailer in Australia, offering products across the premium beauty, wellness and personal care products. Its first private label brand was launched two months ago, in June.

FY22 delivered full year earnings of $5.3m, a -30% decline on the previous year, while earnings margins reduced to 2.7% from 4.2%. The first seven weeks of the new financial year did not break the trend with the retailer witnessing a -28% decline in sales.

Moving forward, Adore Beauty will rely more on repeat customers, as new customer growth slows. Returning customers contributed around 70% of revenue in FY22, 62% in FY21 and 56% in FY20. While new customer growth remains above FY19 levels, it has slowed as trading conditions have normalised from the previous covid-related boost.

Expansion of the company’s private label brand is expected to drive long-term margin growth for the retailer, with the launch of a second private label brand expected in the second quarter of FY23. Private label products are expected to contribute 10% to earnings by FY27, which could represent an approximate 5 percentage point benefit to margins, and 15% beyond FY27.

Near-term guidance disappoints the market

Of FNArena’s database brokers, both Morgan Stanley and UBS have updated on Adore Beauty since the company’s full year results release. Both brokers are equivalent Buy and equivalent Hold rated respectively, and between them have an average target price of $1.90. Outside of database brokers, Shaw and Partners and Jarden have also updated, both are Buy rated.

Noting the retailers’ first seven weeks of FY23 have tracked well below expectations, Morgan Stanley (Overweight, target price of $1.90) highlights the company is cycling strong 26% growth in the previous year. The broker notes its earnings target multiple represents a -25% discount to other profitable domestic e-commerce peers, with the beauty category more competitive than other retail segments.

Describing Adore Beauty’s full year results as only marginally below its expectations, Shaw and Partners (Buy, target $2.50) liked that long-term targets remain positive, with the company continuing to guide to earnings margins between 8-10% in FY27, and margins above 10% beyond that.

This broker noted with the stock declining -22% in the last six months, amongst a -20-70% decline across the e-commerce and retail sectors, Adore Beauty's present valuation is compelling assuming the company can achieve longer-term targets. Short-term, Shaw and Partners downgraded its sales and earnings forecasts -12% and -61% respectively, noting some conservatism to its downgrades.

UBS (Buy, target $2.10) noted the early trading decline in the new financial year was in line with its own expectations for the company. UBS anticipates the beauty category will prove more resilient than other retail categories in a softer trading environment given the less discretionary and lower value nature of beauty purchases. This broker described the company’s longer-term earnings margins targets as "ambitious", and continues to guide to margins of 7% in FY27 and 9% in following years.

Noting the retailer missed its earnings forecast by -16%, Jarden (Buy, target $2.49) raised concern around Adore Beauty’s ability to grow its new customer base amid rising marketing and customer acquisition costs.

This broker notes the company intends to focus on attracting and retain customers with a higher lifetime value. Jarden has lowered its earnings per share estimates -75% and -18% in FY23 and FY24 respectively, reflecting lower margins and ongoing challenging trading conditions.

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