3 factors that could make the Adore Beauty share price too good to miss

This ASX share could be a beauty for multiple reasons.

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Key points

  • The Adore Beauty share price could be attractive after falling heavily in 2022
  • The online beauty market is expected to grow by more than 20% per year to 2024
  • Over the long-term, the ASX share’s margins are also expected to grow

The Adore Beauty Group Ltd (ASX: ABY) share price has suffered in 2022. But there are a few factors that could make it a compelling proposition.

Adore Beauty is a leading online retailer of a wide range of beauty products. The company says it has evolved into an integrated content, marketing, and e-commerce business that sells more than 11,700 products from more than 270 brands.

The Adore Beauty share price has fallen by around 54% since the start of 2022.

But, for these three reasons, the ASX share could be an attractive idea:

Business growth

Some businesses achieved booming sales during the COVID-19 years of FY20 and FY21 but then lost that momentum.

However, Adore Beauty has grown a lot over the last two years and it continues to grow.

In the first six months of FY22, revenue rose 18% to $113.1 million. This was an 18% increase year on year. Over two years, the compound annual growth rate (CAGR) was 47%.

It’s also seeing growth of active customers that reached 876,000 in HY22 (up 13% year on year).

Not only is the number of customers growing, but the annual revenue per active customer is increasing as well. In the 2019 calendar year, the average active customer spend was $210. In 2020, this figure was $213 and, in 2021 it rose 5.3% year on year to $224. The company said that this reflects a larger proportion of returning customers and “strong” average order value growth. In HY22, there was returning customer growth of 56%.

The company has implemented strategic initiatives to reduce the loss of customers within the first year and improve retention, such as its mobile app and a loyalty program.

Adore Beauty is also growing its core product range and it’s targeting related ‘verticals’ that the company believes stay true to its ‘brand voice’ and that customers will respond to.

Some of those verticals include ‘fragrance’ and ‘Korean beauty’.

Growing industry

Some businesses, or entire sectors, can benefit from a tailwind that can help grow demand and revenue.

According to Adore Beauty’s sources, Australia’s beauty and personal care market is an $11.2 billion market, with a forecast CAGR of 3.8% to 2024.

The online beauty and personal care sales account for $1.3 billion, or 11.4%, of the total market. It’s growing faster than the overall market and is forecast to increase at a CAGR of 26% to 2024. Adore Beauty claims to be the market leader in online beauty, with a 13% market share.

Further, Adore thinks that the online beauty market can benefit from several tailwinds.

First, COVID-19 has accelerated the shift from in-store shopping to digital channels.

Second, demographics can organically help its growth. Digital native ‘millennials’ and ‘Gen Z’ are entering the online shopping world.

Finally, online sales in Australia are “significantly under-penetrated” compared to the US and the UK.

Long-term margin expansion

The Adore Beauty share price could benefit in the long-term from the company’s plans to grow its profit margins.

The ASX share plans to benefit from operating leverage to grow its contribution profit margin percentage.

It’s going to scale its private-label offering, which is expected to increase its margins.

The ASX share also expects to increase its marketing return on investment (ROI) as the company benefits from the impact of returning customers, the growth of brand awareness, and its mobile app.

Adore Beauty also plans to forge closer relationships with brands to optimise terms and increase brand funding.

Growth will also allow the business to slow its investment in fixed costs.

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 recommended Adore Beauty Group Limited. 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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