Adore Beauty Group Limited (ABY) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Adore Beauty Group Limited First Half FY '23 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Tamalin Morton, CEO. Please go ahead.

Thank you. Good morning, everyone. I'm Pamela Morton, CEO of the Door Beauty Group. Having joined last month, I'm excited to be part of a company that plays a key role in the daily lives and routines of our customers. While I haven't met most of you in person yet. Thank you for joining us this morning to discuss Adore's Beauty's results for the first half of FY '23. Here with me today is our CFO, Stephanie Carroll. Today's call will reference slides from the investor presentation uploaded to the ASX earlier. I'll begin by providing a brief business update before handing over to Stephanie to go through the half year numbers and balance sheet. I'll then take you through how we're progressing with our strategic priorities before finishing with some comments on the Adore's outlook. We will welcome questions at the end of the presentation. Adore Beauty's half 1 FY '22 results reflected the volatility in the market as we cycled 2 consecutive periods of significant lockdown growth. revenue of $93.6 million was down 17% over the prior corresponding period when many of our customers were experiencing lockdown. However, it's important to note that our revenue has grown at a compound annual growth rate of 22% over the past 3 years. Active customers of 801,000 declined 9% from the same period last year, reflecting the cycling of large volumes of new customers. Our retaining customer numbers are up 10% over the prior period to $481,000, with this number up 40% on a 3-year CAGR. Gross profit margin was down 0.5 percentage points to 32.6%, and Stephanie will provide more detail on this shortly. Reported EBITDA of $406,000 reflects lower operating leverage, cost inflation and investment in strategic priorities. The Adore Beauty is generating free cash flow with a strong balance sheet of $30.1 million in cash. Turning to Slide 2. Before we dive into the detail, it's useful to provide some context to our half year performance. As I mentioned earlier, we were cycling 2 lockdown impacted periods of significant growth, making comparisons difficult. However, our revenue has increased 80% on half 1 FY '20, highlighting the growth in our business. In this post lockdown environment, we're seeing some consumers return to bricks-and-mortar stores. This is impacting many e-commerce businesses. Given the significant growth over the past few years, this current shift to install aligns with Boston 7's 2022 market data, forecasting subdued online market growth for calendar year '22 and '23. Importantly, online market growth is expected to ramp back up in the longer term. Our operations are also being impacted by inflationary cost pressures across sales, marketing, employee and other costs. We are implementing cost optimization and margin improvement measures to address this. That said, we were pleased with some of the achievements in the half. This included a record 4-day fiber sales event in November, which was achieved despite some of the headwinds we experienced. Also brand awareness in our target market grew 4 percentage points to 63%. And finally, our capital-efficient business model generated free cash flow of $0.3 million. Turning now to active customers on Slide 3. We now have a record 481,000 returning customers. These low customers spend more on the platform than new customers. A higher proportion of returning customers is driving improvements in key customer metrics with annual revenue per active customer up $1 over the prior period to $225. The next slide shows our revenue breakdown by new and returning customers. Revenue in half 1 FY '22 was underpinned by our valuable returning customers to contribute 78% of all revenue. This is up from 71% in the prior period and 64% in half 1 FY '21. The graph on the right shows revenue contribution from our returning customers has grown at an impressive annual growth rate of 30% in half 1 FY '20. I'll now hand over to our CFO, Stephanie Carroll, who will take you through our financial performance.

Thanks, Tamalin, and good morning, everyone. As Tamalin has outlined, Adore Beauty's half year results reflects the volatility in year-on-year comparisons as both half 1 FY '22 and half 1 FY '21 were impacted by coded lockdown. These 3 graphs show the performance of the company prior to lockdown, during lockdowns and now in the post-lockdown environment. As you can see, Adore Beauty post lockdown performance is significantly higher than pre-coded levels, and we are now growing off an elevated basis. Revenue of $93.6 million declined 17% compared to the prior period. Over the last 3 years, the door Beauty has grown revenue at a compound annual growth rate of -- gross profit margin of 32.6% was down 0.5 percentage points on the prior year due to cost inflation increases and increased promotional discounting. Margin impacts were offset by some rebates falling earlier this year. Reported EBITDA of $406,000 and EBITDA margin of 0.4% includes a significant one-off benefit related to the forfeiture of CEO options. Adjusted EBITDA of a loss of $493,000 and EBITDA margin of minus 0.5%, reflects lower operating leverage and reinvestment in strategic initiatives. Slide 7 shows our profit loss statement for half 1 FY '23 compared to the corresponding period. Revenue of $93.6 million was supported by a record 4-day Cyber trading period and a record number of returning customers. These high-value customers spend more on the platform and do so more frequently, which is underpinning growth in average order value and annual revenue per active customer. Our reorder value increased 2% on the PCP to $109.2 while average order frequency remained stable at 2.1 orders per customer annually. Moving down the P&L. Gross profit margin declined to 32.6% for the reasons mentioned earlier. Marketing as a percentage of sales increased 1 percentage point over the prior year to 15%, impacted by higher customer acquisition costs. Moving now to our balance sheet on Slide 8. The bill Beauty is capital efficient, generating free cash flow of $322,000 during the half. We have a strong closing cash balance of $30.1 million and remain debt-free. Disciplined stock management saw inventory levels declined 15% on the prior year. This was achieved despite half 1 typically being a higher inventory period to account for supply closures. Our strong balance sheet provides flexibility to pursue growth opportunities, such as scaling our own brand portfolio. I'll be happy to take questions at the end of the presentation, but for now, I'll hand back to you, Tamalin.

Thanks, Stephanie. Now turning to Slide 10. Adore Beauty is focused on beauty done better. We provide our customers with an authentic and relatable beauty shopping experience that focuses on high-quality products, a wide range, value and convenience. Our community-minded approach to beauty and personal care improved accessibility to the category. We are delivering on this mission by progressing our key initiatives. These are designed to drive improvements in customer metrics and support sustainable long-term growth. They enable us to attract and retain loyal high-value customers to drive top line growth while expanding margins. Our loyalty program and mobile apps, which support customer retention and lifetime value are gaining momentum, now contributing 63% and 18% of total revenue, respectively. Adore Beauty's content-led owned marketing channels and community are boosting brand awareness up 4 percentage points to 63% in our core 25 to 45 demographic. Our content supports new customer acquisition, brand awareness and cost-effective retargeting of existing customers. We onboarded 13 new brands during the period and continue to see strong growth in adjacent product categories. Adore Beauty's extensive product offering drives customer acquisition and increase the share of wallet. We also funded our own brand portfolio, launching new fun screens under a second one brand, AB Lab. We're receiving positive customer feedback on the skin care led SBS products. Own brands diversify our revenue profile and will be instrumental in expanding our margins over time. Moving now to our loyalty program on Slide 11. I -- as I mentioned, our resort society numbers contributed 63% of all revenue in H1 FY '23. This community of engaged customers have a higher average order value and lifetime values than our non-loyalty members. The loyalty program plays an important brand in supporting retention and lifetime value with these engaged customers. Aggregate calendar year '22 customer retention of 54.9% was down 1.3 percentage points on the PCP, reflecting the significant volume of new customers acquired during Lockdown. We typically see our lowest retention rates in the first year of acquiring a customer at around 35%. From year to onwards, our customer retention rates were higher. The growth -- the graph on the right shows our lifetime value to customer acquisition cost ratio, which measures the effectiveness of our marketing. For the calendar year '18 22 cohort, the average customer acquisition costs was recovered in just over a year, while the lifetime value continues to grow over time. By year 5, customer lifetime value is 6.6x the acquisition cost. Turning to Slide 12. Our mobile app is continuing to gain traction with revenue contribution doubling from the prior corresponding period to 18% for the first half of the 2023 financial year. The graph at the bottom left shows mobile app revenue growth on a quarterly basis. Encouragingly, the app continues to deliver higher levels of conversion and order values even as our user base has grown to more than 250,000 downloads. Average order value on the app is 16% higher than our nobler, while average order frequency is up 24%. And our customers are loving it currently rated 4.8 over from almost 10,000 of you. RF is another content-led own channel to line to engage, retain and grow the lifetime value of our customers. It enables us to build an ongoing relationship with our existing customers so that we can add value to their daily lives, not just when they're shopping. The dual beats content is an authentic and entertaining voice from beauty and personal care with a loyal and highly engaged community. During the half year, our content-driven impressions increased 15%, which cost effectively drives traffic to our own marketing channels. These include multiple podcasts, block and follower communities across Instagram, YouTube, TikTok and Facebook. Engagement with our content is compelling with our 8 forecasts now down later the combined 5.1 million tonnes. Our digital marketing capability and content ecosystem is also increasingly important to our brand partners. The next slide highlights our extensive brand product offering. We continue to refine our range to meet evolving customer needs. During the half, we onboarded 13 new brands, which you can see on the screen. This includes the internationally renowned Dior and [indiscernible] Beauty, which support our conversations with other luxury brands. Pleasingly, since October, these 13 brands have already grown to account for 1.8% of revenue. We're also seeing growth in our adjacent product categories with Fraser maiming for 5.3% of total revenue, while Korean DC represents 3.3%. Moving to our own brand on Slide 15. – Adore Beauty continues to grow its own brand portfolio, meant launching 2 Sinhala sun screens under our new brand, AB Lab in October. AB Lab leverages the Adore Beauty brand with its first product developed in response to feedback from our loyalty members. Our first time brand, Viviology, continues to receive positive customer feedback. We are expanding our wholesale distribution for this brand through fellows and professional clinics. We've also expanded our Adore Beauty branded range of accessories, which includes makeup brushes and the makeup cases that you can see in the top right-hand corner. These are continuing to perform very well. Now to the market opportunity and outlook. While many of you will have seen Slide 17 of, it highlights our significant long-term growth opportunity. We operate in Australia's $11.8 billion PC and Personal Care market, which according to Frost Sullivan is expected to grow at a CAGR of 4.3% to 2026. We estimate that in this market, Adore Beauty is the market leader of a GBP 1.5 billion online segment, which is forecast to grow faster than the broader category to 2026. As I mentioned earlier, this market growth is not expected to be linear with subdued online market growth forecast for the '23 calendar year as the market ingests the accelerated growth of the past 2 years. Despite more subdued online market growth in the short term, Adore Beauty has a long runway, and we remain optimistic about Adore Beauty's growth opportunity. The graph on the right shows online sales in Australia are still here behind more mature markets such as the U.K. and the U.S., which were forecast to reach 40.5% and 32.8%, respectively, by the end of 2022. This will be supported by medially noted millennials and Jase consumers entering the market. As the Australian market matures, as the incumbent, we are well placed to grow customers, revenue and margins. Lastly, historically, Beauty has been a resilient and attractive category, in terms of economic hardship. The graph in the middle shows this resilience with the category demonstrating a strong track record of long-term growth through the macroeconomic cycles. Beauty products, particularly skin and hair to where we index highly are often used as part of the daily routine, which many consider essential and are frequently repurchased. Turning to Slide 18. Adore Beauty's long-term strategy remains focused on driving top line revenue growth from returning customers, cost effectively acquiring new customers, growing our range and building our own brand portfolio to expand margins. Our investment in strategic initiatives will prioritize those that accelerate revenue and margin growth. As part of my 100-day review of the business, we are also exploring additional strategic opportunities. We are scaling our mobile app and loyalty program to grow retention and lifetime value. Improved gear draperies, site speed and data-driven personalization will also continue to be a focus as we enhance our online transactional experience. Our content and expanding owned media channels enable us to improve brand worth, acquire new customers and cost effectively retain returning customers. They also play an important role in building our brand co-funding opportunity. Adore Beauty's exceptional product offering will continue to grow, increasing share in the core categories of skin care, hair care and makeup. We're also scaling adjacent product categories, such as fragrance, desk, men and wellness. Our broad product offering supports new customer growth and increase its share of loss. And finally, we're growing our product offering under our own brand portfolio. Our own brands will expand margins over time. We're also increasing our footprint in new Zemen, which remains underpenetrated. Turning to Slide 19. We remain focused on increasing long-term profitability. The key pellets of margin expansion are revenue growth, improved gross profit margin and reduced costs, increased scale, new products initiatives to improve average order values and frequency and retention of returning customers will support top line revenue growth and deliver operating leverage. Longer term, we will continue to evaluate opportunities to drive further revenue growth through [ M&A ]. Gross margin improvements will come from our margin accretive owned brands, partner support and adjacency expansion. And finally, a new cost optimization program will reduce our expenses while our growing owned media channels, loyalty program and brand funding will enhance our marketing efficiency, one of our key input lines. Turning to outlook now on Slide 20. Trading conditions remain challenging with high levels of inflation, subdued consumer sentiment and the current shift to bricks-and-mortar retail. While door Beauty has now finished cycling cover lockdown period, January 22 did produce some lock-time light conditions, given on the corn infection and mandated isolation across the community. It also featured additional promotional activity. This has made growth comparisons volatile for the first 7 weeks of half 2, with revenue down this year, 7.8% on PCP. However, sales have increased through February and are up 3.7% on the PCP. Given the tougher-than-expected trading conditions, we no longer expect to see double-digit revenue growth this half, with half 2 FY '23 likely to be flat to the PCP as the company focuses on margin and remaining profitable. Adore Beauty reaffirms that expects to remain EBITDA profitable on a full year basis before returning to a 2% to 4% EBITDA margin in FY '24. We have several cost optimization and margin improvement initiatives being developed across the business to support these targets. Longer term, strategic initiatives, including our own brands and marketing channels and scale benefits are expected to increase operating leverage and deliver EBITDA margin expansion. Thank you for your time today. Before I hand you back to the operator for questions, I'd like to acknowledge the hard work and the dedication of the entire Adore Beauty team. The company's incredible culture, passion and innovation mindset were key attractions to me in joining Adore Beauty Stephanie. And I will now take questions.

[Operator Instructions] The first question comes from Apoorv Sehgal from UBS.

A few questions for me, please. Just firstly, the difference between January and February trading, is it fair to say that February sales in dollar terms were well ahead of January sales?

Yes. In terms -- do you have to come on -- well, I think if we talk about January, I don't -- in terms of the comparative period, we had -- last year, we had Omicron high levels of Omicron and mandatory isolation. The promotional calendar isn't like-for-like in January, and there was more travel this year versus last year. So that's just the context in terms of January. And pleasingly, we are seeing February seeing that growth in February of 3.7%.

Okay. And then just a question on the guidance for positive full year EBITDA. Is that using reported EBITDA, which I think was $0.4 million in the first half? Or is that using the underlying operating number, which excludes the SBP expense benefit. So I think that was minus 0.5% in the first half because we one of those stores are easing?

It's on the reported EBITDA.

Reported EBITDA. Okay. Perfect. -- then by extension, I guess, if I'm thinking about second half '23 EBITDA, obviously, if it's positive for the full year, that most likely is positive for the second half. So at flat revenues, right? That's about $87 million. If I just assume gross margins hold steady, getting about $28 million of GP. So that would imply that operating costs in the second half would be kind of a few million dollars below the first half of '23, which is about 30 or so million -- can you just talk to where that cost subtraction happens half and half? I guess like marketing and other costs are largely variable, but I'm just thinking, are there anything like staff reductions being factored into that employee cost line? Or are you expecting gross margins to go higher in the second half?

So I'm happy to talk to cost. So we are conducting a cost optimization program. Obviously, I'm new to the business, but we're working through that, and it will be a broad look at costs across the business. So we're working through that. We do anticipate that there will be partial impact in FY '23 of that program and further impact in FY '24.

But to your question, Apoorv, just to add to that, I mean, we're doing that review across all lines of the P&L, and we have been working through that. One initiative that we've implemented already, but the impact was not in half 1 is that we have removed the Sunday shifts at the customer fulfillment center with no impact to customer service. So we will continue to do that removal. So that is an employee expense line, specifically. We're working through a cost and marketing optimization. So we're looking at marketing efficiency. And so marketing line, and we're not giving guidance in terms of what's going to come down there, but we're working through every line.

Got it. And one last one for me, please. Just in the past, you've had long-term targets. EBITDA margins, 8% to 10% by 27%, 10% plus long term and you've had private label targets at all. I think that was 10% of sales by FY '27, 15% plus long term. What do you think about those targets now?

So again, I'm still relatively new to the role. Those are the stated targets the plan for the business, and I'm immersing myself in the business now and understanding on credit, but they're absolutely the current plan.

[Operator Instructions] Your next question comes from Elijah Mayr from CLSA.

Just a couple from me. Maybe just quickly following on from the previous question on the EBITDA and I guess maybe the impacts of that cost optimization program. You're saying there's going to be partial impact in '23 and '24. Are you able to give a dollar amount and then just confirm if that's included in the EBITDA targets of being positive for FY '23?

No, we haven't given any -- what we've confirmed is that we will remain profitable for FY '23, and we've confirmed 2% to 4% EBITDA guidance for FY '24.

So there will be costs involved with the cost optimization program impacting '23. We just don't have the numbers for that, but that will be included in the EBITDA positive number that you're targeting in FY '23?

That's correct.

Yes.

Cool. Also just previously, you presented new customers by quarter. I was just wondering if you could maybe sort of break out the number of customers, number of new customers, sorry, in second quarter '23?

No, I don't think we have provided by quarter. We normally do customers on an LTM basis. The last time we did customers was in our quarterly -- quarter 1 update. We did active customers in our quarter 1 update and that active customer number has increased since that quarter 1 update.

Previously, I think they've just been presented in chart format rather than actually being called out, but you can sort of see the trend, and I was just wondering if we could get some more clarity on what those sort of new customer numbers were doing in the second quarter.

We'll have a look and I'll come back to you individually.

Yes. No problem. And then maybe just lastly on labor challenges. Can you maybe make a comment on sort of employee retention and attrition that you're sort of seeing at the moment?

Yes, sorry, we as was the case for much of the market last year, there were high levels of movement and Adore Beauty with no exception to that. We've seen a stabilization in those numbers as we've worked through an employee value proposition. And we have one but we've been working through it in more detail, and those numbers have stabilized.

I think just to add to what Stephanie said that joining the business that has been pleasing to see that stabilization. And I think also our team engagement, we had our team engagement or those results come out relatively recently, and they were also very pleasing. So good to see that that is stabilized and that we have an engaged team.

[Operator Instructions] I'll now take questions from the webcast. The first question from the webcast today comes from Christopher Tenan. Christopher asks, could you please outline the mix between the volume what appears it's been deleted. If there's no further questions, I'll now hand back to Mr. Tamalin Morton for any closing remarks.

Pardon me. We're just experiencing on May we have retraced question.

Pardon me, we have retrieved the question. The question from the webcast comes from Christopher Tenan. Chris asked, can you please outline the mix between the price and volume and trading? Have prices been put up during this period are volumes negative?

Yes. So revenue for the period was down 17%. We have -- we are a third-party distributor of brands. We have 270 of those. We have had increases come through on those brands. But typically, they are market-wide increases and increases are reflected in RRPs that are being passed through. I think what we've talked to is that there was increased promotional discounting in the period to remain competitive...

As there are no further questions from the webcast, I'll now hand back to Tamalin Morton for any closing remarks. Thank you.

Thank you, and thanks again for joining us today. I look forward to meeting many of you over the coming days. I want to say a big thank you for your support, and we'll now close the call. Thank you.