3 reasons why the Adore Beauty (ASX:ABY) share price could be a buy

Adore Beauty shares could be an opportunity for a few different reasons.

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adore beauty share price

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The Adore Beauty Group Ltd (ASX: ABY) share price could be one to consider because of several compelling reasons.

What does Adore Beauty do?

This company is described as Australia’s first beauty business that was focused on e-commerce.

Adore Beauty has evolved into an integrated content, marketing and e-commerce retail platform that partners with a broad and diverse portfolio of around 260 brands and 10,800 products.

Who rates Adore Beauty? It is rated as a buy by the broker Morgan Stanley. The broker has a price target on the Adore Beauty share price of $6. That suggests that Morgan Stanley believes Adore Beauty’s shares can rise by around 25% over the next 12 months, if the broker is right.

Here are three reasons to think about the beauty e-commerce ASX share:

Fast growth

The company has seen rapid growth in various parts of the business. It’s quickly becoming a much bigger business.

In FY21, it beat its guidance and grew revenue by 48% to $179.3 million. Active customers rose 39% to 818,000 whilst returning customers rose by 64%.

Profitability improved for the business – the gross profit margin increased 1.2 percentage points to 33.1%.

A recent update for the three months ending 30 September 2021 showed continuing double digit growth. Revenue went up 25% year on year to $63.8 million. Active customers increased 24% to 874,000, whilst returning customers grew 63% to 418,000. Adore Beauty said this showed it had strong customer retention.

FY21 demonstrated that those customers are spending more. Annual revenue per active customer increased 7% to $219 driven by the customer retention and increasing average order value.

Big total addressable market

Adore Beauty says that it is benefiting from the ongoing structural shift to online shopping, which has been further accelerated by the recent COVID-19 lockdowns.

The company says that it’s operating within a large and growing $11 billion market.

When the ASX e-commerce share gave its FY21 third quarter update, it said that the Australian beauty and personal care market is expected to grow at a compound annual growth rate of 26% to 2024. Online sales only comprised 11.4% of this beauty market. That’s a lower rate than markets like the US, the UK and China.

The company wants to capture as much of this opportunity as possible, which could help the Adore Beauty share price over time.

Investing for growth

Adore Beauty’s strategy is to grow its market share through “disciplined investment” to increase brand awareness, new customer acquisition and returning customer retention.

The company is investing in numerous areas to grow its online market leadership, and scaling its mobile app, loyalty program and grow its range.

It’s planning to launch its first private label brand in the first quarter of FY22.

What is the long-term benefit of growth? Adore Beauty says:

Given the predominately fixed nature of the business’ cost base, management expects scale benefits to increase operating leverage and deliver earnings before interest, tax, depreciation and amortisation (EBITDA) margin expansion in the longer-term as the company continues to grow revenue.

Adore Beauty expects to maintain an EBITDA margin of between 2% to 4% in the short to medium-term to achieve faster-than-market growth.

Should you invest $1,000 in Adore Beauty right now?

Before you consider Adore Beauty, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Adore Beauty wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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