The Adore Beauty Group Ltd (ASX: ABY) share price could be a really good buy right now for three reasons.
Not sure what this ASX share does? It sells many thousands of beauty products from hundreds of brands through a website.
Why the Adore Beauty share price looks like a good deal
When you combine the below three reasons, I think that the current Adore Beauty share price looks very interesting:
Scalable platform model to help growing margins
One of the best reasons to like Adore Beauty is that its business model utilises the strong e-commerce platform that it has created.
There are lots of benefits to online retail. Websites are typically cheaper to run than a store network, particularly as it gets bigger. Adore Beauty can also benefit from being the number one player. The bigger it gets, the more likely it is that brands will want to sell their products on the site, further encouraging shoppers to come and then stay as customers. Increased size comes with operating leverage, but it also means Adore Beauty is more likely to be able to get the brands to pay for some marketing.
Adore Beauty is also doing a good job at setting the stage for higher profit margins, which should help the Adore Beauty share price over time. The gross profit margin rose 0.6 percentage points to 33.1% in HY22. It’s planning to launch a range of private brand products, which will come with a higher margin. It’s also managing to reduce its marketing costs by growing its ‘owned’ marketing channels, like podcasts.
Excellent compound revenue growth
With the scene set for rising margins, Adore Beauty will benefit from good revenue growth.
In the FY22 half-year result, revenue rose 18% to $113.1 million. The two-year compound annual growth rate (CAGR) was 47%. If it can keep growing revenue in the good double digits over this decade, I think the company will be able to become a very strong business.
Part of that growth will come from winning new customers, retaining the loyalty of customers and getting them to keep spending more.
At 31 December 2021, active customers rose 13% to 876,000, the number of customers that returned grew 56% and annual revenue per active customer went up 5% year on year to $224 thanks to higher average order values and an increasing proportion of returning customers.
Impressively, Adore Beauty has managed to keep growing revenue whereas online retailers like Redbubble Ltd (ASX: RBL) are not seeing growth this financial year.
Adore Beauty share price decline
Let’s face it, investing is all about buying good assets at good prices.
The Adore Beauty share price has fallen almost 50% since the start of 2022. That’s despite the business continuing to grow all of the numbers it’s working on.
Whilst there is certainly going to be some volatility, particularly this year, I think the long-term looks promising for the Adore Beauty share price as it grows its size, margins and customer offering.
