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

Thank you for standing by, and welcome to the Adore Beauty Group Limited H1 FY -- [Operator Instructions] I would now like to hand the conference over to Sacha Laing, Chief Executive Officer. Please go ahead.

Good morning, everybody, and thank you for taking the time to join us this morning. My name is Sacha Laing, CEO of Adore Beauty Group, and I'm joined by our CFO, Stephanie Carroll. Thank you very much for joining us today as we present Adore Beauty's results for the first half of the 2025 financial year. I'm pleased to report that the early stages of our strategic refresh has yielded a strong performance, setting a solid foundation for future growth as we grow Adore Beauty into a leading omnichannel beauty authority. The past 6 months have been a period of transformation and disciplined execution. Since announcing a fresh 3-year strategy, we are focused on building a stronger, more profitable business while continuing to deliver exceptional value to our customers. Stephanie will speak to the numbers shortly, but I'm pleased to share that as a direct result of our growth initiatives, we are seeing improved quality of earnings and significant margin [indiscernible]. Highlights for this half include delivering a material gross margin increase of 270 basis points, completing the acquisition of iKOU into our own brand portfolio with the brand performing well and in line with our expectations. I'm really excited for iKOU's future. It's well positioned to enter its next phase of accelerated growth and deliver solid margin expansion for the group. Customer acquisition continues as a core focus across our channels, and I'm pleased to report we grew our contactable database by 20% on the prior year to 1.26 million, and an increase of -- on our active customer base by a further 4%. The launch of our first physical Adore Beauty retail store at Westfield Southland in Victoria earlier this month marked a significant milestone in our transition towards becoming an omnichannel beauty retailer. The store is truly an extension of our online platform and is deeply immersed in our digital ecosystem. Our store network will unlock new revenue streams for both Adore Beauty and iKOU with another 4 stores opening by June, along with an additional 4 to 6 Adore Beauty stores this calendar year. Over the next few years, we are targeting 30% revenue uplift and doubling of EBIT margin. This slide, Slide 3, demonstrates how the last 6 months has begun to see the group in this direction. Revenue was $103 million, up 2.3% compared to the prior corresponding period. We achieved a gross margin of 36.2%, reflecting our focus on quality of revenue and margin-accretive initiatives. EBITDA nearly doubled from the previous year to $4.7 million, representing a margin growth -- margin percentage of sales of 4.5%, and EBIT was $2.8 million, a 126% uplift. These results truly demonstrate the effectiveness of our strategy -- of our refresh strategy, aiming at improving the quality of our earnings and long-term profitability. Adore Beauty's signature online experience keeps our loyal customers returning time and time again. And as shown on Slide 4, we've not only grown our balance of active customers by 4%, but also expanded our contactable database to over 1.2 million customers, which is a 20% increase on the prior period. Looking ahead, we remain focused on delivering the Adore Beauty experience, while deepening customer engagement and loyalty through increased mobile app adoption, expanding our subscription service, enhancing our rewards program and utilizing our advanced data and AI capabilities to maximize share of wallet, both online and in-store. I'll now hand over to Stephanie to take you through our financials.

Thank you, Sacha. I'm pleased to share the strong early results of Adore Beauty Group's refresh strategy, demonstrating improved quality of revenue and profitability. In the first half of FY '25, we delivered revenue of $103 million, an increase of 2.3% on the prior year. EBIT increased 126% to $2.8 million, which drove our EBIT margin to 2.7%, up from 1.2% in half 1 FY '24. We also delivered a reported EBITDA margin within the full year guidance range, reinforcing the strength of our execution. With this momentum, we are on track to exceed our target of 5% EBIT margin over the next 3 years, positioning Adore Beauty Group for sustained and profitable growth. This performance reflects the progress on the group's near-term objectives of improving the quality of revenue with a clear focus on initiatives that drive quality of earnings. Key contributors to margin expansion included the growth of our private label brands and retail media as well as disciplined cost management which helped deliver record gross margins and a strong profit uplift. In addition to our strong EBIT performance, we delivered significant growth in operating EBITDA, which increased 64.8% to $4.3 million at a margin of 4.2%. This was supported by disciplined promotional activity, ensuring both profitability and sustained customer engagement. Marketing as a percentage of sales decreased by 0.6 percentage points to 13.3% compared to the prior corresponding period. This was driven by data-led efficiency gains in marketing as well as refined -- as well as a refined promotional cadence over the half. We invested in our key growth levers, including our omnichannel capability and our first retail store while maintaining focus on disciplined cost management and profitability. The group remains in a strong financial position with $11.7 million in cash on hand as at the 31st of December 2024. The reduction from $32 million at 30 June 2024 reflects investments, including the $20 million upfront consideration for iKOU and capital outlays for new retail stores. Importantly, we remain debt-free and cash flow positive with working capital efficiencies driven by improved inventory turnover. Thank you. I'll now hand back to you, Sacha.

Thank you, Steph. For those of you who might be new to the Adore Beauty story and with our first store in Victoria now open, I'm going to recap our 3-year strategy, its targets and how we are going to deliver a material step change in growth to achieve long-term value creation for our shareholders. I joined the company last year with a clear vision to launch Adore Beauty into its next chapter of growth. Leveraging the Adore Beauty technology platform, digital ecosystem, strong brand and existing loyal customer base, we are embarking on a journey to unlock substantial incremental value to our stakeholders. Our clear 3-year strategic plan will [ see Adore Beauty ] evolve from a pure e-commerce player to a leading omnichannel beauty authority. To achieve this, we will materially broaden our addressable market with a 25-plus national retail store network, leveraging our online authority and authenticity and unique content capabilities. We will elevate our engagement with existing customers to reach an increased share of wallet and of course, grow our own brands to drive margin expansion through retail, direct-to-customer and wholesale growth in new geographic regions and of course, through expanding our range of product purpose. We have set 5 key targets for our 3-year strategy. Our total group revenue will exceed $260 million, representing a 30% growth on FY '24; gross margin expansion of more than 200 basis points, which we've already delivered in this first half; and cost efficiencies to deliver 150 points improvement in CODB; EBIT margin target over 8% and EBIT margin target of over 5% in that 3-year period; owned brands will represent 8% to 10% of total product revenue, driving more margin improvement, and we will have more than 1.25 million annual active customers. The following graph -- the following growth initiatives are designed to achieve these targets and deliver a step change in the group's sales and profit. Retail stores represent a material high-growth opportunity, which leverages Adore Beauty's strong brand and existing infrastructure. With a physical store presence, we can increase brand efficacy and awareness as well as drive new customer acquisition. We'll continue to focus on operational excellence by leveraging our retail media monitoring algorithms, advanced data and AI capabilities to seamlessly evolve into an omnichannel beauty authority, delivering the signature Adore Beauty customer experience no matter how our customers choose to shop for our 14,000-plus products in in-store or a mixture of the two. We'll continue to optimize our product portfolio, focusing on high-growth, high-margin brands, and in time, expanding our presence with other categories such as fragrance, makeup and wellness. The highly margin accretive retail media model is another focus area for us. We have recently invested in a dedicated team to drive further growth in this area as well as an online portal for a more streamlined process for our brand partners. We'll take our own brands, iKOU, AB LAB, Viviology and Adore Beauty, to the next level to drive brand loyalty and differentiation, delivering growth across multiple channels, particularly in new geographies and in new retail formats. The national retail store network will be a key driver to our growth. By closing the cycle on how our customers shop, we can capture a greater share of market -- share of wallet and drive higher transaction values and improve overall margins. We've opened the door of our first physical Adore Beauty store and are on track for 4 to 6 additional stores throughout the '25 calendar year as well as expand iKOU beyond its 3 existing stores in New South Wales. Many of you have asked, when is a store opening near you? And I'm pleased to say we have Watergardens in Victoria opening in early March and additional flagship Victoria store location now confirmed. And we have additional locations for Adore in New South Wales, Queensland and WA, all soon to be announced. Stay tuned. The common misconception that online and in-store shopping are separate experiences. With Adore Beauty, we're setting a new omnichannel standard by bringing our signature online experience to life. That's true to our digital DNA and aligned with customer preferences. Our stores will be deeply embedded and immersed in our digital ecosystem. The stores are powered by our advanced digital infrastructure with digital kiosks, enabling customers to explore, browse and order from our 14,000-plus products. They can also access online aspects they value most, such as detailed product information, ingredients list and authentic customer reviews, all while enjoying the added benefits of our in-store product interaction and a personalized advice from our beauty experts. We have digital pricing and dynamic content that's linked to our website throughout the store, ensuring our customers receive the full Adore experience no matter how they choose to shop with us. We'll be creating moments of delight to drive customer loyalty and engagement, including free samples, of course, access to our rewards programs, and the highly sought after Tim-Tam with every transaction. Our in-store beauty experts provide professional, brand-neutral guidance to help customers navigate their skin care and beauty choices with confidence, trained in the latest industry trends and equipped with cutting-edge skin analysis technology that offer personalized recommendations tailored to individual needs. By delivering educational support and unbiased advice, just like the insights featured in Beauty IQ, we empower customers to make informed decisions, enhancing both their shopping experience and brand loyalty. And lastly, Slide 15 demonstrates how we will elevate our retail media capabilities, both online and in-store to drive further margin expansion and profitability. Our enhanced retail media capabilities are unlocking new revenue streams while delivering high-margin growth. We've streamlined the process for our brand partner portal to provide them with a data -- with data-driven insights to ensure they are highly engaged with us and have easy access to value-added marketing solutions. Our newly appointed in-house team is dedicated to maximizing media effectiveness, optimizing placements and driving measurable results through our partners. And by leveraging in-store opportunities, including strategic advertising and product placements, we can capitalize on real-time customer data and first-party insights to create targeted high ROI campaigns, enhance both brand visibility and profitability. We have a clear 3-year strategic plan that will leverage multiple growth initiatives to deliver a material step change in customer acquisition, revenue growth and profitability and importantly, improve value for our shareholders. We are already seeing early success with strong EBIT and gross margins in half 1 of FY '25. We have clearly defined tactics to expand our gross margin, including multichannel growth of owned brands, retail media revenue, refined promotional cadence and disciplined inventory management. We've strengthened the leadership team and reset the organizational structure to align with the needs of the revised strategy and creating capability and efficiency aligned to our strategic growth initiatives. We have a strong platform of new stores underway with the first Adore Beauty store successfully opened at Southland with an additional 4 to 6 Adore Beauty and 2 iKOU stores planned in calendar year '25. The group is on track to deliver 25-plus stores by 2027. And lastly, I'm pleased to reaffirm our EBITDA margin guidance of 4% to 5% for FY '24, and provide guidance for EBIT margin at 2% to 3% for FY '25. I'm truly excited about the path ahead for Adore Beauty, and our 3-year plan is just the beginning. We have a significant opportunity and are well placed to capture further share of the $1.3 billion beauty industry over the long term, and I look forward to providing further updates at our next briefings. Thank you.

[Operator Instructions] Your first question is a phone question from Apoorv Sehgal from UBS.

Maybe first one in terms of kind of the core online business. If we sort of look at kind of July-August trading last year, you were growing kind of 7% for the first 7 weeks. And then the last 4 months of the year, growth kind of slowed down quite a bit, closer to kind of flat for the last 4 months. I appreciate, obviously, the pivot in strategy to stores and the kind of the margin optimization, but any other drivers you could speak to regarding that slowdown in the core online business? Was that as expected? Was there a deterioration in the consumer environment or something that may have driven that as well?

I think as we've spoken to in our release and investor presentation, we've been very much focused on quality of earnings. And why I'd like you to think about that is that we have looked at ensuring that every piece of revenue that we take is profitable. And that may mean at times, we're either deleting products that aren't profitable, and that may be -- they may have a top line revenue impact. But moreover, we're refining our promotional cadence. And by that, that means assuming revenue that's of higher margin capability and caliber, which we believe will deliver a more sustained long-term profitability model for the business. So yes, revenue has slowed in that second quarter, but not slow through anything more than us consciously ensuring that all of the revenue that we pursue is profitable.

And I guess then going forward, Sacha, just taking into account the focus on profitable revenues and stronger gross margins, do you -- I mean is it fair to still expect the core online business to grow sales going forward, at least at kind of what the market grows at? Is that still fair? Or might it be more kind of closer to flat in the next few years?

Yes. I think you should think about it in a couple of ways. We won't expect it to be flat. Absolutely not. We are absolutely focused on growing the core business and growing our online business. And we expect to see that in a BAU sense as well as the incrementality that we will not see from the halo of the store network. But as I said, importantly, we're looking to grow margin. And when you look at the gross margin dollar growth for the half, as per our financial reports, you'll see a substantial lift. And I think we're realigning revenue and gross margin growth and thinking about them in the same way, the gross margin growth is a material performance relative to market.

And actually, just on those margins, I guess you were targeting 200 bps expansion in your 3-year targets, which you've already kind of got to in this half itself. Could we be thinking about gross margins going up even further over the next couple of years, especially thinking about kind of the store -- the physical store economics?

Look, I think if I was looking at a high-low scenario from a modeling perspective, I'd certainly expect it'd be a high case and a low case, and the high case would be higher than what we've already seen. We've been very pleased with the delivery of our margin improvement in half 1. And as I said, that's come through 3 key drivers. One is the improvement of quality of earnings, particularly through managing our promotional cadence. The second is the growth of our own brands. And we are fully on track to continue to accelerate that growth, particularly in the iKOU brand. And thirdly, the ongoing continued growth in retail media. And as I said, we've only just onboarded a new platform to support our partners working directly with us as well as a dedicated team to continue to focus on driving revenue and service to those brand partners. So we've got very strong positive momentum in our margins, and we expect that to continue moving forward. And if I can provide any insight, half -- the first half of this second half of FY '25, I should say, this first period of trade, we've seen that gross margin expansion continue.

And actually, just on the owned brands point, I can see that you're obviously targeting 8% to 10% of your mix to the owned brands. Sorry if I missed it. Is there a comment you can make on what that sits as of today, like what is owned brands as a proportion of revenue?

Yes. So we made a comment in November that, that would see owned brands doubling over that '24 to '27 period.

Yes, understood. Okay, maybe just one kind of final question for me. If we're just thinking high level about the store rollout strategy, I guess the obvious question people kind of ask is, okay, physical store industry, pretty competitive, the likes of MECCA and Sephora department stores all pretty -- they're all focused pretty well on the beauty category. How do you see Adore Beauty differentiating from a physical store perspective versus some of your key competitors?

Yes. Great question. So I think for those that have had the opportunity to visit the store, what you'll immediately see is an elevated store execution. The actual store itself, the design, the architectural elements of the store are elevated, and they certainly stand the brand apart and very much in keeping with the brand positioning in market. The store is deeply digitally immersed. And by that, I mean, it is a direct extension of the online ecosystem. So throughout the store, every product is digitally priced and directly linked back to our core online platform. All the content that you see in store is an extension of what you'll see on the online platform. Ratings and reviews that you'll see on the Endless Aisle portal in-store are directly coming off the website. So the story is a deeply, deeply digitally immersed experience. Equally, the basket of goods that we've curated for the store are reflective of what Adore has always been very well known for: high-low shopping, brand-agnostic, great product that's going to solve the end-use need of a consumer. And so again, when you walk into the store, what we'd like our customers to feel is a sense of comfort that it's an environment that's conducive to having it open and honest conversation with our beauty advisers around the particular concern that a consumer might be looking to solve. And importantly, knowing that they can trust, as they do online, that we'll deliver them a solution in a brand-agnostic way that gets them the right outcome. So the store is truly an extension of our online platform, and we think is a very unique proposition to market. As we've just touched on earlier, we opened the Southland store on the 1st of February, so 17 days ago. It's trading very well. Customer response has been very strong. And we're continuing to evolve the brand portfolio directly through feedback from customers. But needless to say, without talking to the specific results of the store, it's exceeded our expectations, and we're delighted looking forward to the next one.

And can I just ask one quick follow-up question? Is the category mix expected to be the same in-store versus online, like that sort of bigger skew towards skin care per usual?

Yes. No, it's a really good question, actually. And so what we typically see online, as we've talked about previously, is skin care and hair care are over indexed, and that's what we're really well-known for online as a pure-play e-commerce retailer. As we move into the offline environment and categories like fragrance and makeup, which tend to be more sensory and tactile, have played a much heavier role. And we've expected and have forecast that. And we've seen that come through. So both fragrances and makeup are over-indexing relative to online. Importantly, too, those are 2 higher-margin categories. So what we are seeing is the store margin exceed expectations as well, which is something we've been very pleased to see.

Your next question comes from Joseph Michael from Morgan Stanley.

First question just around stores. So very early days, I know, but is there any sort of areas of improvement you'd like to call out? Or things that have gone better than expected? Any sort of early feedback on your first store? I know it's early days, but anything there would be appreciated.

Yes, we've seen a really high level. So just in an overall sense, I think I commented on just a moment ago, but we've been really pleased with the customer response. The stores trading ahead of expectations, margins ahead of expectations, footfalls ahead of expectations. And that being said, we're always looking to learn and improve as we move forward. So we're learning more and more about the basket in terms of what customers are looking for, for a brand mix in store, and we're continuing to refine that. In fact, just in this last week, following conversations with one of our brand partners, we've agreed to put a particular brand in store. And why I use that as an example is that normally in a typical beauty store environment, that might take 3 to 6 months to get fixtures built because in most environments, as you can appreciate, they have custom-made fixtures in the particular brand and design. The way that we've built our stores enables us, through the use of digital execution, to be able to immediately personalize the space for a brand in a way that they would be used to seeing in a more physical execution within 48 hours of agreeing for that brand to go in store. It was set up in its own bay in the store looking fantastic. And in fact, it's traded as our third highest performing brand since that went in at the start of last week. So to give you an example of just how powerful the digital immersed environment that we have there is. We'll continue to refine the brand offer. We'll continue to refine the store design. In our Watergardens store, which will open in early March, we will have a private consultation space in the store where customers could come and have treatments and a very much personalized consultation experience. We have an in-store, semi-private consultation environment in Southland, that's performed very well where customers are coming and getting a digital skin analysis and then getting product recommendations from that analysis. Between Southland with that in-store experience in that semi-private environment and Water Gardens with a fully private area, we'll take the learnings from both of those 2 stores forward to inform how we'll execute treatments in the store and beyond the first 2 stores. Needless to say, response has been great from customers.

Okay. Great. Next question I had just around, I guess, what are the key metrics to focus on going forward now that you're becoming an omnichannel retail. I noticed today in today's presentation, you've added contactable database. You've dropped a couple of the other metrics. As investors, what should we be most focused on to sort of get an understanding and a feel of how the business is performing?

We're holding ourselves to account. And the reason why we've specifically provided guidance on the key financial metrics of gross profit and an improvement in gross profit margins by 200-plus points and the expansion of EBIT margins to 8 plus and EBIT -- sorry, EBITDA margins to 8 plus and EBIT margins to 5 plus, they're the metrics we want you to be holding us to account for to see continued momentum on those 3 metrics over the course of this strategic horizon. And the reason why I called out those 3 specifically is that as we continue to take share as we open more stores and we see the online benefit of that as well, the improved gross margin is a key driver in obviously, that profitability model, the continued expansion of our own product as well, and that's why we're particularly calling out the growth of iKOU stores which will be substantially margin accretive over this period. So holding us to account on margin expansion, I think, is something that we're happy to put our hand up and talk about on an ongoing basis because ultimately, with a $260 million plus ambition over this 3-year period, we're talking about margin expansion that's 3 to 4x historic levels. And to do that off a 30% increase in revenue will deliver sustainable and long-term shareholder value.

Okay. Got it. Next question I had, just around, I guess, second half trading. No trading update provided today. Is it fair to assume that the trends from the first half have continued into the second half?

Yes. I think that's just -- it's just aligned with our longer-term strategy. So we've said we're focused on improved quality of revenue, reshaping our promotional cadence and refining our promotional cadence to ensure that we're growing profitable revenue, continuing to grow retail media, continuing to grow our own brand. So I think those trends that we've seen in the first half through substantial expansion of gross margins and ongoing growth of EBIT and EBITDA margins, you can expect that momentum to continue as our guidance hasn't changed on both the near horizon and long-term horizon on those metrics.

Okay. Got it. And then just one last question for me, just around more modeling type of question. Have you thought about how you might sort of disclose your segments going forward? Will it be just Adore like an omnichannel? Or will you have Adore online, Adore stores and iKOU stores? If you could just help us just for modeling purposes going forward?

We'll be keeping to -- until we reach a level of maturity and I'll probably preface that by saying maturity being a national store network opened, we've seen a maturing of those stores, we see the omnichannel because the stores are deeply connected to the online environment. Equally, our iKOU business is deeply embedded within now the Adore ecosystem and infrastructure as well. So individual brand and/or channel reporting becomes less and less relevant in the medium term. But for the long term, when we talk about comparable growth, comparable growth in the store network won't mature for at least 3 years.

Your next question is a webcast question. Douglas, a private investor asks: How is the performance of the recently opened store going? And what benefit is it in subsequent stores likely to add to earnings?

Thanks for your question, Douglas. As I just mentioned before, on the performance of our first store, very early days, 17 days open, but performing well, and we're very, very positive about the opening of Watergardens in a few weeks' time and subsequent stores thereafter. So we're actively working on our real estate pipeline now. And as I said, we've secured a couple of iKOU stores, which we've talked about and with 4 to 6 Adore stores in this calendar year well underway. Each of these stores are absolutely benchmarked against profitable contribution to earnings. So you can expect, as we said in our November strategy update, that we'll continue to see each of those stores incrementally add to earnings, both at the top line and at the bottom line. And importantly, what we also talked to in November is that in our guidance for that long-term view of $260 million, we haven't necessarily provided a specific category or channel guidance consciously because of that integrated ecosystem that we see between online, offline and between the various businesses.

Your next question is from Ron from [ TAMIM ] Asset Management, who asks: Can you clarify the 25 stores to be opened exclude iKOU stores?

What we've said is we'll open 25-plus stores over this 3-year horizon, and that's across both Adore and iKOU. And within that, we said that we would open 8 to 10 -- we would end up with 8 to 10 iKOU stores at the end of that 3-year period. We currently have 3. But we've said 25 plus in the total network sense.

Ron also asks: In terms of the 30% revenue uplift forecast next 3 years, do you expect all of that to come from the 25 new stores, so approximately $2 million per store?

Good question. And short answer is no. We obviously expect to see growth in our core business and our planning growth in our core business, we would expect to see growth from new initiatives as well over that period of time. And an important call out, and it actually came in a question I had earlier this morning, when we've talked about our guidance for '27, we've also indicated that we expect to open that network of stores at around 8 to 10 stores each year over the 3-year financial period, which means in FY '27, we will have 6 to 10 stores that will only have just opened in that year, hence not reached a maturity or a full year's revenue contribution to those -- that guidance of $260 million plus. So you can expect to see further growth beyond that as those stores opened in the FY '27 year anniversarize in FY '28.

Ron also asks: What was the contribution in the 1H from iKOU revenue and EBIT?

Thanks, Ron. As we said earlier on, we aren't reporting -- segment reporting as part of our results ongoing as we now are a fully integrated business.

Steve from [ Forrester ] Funds Management asks: Can you please outline the impact of the iKOU acquisition on gross margin, i.e., what was BAU for the -- sorry, i.e., what was BAU for the half without the acquisition?

Steve, look, we have said we aren't breaking down individual segment reportings for the half. So I appreciate the question, but that's not something that we'll do. We're now fully integrated at the back end and also at the product level as well. So happy to take any further questions in that way, but it's not something that we'll be disclosing at a segment or brand level.

Your next question is from Jim, a private investor, who asks: Can you talk about the capital outlay required for your first store?

We haven't provided individual...

Sorry. You go.

You go.

We haven't provided individual guidance for each store, but we did say that it would be -- we'd estimate that it would be between 300 and 600 per store, and Southland has fallen into that guidance.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Laing for closing remarks.

Thank you for everybody that has joined the call this morning. We appreciate you taking the time to hear a little bit more about our business. We look forward to continuing to update on our progress against our 3-year plan in further briefings over time. Thanks very much for your time this morning.

And that does conclude our conference for today. Thank you for participating. You may now disconnect.