Adore Beauty Group Limited (ABY) Earnings Call Transcript

Thank you for standing by, and welcome to the Adore Beauty Group Limited FY '25 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Sacha Laing, Chief Executive Officer. Please go ahead.

Good morning, everyone. My name is Sacha Laing, CEO of Adore Beauty Group, and I'm joined today by our CFO, Stephanie Carroll. Thank you for joining us today as we present Adore Beauty's results for the 2025 financial year. It's been a transformative year for the group with initiatives under our new midterm strategy delivering significant uplift in profitability and performance. Record EBIT and profit margins were driven by improved quality of earnings, operational efficiencies and growing owned brands. Our '25 result highlights include a record EBITDA of $8.1 million, up more than 67% over the previous year at a margin of 4.1%. This was in line with our market guidance. Record EBIT of $4 million was a 74.8% increase on the prior year, with margin also in line with guidance. Gross margins of 35.3% was a financial year record, reflecting margin-accretive initiatives and operational efficiencies and revenue of $198.8 million was up 1.6% compared to the prior year. Turning to our key achievements on Slide 3. In FY '25, we built a stronger, more profitable business while continuing to offer exceptional value to our customers. Annual highlights include delivering gross margin increases of 190 basis points, record profitability with EBITDA and EBIT margins up 160 and 180 basis points, respectively. We significantly enhanced our online customer experience with advanced AI personalization and faster site speed. Our newly launched spend and save loyalty program, Adore Rewards, has already had more than 440,000 active members, encouraging higher, more frequent orders. 60 new brands were added to our range, including Biodance, Gucci Beauty, MCo and Prada Beauty, and we have a strong new brand pipeline for the year ahead. Importantly, in FY '25, we diversified our operating model, opening 4 retail stores across the Adore Beauty and iKOU brands. A further 3 stores opened in early FY '26, and we have an additional 4 under construction and opening before the end of the calendar year. Higher-margin stores support revenue, customer and margin growth. Slide 4 demonstrates the impact of our improved quality on group profitability metrics. Our strong profit uplift reflects the growth of our own brands and retail media, combined with disciplined cost management and working capital efficiencies. Inventory turnover was a key in our working capital efficiencies, improving 13% over the prior period without impacting stock availability. EBITDA and EBIT margins were in line with guidance, and I'll provide improved guidance for FY '26 this morning. Notably, this momentum ensures we are on track to exceed our FY '27 EBIT margin target of 5% of revenue. On Slide 5, Adore Beauty's leading online experience and engaging content is a key driver to customer loyalty. As shown on Slide 5, improving quality of earnings has lifted the quality of our active customer base, increasing 2.6% over the prior year to 837,000 active members. We also expanded our contactable database to over 1.3 million members, up 20.4% on last year. Our large and growing contactable database provides a material opportunity to cost effectively grow active customers, supporting our FY '27 target of more than 1.25 million active customers. In parallel, loyalty initiatives such as our new Adore Rewards program, increased mobile app adoption, subscription service and enhanced online personalization all support retention, order frequency and basket size over the year ahead. Adore Beauty's targeted acquisition strategy is focused on profitable new customer growth. As shown on Slide 6, in the second half of the year, we delivered material improvements in marketing efficiency, growing new customers while significantly reducing marketing spend. Our refined acquisition strategy saw new customers return to growth in the second half of the year, up 4.9% on the corresponding period. We delivered this growth while reducing the cost of new customer acquisition down $15 per new customer over the prior year to $59. We expect marketing efficiencies to drive further improvement and FY '26 will benefit from the full impact -- the full year impact of our refined customer acquisition strategies; and longer term, improved brand awareness and in-store customer acquisition will complement online efficiencies. I'll now hand over to Stephanie to take you through the financials.

Thank you, Sacha. In challenging retail conditions, Adore Beauty Group made significant progress towards its mid-term profitability targets. The early impacts of our refreshed strategy delivered record EBIT, EBITDA and gross profit margin, underpinned by strong growth from margin-accretive owned brands and retail media as well as disciplined promotional activity, improved inventory stock turn and cost management. We also delivered significant growth in operating EBITDA, up 46.4% to $7.9 million at a margin of 4%. As Sacha mentioned earlier, data-driven customer acquisition strategies and refined promotional cadence have improved our marketing efficiency. Marketing as a percentage of sales reduced 1.3 percentage points over the prior corresponding period to 12%. We are continuing to invest in growth levers, including platform enhancements, omnichannel capability and capital outlay for our retail network. Turning to our balance sheet. The group remains well funded on a closing cash balance of $12.7 million as at the 30th of June 2025, and no debt. Our strong financial position and positive cash flow supports our strategic investments, including platform upgrades and new retail stores. During the year, our balance sheet funded the $20 million upfront consideration for iKOU. Importantly, improved inventory turnover has delivered more than $3 million in working capital efficiencies while meeting product availability benchmarks. I'm happy to take questions at the end of the presentation. But for now, I'll hand back to Sacha.

Thanks, Steph. As shown on Slide 11, we've made significant progress against our 3-year plan as we undergo a transformation into an omnichannel beauty platform. We've opened 5 Adore Beauty stores this calendar year across Victoria, WA, New South Wales to grow market share, to grow revenues, grow new customers and secure -- and we now have secured a strong pipeline of new stores through until late 2026. We grew iKOU sales across all channels, [ spanning ] from increased brand awareness and retail availability with 2 new retail stores, opening our first in Victoria. We've delivered gross margin expansion, underpinned by strong growth from margin-accretive retail media and optimized inventory management. Improved marketing efficiency enabled us to profitably grow our active customer base as we launched a new loyalty program to support engagement and retention. Operational efficiencies delivered cost of doing business efficiencies across both our core and new channels. And we invested in our core business, enhancing AI-driven personalization capability and site infrastructure. Moving to Slide 12. Key to material sales, customer and profit growth is diversifying into an omnichannel model. A national store footprint materially broadens our addressable market, increases share of wallet and improved our margin profile. We've opened 5 Adore Beauty stores this calendar year so far, including our first in Sydney just last week. Our stores are setting a new omnichannel standard, blending the best of our digital DNA with the benefits of in-store product integration, personalized experience and personal advice from our beauty experts. While early days, our retail stores are collectively exceeding our expectations across all metrics and are supporting our core online business through increased brand awareness and new customer acquisition. New customers represent almost 1/3 of all in-store transactions, while our existing customers are using our stores to try new brands and products. 78% of existing customers that have shopped in one of our new stores have purchased a brand that they hadn't previously shopped online. Revenue is more than 5% ahead of our targets and gross margins are 9 basis points higher than our core business. In-store conversion is also tracking well, and it's almost 3x higher than our on-store -- online channel. Moving to Slide 13. The integration of iKOU within the Adore Beauty Group has been transformative for the brand. Post an integration period in half 1 FY '25, Slide 13 highlights iKOU's significant momentum in the second half of the year as our existing infrastructure and capability drives growth and efficiencies. iKOU delivered solid revenue growth across all channels in FY '25, benefiting from improved brand awareness, greater product availability with more than 100 SKUs now available through the Adore Beauty platform. We also launched the brand on The Iconic as a marketplace partner in early March. We are also investing in expanding iKOU's retail network beyond New South Wales, opening a flagship store in the Melbourne CBD with another under development right now in the Victorian Seaside town of Sorrento. Our new store in Berry in regional New South Wales includes our first in-house spa treatment facility, enabling us to capture a greater share of wallet. iKOU's footprint will continue to grow in FY '26 with a further 2 to 3 stores planned in the second half of the year. We are leveraging our group's shared service to realize efficiencies for the iKOU business, such as moving our online fulfillment to Adore's Customer Fulfillment Center in Melbourne, and we've recently onboarded a new Managing Director to provide a dedicated leadership focus for this team. Our own portfolio of brands, which now also includes Viviology and AB Lab, is expected to account for more than 6% of group revenue in FY '26 and more than 8% in FY '27. Moving to Slide 14. Whilst our new growth levers have made strong progress, continuing to grow our online business remains core and a priority for us all. Our investment in our online infrastructure, including AI-driven personalization, improved customer experience all delivered a 7.8% increase in site conversion throughout the FY '25 year. We've re-platformed our tech stack, materially improving our site speed with the time it takes for the largest visible element on the page to load now best-in-class at just over 1 second. Stay tuned for a full platform refresh later this year. Turning to our disciplined cost management on Slide 15. Over the year, we looked at every line of cost in our business to realize efficiencies, in particular, across marketing, inventory and operations. As I mentioned earlier, we delivered a significant improvement in marketing efficiency in half 2, benefiting from the in-housing of our digital agency and the refinement of our promotional cadence. Optimized inventory management created $3.1 million of improved working capital whilst maintaining our in-stock benchmarks. And operationally, we rationalized our technology infrastructure partners. We integrated iKOU's direct-to-consumer fulfillment into our group operations. We had awarded a 3-year shopfit partner. Efficiency improvements will continue in FY '26 with a new group freight provider to deliver material cost savings from October onwards. On to our outlook in slides -- on Slide 17. Our FY '25 performance has demonstrated the early impacts of our multi-growth levers, and we expect a material step change over the coming year as our initiatives really start to take pace. We've had a strong start to the year with trading for the first 7 weeks up 9% on the corresponding period from last year. In FY '26, we are targeting group EBITDA margins of 5% to 6% and group EBIT margins of 2.5% to 3.5%. Profitability improvements will be driven by strong revenue growth, increased revenue contribution from owned brands, growth in retail media, a refined promotional cadence and disciplined inventory management. And our retail network will, of course, continue to expand with 12 to 14 new stores across Adore Beauty and iKOU planned in FY '26. We will, in fact, have 15 stores trading across both brands by the end of this FY -- sorry, by the end of this 2025 calendar year, and we're on track to deliver a national footprint of more than 25 stores by 2027. Slide 18 shows the expected channel growth and -- channel profile growth of our FY '26 revenue, importantly, showing growth across our core online business and our retail network and own brand iKOU; all channels contributing to our growth targets for FY '26. On Slide 19, finally, Adore Group is executing on a clear midterm strategy to materially grow our business. We are on track to achieve our 5 targets by the end of FY '27. And to reaffirm, these are: total group revenue of more than $260 million, representing a 30% growth on FY '24; gross margin expansion of more than 200 basis points and cost efficiencies to deliver 150 basis points improvement in CODB; an EBIT margin target of over 8% and an EBIT margin target of over 5%; our own brands, the target is to achieve more than 8% of total product revenue, driving, importantly, margin improvement; and we're targeting more than 1.25 million active customers by the end of FY '27. As we enter FY '26 with good trading momentum, we are well progressed in executing our strategic initiatives. I look forward to updating you on our progress at the half year-end. And I'll now hand back to our operator to open the call for any questions.

[Operator Instructions] As we are showing no questions, I'll now hand back to Sacha Laing for closing remarks.

Thank you very much. Thank you all for your time this morning. I would like to take the opportunity to thank the Adore Beauty team, a number of you are on this call today. We've undergone a significant transformation of our business this year, and I'm very appreciative of the support and the way in which all of you have embraced the change. Looking forward to a fantastic 2026 and thank you, everybody, for their time this morning.

That does conclude our call for today. Thank you for attending. You may now disconnect.