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

Thank you for standing by, and welcome to the Adore Beauty Group Limited FY '26 Results Conference Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Sacha Laing.

Good morning, everybody. My name is Sacha Laing, CEO of Adore Beauty Group, and I'm joined by our Interim CFO, Kylie Archer. Thank you for joining us today as we present Adore Beauty's results for the 2026 financial year. FY '26 was a significant year of investment and transformation for Adore Beauty Group. We delivered record revenue while materially expanding our retail network and completing the major infrastructure investments required to support our growing omnichannel operations. At the same time, challenging retail conditions and the upfront investment associated with our still maturing store network impacted earnings. Our FY '26 result highlights include record revenues of $207.3 million, up 4.3% over the prior year, in-store revenue of almost $19 million (sic) [ $18.6 million ], reflecting the expansion of our national retail network and omnichannel customer momentum. New customers increased over 14% (sic) [ 14.4% ] to almost 419,000 (sic) [ 418,600 ], while active customers grew 2.6% to nearly 860,000 (sic) [ 858,800 ] customers. Gross margins at 34.8% were down 52 basis points over the prior year, pleasingly, up 134 basis points on FY '24, in line with our long-term strategic plan. And underlying EBITDA of $3.8 million was at a margin of 1.8%. Turning to our key achievements on Slide 3. FY '26 marked the largest period of growth investment in the group's 26-year history. We opened 13 new retail stores across Adore Beauty and iKOU, taking our national network to 20 stores. We also secured locations for a further 5 stores opening in the first half of FY '27, in line with our strategic plan set out in November '24 to have 25 stores across the group by the end of FY '27. Alongside the store rollout, we built and commissioned our new semi-automated National Distribution Centre and completed the rollout of our new ERP platform. Both projects were delivered on budget and on schedule with the efficiency benefits expected to begin flowing through FY '27. We also delivered strong new customer growth while significantly reducing customer acquisition costs. While the expected earnings benefit from our omnichannel growth strategy is not evident in our FY '26 result, we are very pleased with our progress to date with key positive indicators, including store-led contributions from new customer growth, up 14.4% and a 37.4% decline in customer acquisition costs to $35 (sic) [ $35.20 ] per customer. With omnichannel customers generating a lifetime value 2.5x greater than online-only customers and with a further 5 stores planned to open in FY '27, we remain confident that our omnichannel growth strategy will translate into improved earnings as our store network continues to mature over the next 18 to 24 months. High-margin owned brands continue to grow, contributing 5.8% of group product revenue and retail media delivered another strong performance. We materially strengthened the foundations of our iKOU business with investment in the brand, in infrastructure, customer experience and data analytics. The successful execution of our strategic plans in FY '26 provide a solid foundation from which to grow revenue and profitability as our store network and operating infrastructure mature. On Slide 4, Slide 4 demonstrates the changing composition of our revenue and earnings as we progress our strategic pivot to omnichannel retailing. We delivered record revenue of $207.3 million despite challenging retail conditions, and we're particularly pleased with the composition of this growth with strong performance from our expanding retail network and strong contributions from our high-margin owned brands and retail media. Gross profit margin was 34.8%, down 52 basis points over the prior year, primarily reflecting increased promotional activity in the first half. Pleasingly, we saw margin stabilize in the second half, finishing 18 basis points ahead of the prior year corresponding period, benefiting from increased contributions from our high-margin owned brands, growth in retail media and, of course, our growing store network. Of note, gross profit margin lifted significantly against FY '24, up 134 basis points, in line with our long-term strategic goal. Underlying EBITDA declined 39% (sic) [ 39.3% ] to $3.8 million, and this reflects the higher fixed cost base associated with our still maturing store network and investment in capabilities required to support our omnichannel strategy. With most of our retail network still in its early maturity curve, we expect a greater financial contribution from retail stores in FY '27 and beyond. I will now hand over to Kylie to take you through our key financial results.

Thank you, Sacha, and good morning, everyone. Turning to Slide 6 being the group financial statement. The first thing I did just want to quickly touch on here is the change in how we're reporting profit compared to FY '25. Consistent with our approach at the half year and due to our growing retail footprint and the requirements of AASB 16, from FY '26, we've commenced reporting EBITDA on an underlying and pre-AASB 16 basis. This measure takes account of rental costs, and we feel it best reflects the underlying performance of the business. Moving now on to the financial results. And while Sacha has already touched on the key aspects of the headline results for the year, it's worth calling out the substantial improvement in marketing efficiencies. We see for FY '26 a significant reduction in marketing and advertising costs, declining 22.8% over the prior year to finish at 8.8% of sales. This is 316 basis points lower than the prior corresponding period. This was achieved despite continued investments in brand awareness and customer acquisitions and reflects both ongoing refinements to our data-driven customer acquisition strategies and our strategic pivot to omnichannel retailing. In parallel with these targeted marketing efficiencies, we also remain focused on operational costs more generally, having completed throughout FY '26, the head office restructure and ERP system rollout, commissioning of our new semi-automated National Distribution Centre as well as AI implementation across the business and the new freight partnership with Team Global Express. Together, these initiatives are expected to deliver significant cost and productivity benefits over the year ahead. Turning now to our balance sheet on Slide 7. FY '26 has represented the most significant investment cycle in Adore Beauty's 26-year history with investment across our growing store network, new National Distribution Centre and supporting operational infrastructure. The group closed the year with cash balance of $0.7 million and net debt of $9.3 million. In June, we successfully refinanced our debt facilities with our long-standing banking partner, CBA, under a new 3-year agreement, increasing our working capital facility and establishing an asset-backed facility supporting the new distribution center. At 30th of June, we had $14.4 million of undrawn facilities available, providing a significant level of liquidity headroom as we enter FY '27. Inventories remained tightly managed at $23.2 million despite the addition of 13 new stores carrying close to $5.3 million (sic) [ $5.1 million ] of stock at year-end. We're now nearing the end of this major investment cycle with the infrastructure and funding capacity in place to support the group going forward. I'm happy to take questions at the end of the presentation. But for now, I'll hand back to Sacha.

Thanks, Kylie, and great to have you here today.

Thank you.

Now in detail, the Adore Beauty business specifically. Expanding Adore Beauty retail network is supporting a more cost-effective customer growth while helping us deliver a more engaged and valuable customer base. Stores accounted for 26% of total new customers in FY '26 compared to just 3% in the prior year, helping us to offset a deliberate reduction in lower-value customer cohorts. Our loyalty program is also increasing customer value. Loyalty revenue increased 18.7% to $151.8 million with loyalty members accounting for 81% of total product revenue, up from 70% in the prior year. Together, stores and loyalty are helping us acquire customers more efficiently, strengthen engagement and improve the quality of group revenue. Moving to Slide 10. Our national Adore Beauty network now comprises 14 stores and remains in its infancy with more than half of our network less than a year old and only 5 stores trading for the full 12 months. Adore Beauty store revenue increased 40% (sic) [ 40.9% ] from the first half to the second half to $8.8 million and attracted 1.4 million customer visits during the year with strong in-store conversion at 15%. Importantly, omnichannel customers have a lifetime value 2.5x higher than customers shopping through a single channel. Omnichannel revenue increased from 5.1% of product revenue in the first half to 11.9% in the second half, making up almost 10% of total revenue for the year. We've secured leases for a further 5 Adore Beauty stores opening in the first half of FY '27, including most excitingly, a national flagship store in Melbourne's CBD. Slide 11 demonstrates the improvement in our store performance as the network and our retail capability mature. In-store conversion increased from 13.1% in the first half to 17.4% in the second half, a 420 basis points (sic) [ 429 basis point ] improvement and comfortably above our 13% success benchmark. We are also seeing emerging online halo across new store catchments, particularly in markets where the Adore Beauty customer base had previously had very low penetration. Omnichannel customers spent 52% more than online-only customers during FY '26, reinforcing the opportunity to increase share of wallet as more customers shop across both channels. Broadway in the state of New South Wales is currently our best-performing store, while Western Australia, Queensland and South Australia are outperforming our Victorian stores, which obviously has a much higher penetration of existing Adore customers. The Adore Beauty retail channel delivered an underlying EBITDA loss of $1.1 million in FY '26 with more than half of that network less than a year old. However, as stores move towards operational maturity over the next 18 to 24 months, we expect a higher contribution from stores to group earnings. Importantly, we do not expect the store network to represent a material impact on group profitability in FY '27. Moving to Slide 12. While our retail network is gaining momentum, continuing to grow and enhance the online business remains an absolute priority. Active Adore Rewards members increased 22% to 538,000, supporting average order frequency and value growth. Customer acquisition costs declined to $37 (sic) [ $37.30 ] compared to $57 (sic) [ $57.30 ] in FY '25, demonstrating the increasing efficiency of our acquisition strategy. Mobile app revenue increased 21% and now represents 36% of all online sales and 34% of product sales. We continue to refine our brand portfolio, launching 16 new brands, including Dolce & Gabbana Beauty, Kilian Paris, Prada and Miu Miu alongside a significant expansion of our Korean beauty range with now over 20 K-Beauty brands in our portfolio. We also deployed proprietary AI across customer-facing and internal channels. Ask Aura, our online AI agent is improving product recommendations and customer engagement on site. Abi, our customer service AI agent, is supporting customer service and answering over 40% of total customer queries today. And Dora, our internal AI platform is enhancing internal analytics and reporting. Through our partnership with Google as a launch partner for the ANZ region, Adore launched agentic retail in Australia, enabling customers to purchase directly from Adore Beauty within Google Search, including AI Mode and the Gemini app. Turning to our new National Distribution Centre in Broadmeadows in Victoria. The transition to our semi-automated 6,300 square meter facility is now complete with the efficiency ramp-up commencing from the second quarter of FY '27. The NDC combines leading edge robotics and technology and provides more than 7 years of capacity to support our future growth ambitions. With its automated picking and replenishment capabilities, we are anticipating approximately $2 million in labor efficiencies while materially increasing our dispatch capability and speed. The $8 million investment is split across both FY '26 and the early part of FY '27 and is largely funded through a project-backed facility from the CBA, and we expect to achieve a payback within 4 years of the center being operational. Slide 14 brings together Adore's broader efficiency initiatives delivered across marketing, inventory and operations. Our more targeted customer acquisition strategy supported growth in new customers despite an almost 30% reduction in marketing spend and continued investment in brand marketing. Marketing return on ad spend increased to 14x compared to 9x in the prior corresponding period. Inventory closed at $23 million (sic) [ $23.2 ] million, including approximately $5 million (sic) [ $5.1 ] million held across the 13 new stores that we opened during the year. On a like-for-like basis, excluding these new stores, inventory was back 11.3% on the prior period as the team diligently managed our inventory levels, and we saw stock turn increase up to 6.9x from 5.9x last year. Operationally, the new ERP is improving planning and productivity, while the reshaped head office team is expecting to deliver more than $2.5 million in annualized cost efficiencies along with greater broader omnichannel organizational capability. These benefits will be complemented by our new freight partnership, revised shipping revenue thresholds and the broader use of AI across the entire organization, all playing a significant role in keeping the cost of doing business under control as we scale. Moving to the Blue Mountains and our iKOU business. iKOU delivered double-digit revenue growth in FY '26 with stores, online and wholesale all contributing to growth during the year. During the year, we opened new stores in Berry and Sorrento. The Berry store is particularly significant as it includes iKOU's first in-house day spa treatment facility, building on our legacy in wellness and to capture the greater share of wallet from existing customers. The retail network now comprises 6 stores across New South Wales and Victoria with a seventh store currently under construction in Hobart and scheduled to open in September this year. Active customers increased 49% to 35,000 customers, reflecting both the expansion of the store network and improved brand awareness. Stores accounted for 45% of new customers, up from 20% in the prior year, highlighting the growing role of physical retail in customer acquisition. Over the year ahead, iKOU will launch its first loyalty program just now in September and a new digital wholesale platform in Q2, supporting customer engagement and further growth across its retail, online and wholesale channels. Slide 17 highlights the investments made during the year to strengthen iKOU's operating capability and to support its next phase of growth. In FY '26, we completed the rollout of a new e-commerce and point-of-sale platform in both of those 2 channels, launched a customer-facing AI shopping agent on site and fully integrated iKOU into Adore Beauty's data and analytics infrastructure. We also strengthened the leadership team with the appointment of a dedicated Managing Director, established a formal customer service capability and completed a full packaging refresh, which will be progressively rolled out through FY '27. Taken together, these initiatives have significantly strengthened the iKOU brand, customer and operational foundations and position us well to scale in the years ahead. On to group outlook. We expect revenue growth and the benefits of investments completed this year to drive significant improvement in underlying profitability over the years ahead. Revenue and margin growth will be supported by continued momentum in our online business and increasing contribution from high-value omnichannel customers and the maturation of our existing 20 stores. Finally, on Slide 20, we summarize our step from this year's $3.8 million to our current target of $9 million to $13 million in EBITDA with revenue growth of at least 10%. Omnichannel customers are expected to drive online revenue growth as the contribution from this high-value cohort continues to increase. 4 new Adore Beauty stores and 1 new iKOU store will open in the first half, taking our national network to 25 stores across both brands. And the completed infrastructure investments are expected to deliver significant operational efficiencies across the business. FY '26 was a year of significant investment and operational progress. With our omnichannel strategy gaining momentum and the key infrastructure required to support growth now in place, we enter FY '27 with confidence in our ability to deliver a material step-up in revenue and profitability. I'll now hand back to the operator to open the call for questions.

[Operator Instructions] Your first question from the phone today comes from Leo Armati from Bell Potter Securities.

Just wanted to start just on that record revenue for you guys. It's with the retail store network only partially contributing about $18.6 million of that print. Can you just give us an idea of how much of that is iKOU versus the Adore banner?

Yes. So we break that down in the Adore section of the presentation. Leo, the Adore stores made up around $15 million of that $18 million.

Yes. Great. And then just on private label, you just spoke to iKOU, but that double-digit growth and the seventh store that's going to open outside of New South Wales and Victoria, shows pretty good momentum. I just want to know what the long-term vision of the brand is maybe in terms of footprint, if it can rival Adore and considering that you flagged that partnership for an entrance into Asia in FY '27?

Yes. I mean, 2 very different businesses from a customer perspective. iKOU is very much based in wellness and the iKOU brand translates into Rest, Restore and Relax by origin. We'll continue to look for locations, and we have several targeted in locations where customers do go to holiday. And if you look at the locations that we're in today, like Byron Bay, like Berry, like Sorrento, like Leura in the Blue Mountains, where people go and spend their weekends relaxing, restoring, we will continue to seek out locations very much in the same vein as those existing stores. Hence, why we're opening our next store in Hobart, which is obviously a key tourist destination where customers do go to spend some time away and to restore. And the iKOU brand is very much anchored in wellness with skin care being a primary part of that and the rituals of skin care, how they lean into the rituals of relaxing with our home fragrance and bath products, very much a different proposition to Adore, which finds its stores located in high-traffic shopping center locations around the country. We absolutely have aspirations for the iKOU business beyond the ANZ region. And this year, we will continue to develop and explore partnerships into Asia, and we'll talk a little bit more about that at the half year results.

Yes. Okay. Great. Great. And just on customer acquisition costs, obviously, a 37% reduction is quite good when you're growing new customers at the same time. Just give us an idea of the change in marketing mix or the targeted approach. I presume stores are quite a large part of that. But any color would be great.

Yes. I mean if you look at both businesses, and I'll just talk about Adore given that's a material component of that marketing spend, 26% of new customer acquisition came through the store network. And we're seeing a significant and meaningful portion of those customers now shopping online and then shopping back in stores again. So truly becoming omni in the way that they're engaging with the brand. And pleasingly, the only way we know who those customers are is because they've joined our loyalty program. So, as we start to see them benefit from the rewards of that loyalty program and redeeming the benefits of that program, both in-store and online, their frequency continues to improve. What that enables us to do is obviously focus on acquisition, both through stores and online, and lower those acquisition costs online. Historically, the only channel that the business had to acquire new customers was obviously digitally and digital acquisition at the top of the marketing funnel can be quite expensive as you see quite broad audiences. And clearly, when a customer is in store, you could describe them as a customer with intent or interest in beauty. And therefore, we find those customers immediately become more valuable. And as they shop from stores into online, particularly, we see the increasing mix of skin care being a much higher proportion of their basket, and that's a key focus for us as skin care is what sets us apart in market.

[Operator Instructions] There are no other phone questions at this time. We will now pause a moment before addressing webcast questions. Your first webcast question today reads, can you talk about the individual stores that have worked really well and why and some that haven't worked so well?

Yes. Thanks for the question, Mark. I think what I'll talk to there is the journey that we've had since opening our first store in Southland in February last year through to today, as we opened our 15th store just recently in Hurstville here in New South Wales. When we opened our first store in Southland, Victoria. We opened with 60 brands in that store. We didn't have a treatment space and maturity operationally was obviously at the very early stages. As we opened our most recent store in Hurstville in New South Wales in the Westfield center there, close to 140 brands in that store, so almost more than double the number of brands that we introduced initially in Southland, a dedicated treatment space, dermal therapists permanently on staff. And that's now the case in 14 of our 15 stores outside of Southland, where our typical product assortment is around 120 to 140 brands. A treatment space, a dedicated private treatment space in every store, dermal therapists on staff, a very strong skin care and Pro Hair professional hair mix from a product perspective. So when answering that question around what's worked individually or not, it's more been about the progression as we've gone through the store rollout, and we've provided customers with a greater elevation, particularly in skin care and Pro Hair. And that's really where our learnings have been and what customers are looking for when they're coming into store has been advice, service and consultation, and we've significantly invested energy in improving our experience in store for customers in that area. Individually, I won't comment on stores that have out-traded or under-traded. I think we've talked to our nontraditional markets outside of Victoria seeing significantly higher acquisition of new customers. That's not surprising. That's been pleasing, and that was certainly what we hope to achieve by opening stores in those markets. And we're continuing to consider other store opportunities as we move forward. There's a further question there on, it's 25 stores, the extent to which we will cap the network or will we continue to open more stores. We're very much still in the early stages of our store strategy and with 4 more Adore stores opening in this half, one of those already being opened, as I mentioned, in New South Wales. We'll continue to consider the opportunity for more stores as we move forward, but we've certainly got a long runway of benefit to come from the 15 stores that we've already opened and the 3 further stores that we're soon to open in this half.

Your next question reads, what was LFL for online sales and retail sales, respectively?