Could the Adore Beauty share price be a bargain hunter's dream?

Can we make beautiful returns with this beaten-up stock?

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Key points

  • The Adore Beauty share price has been smashed over the last few years
  • Sales growth has halted, but it’s still seeing strong numbers in some areas, such as returning customers
  • I think it’s a long-term buy, with expectations of decent profitability in FY25

The Adore Beauty Group Ltd (ASX: ABY) share price has dropped close to 90% from where it was on 23 October 2020. Could this be an incredible buying opportunity for the beauty ASX e-commerce share?

It's understandable why the share price is lower than it was three years. In 2020 the company was benefiting from an enormous increase in demand for online shopping with some people avoiding shops, and many consumers having more money for discretionary spending.

What's going on at the moment for the Adore Beauty share?

In the year to date, it has seen a share price decline of close to 20% as economic conditions have started to bite.

For the three months to 31 March 2023, it reported that it made revenue of $41.3 million, which was down 3.3% year over year, but up 4.9% over two years.

The company said that year over year comparisons with the FY22 third quarter were "challenging" with the prior period boosted by a high level of demand due to the Omicron variant and ongoing mandated isolations.

It was also announced that founders and executive directors Kate Morris and James Height had revealed their intention to the board to transition out of their part-time executive roles at the end of FY23, which has occurred. They will remain on the board as non-executive directors.

Is the ASX e-commerce ASX share a bargain opportunity?

Adore Beauty is now priced a lot cheaper compared to its revenue generation and there are still a number of positives. In its FY23 third quarter, its customer base included 483,000 returning customers, which was up 56% on a two-year basis and up 6% year over year.

There are also good signs with its mobile app, with an increasing average order value and returning customer frequency, which accounted for 23% of total revenue, up from 18% in the first half of FY23. The business theoretically doesn't need to pay advertising to reach these returning customers, which is hopefully good for longer-term margins.

I also like that the business is growing its own brand portfolio. It recently launched a new sunscreen offering from AB Lab brand.

Earlier in the year, the company said that it's implementing cost and margin optimisation programs, to "position the company to return to an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 2% – 4% in FY24". Time will tell what its profit margin for FY23 is.

Forecasts can be wrong, or be changed, but at the moment estimates on Commsec suggest that the business can make a small net profit after tax (NPAT) in FY24 and then generate 2.6 cents of earnings per share (EPS) in FY25.

Demonstrating profitability could be a catalyst for sending the Adore Beauty share price higher. At the moment, the forecasts put the company at 32 times FY25's estimated earnings. If profit keeps rising in the years after that, the price/earnings (P/E) ratio could quickly come down.

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. The Motley Fool Australia has recommended Adore Beauty Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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