Description

Adore Beauty is a leading beauty and personal care (“BPC”) ecommerce company in Australia. It was co-founded in 1999 by wife and husband Kate Morris and James Height. It grew revenue from $9M in 2015 to $120M in 2020. It had its IPO in late 2020, and the shares are down 80% since then.

Nonetheless, we think Adore has a great long-term growth outlook given the immaturity of online BPC in Australia, combined with Adore’s very strong brand perception with Australian BPC consumers.

Adore is also already profitable, has net cash on the balance sheet, and trades at only 0.5x sales. If you believe in ecommerce, we think this is a great setup: a cheap, profitable ecommerce pure play with what looks to us like a long growth runway. If you don’t, well, read no further. We’ve kept the write-up very to-the-point because we think the situation is fairly simple.

Reasons for Excellent Growth Outlook

1. Adore is by far the leader in pure play BPC ecommerce in Australia. Its two primary competitors in BPC overall are not ecommerce pure plays but Mecca and Sephora Australia, both of whom started in brick and mortar but have become very capable multichannel competitors. Both file financials with the Australian regulators despite being private companies, but neither discloses its split of online revenue (though Mecca’s CEO disclosed ecommerce as 15% of sales in 2019, meaning its business was smaller than Adore’s at the time).
      

2. Adore is well known and well liked by the Australian BPC consumer, making it a leading destination for beauty product purchase and discovery. It has the #3 BPC website (#1 among online-only retailers, highest organic traffic share), the #2 mobile app (after Sephora), as well as the #2 beauty podcast in Australia (it is the only publisher with 3 podcasts in the top 20 in the fashion & beauty category). In 2021 it reported a net promoter score of 82.

3. Australia significantly lags developed countries such as the US and UK in online penetration of BPC but will surely catch up over time, generating a strong tailwind for BPC ecommerce in Australia.
   

4. Additional opportunities for growth include the recently-launched mobile app and owned-brand products, as well as expansion into adjacent categories. From a financial perspective, the most meaningful of these is likely to be the owned brands (Viviology and AB labs), because owned products generate much, much higher margins than the core retail business does (low 30%s gross). Viviology and AB labs have only recently launched, with the effort being spearheaded by Kate Morris herself. 

Investment Thesis

1. Leadership in niche categories of ecommerce is an attractive prize to win, as it allows businesses to scale very quickly to substantial size. As an example, Wayfair grew its revenue at a 42% CAGR from 2013 to 2021, and Temple & Webster, the Australian Wayfair, grew 53% annually over that period. Chewy, which sells pet goods, grew 44% from 2017 to 2021.
   
   So far, Adore has fit right in with this trend, growing 48% annually over the past five years, including the COVID boom and subsequent bust.
   
   One possible pushback is that one could argue these track records were created at a time when brick and mortar incumbents were clueless about ecommerce, so share was easy to win, whereas now retailers are better at competing online so market share gains will be harder for disruptors to come by. Our retort would be that Adore’s revenue growth to date suggests it is doing just fine taking share.

2. Adore’s history as a profitable company makes its long-term EBITDA margin target of 10%+ look reasonable. The company has averaged an EBITDA margin (not “adjusted”) of ~3% in recent years despite being in a hyper-growth phase. The company was bootstrapped by its founders and has been run for cash flow breakeven for essentially all of its history, so we don’t think a huge cut in growth expenses or massive leap in sales are required for Adore to generate respectable profits.
   
   Adore is extremely cheap, currently trading at 0.5x sales, which would equate to 5x EBITDA at a 10% margin. Obviously the EBITDA margin target is “long term” and so 5+ years away, but at the same time, revenue is almost guaranteed to be dramatically higher.

3. Incentivized insiders with substantial ownership: Kate Morris and James Height, Adore’s founders, each own 11% of the company, with neither having sold a share since the IPO. And though neither is CEO, both remain actively involved in the day to day operations of the company, Kate in owned brands and James as the company’s Chief Data Officer.
   
   

4. $30M of net cash and breakeven operations mean the company is in a very stable financial position.

Issues

1. COVID hangover. Lockdowns in Australia drove a huge spike in new customers, and now the churn of those customers (typically between one third and one half of them in the first year) is overwhelming slower new customer additions. As a result, revenue for the June 2023 fiscal year is unlikely to grow substantially, or at all. Nonetheless, we believe strongly that the long-term growth prospects for the business are unchanged and remain very strong.
   
   

2. Private equity ownership overhang from the company’s PE partner, Quadrant, which still owns 30%+ of Adore, and which was rumored to be interested in exiting its position at significantly higher prices.
   
   

3. Co-founder divorce and CEO departure. Earlier this year the co-founders Kate and James announced that they are divorcing after 24 years of marriage. Both are remaining at Adore and we assume there will be minimal impact to the business, especially since the two work in different parts of the company, but this is an operational risk nonetheless. There is also some investor concern about what Kate’s level of involvement in Adore is given that she recently co-founded a small PE fund along with an ex-Quadrant partner to invest in growth-stage private companies in Australia. Some evidence to the contrary are multiple press interviews she has done in Australia about Adore’s new owned brands whose launch she has spearheaded, and her routine availability for calls with us (and, we presume, other Adore investors). As we mentioned above, the co-founders each own 11% of Adore and have not sold any shares since the IPO.
   
   In addition, the company’s CEO, Tennealle O’Shannessy, is leaving Adore in 2023. We think very highly of her, and apparently we are not the only ones: she is being poached IDP education, a company with a $7.7B market cap, over 5,000 employees, and the ability to pay her multiples of what Adore could.
   
   The incoming CEO, Tamalin Morton, has two decades of experience in ecommerce in BPC, pet goods, and a few other areas. We don’t have enough experience with her yet to give an opinion.

Catalyst

Getting post the COVID boom hangover, good showing by new CEO, margin improvement as revenue grows.