Once was adored: What went wrong with Adore Beauty

It was August 2020 and Adore Beauty founder Kate Morris was getting ready for her big sharemarket debut.

The ASX listing of the online beauty retailer in two months’ time was expected to make the Melbourne entrepreneur and face of the business, her co-founder James Height and their private equity backers super rich, and give Adore a valuation of $653 million.

As part of the float, Morris (dubbed “Girl Boss” in tech circles, and a part-time executive in the prospectus), Height and Adore Beauty’s backers would sell millions of their shares to new investors for $6.75 a pop. It was a big price for a stock with earnings of $5 million and a statutory net loss after tax of $1.234 million in the 2020 financial year.

A media campaign for its ASX debut pitched Adore Beauty as a way for women new to investing to buy shares in a company that was relatable – it sold beauty products – and had boomed during the pandemic along with other online retailers.

During the media blitz ahead of the float, Morris did several interviews to promote the company she cofounded in 1999. In one interview with now-defunct women’s financial empowerment podcast Tilly Money, she described her “money rituals”.

“I think giving back is something that is really important,” she said.

“We’re so lucky in Australia, we have so much, and I think there’s something to that whole kind of idea of karma – that we should pay it forward.”

It would be a statement that would ring hollow for Adore Beauty investors who bought into the stock in late 2020 and into 2021 before a share price rout tarnished its brand with shareholders.

In the three years since Adore Beauty listed, its market capitalisation has fallen more than $500 million. And while Adore Beauty’s founders and backers got “paid forward” through the float – with Morris and Height scoring $45 million each, and private equity firm Quadrant $137 million – the stock has not been a successful investment for many of the group’s other shareholders.

Since its October 2020 listing, Adore Beauty’s share price has tumbled from an intraday high of $7.42 on its first day of trade on the ASX to a low of 71¢ in October this year as the market fell out of love with the stock.

Driving the falls were fears Adore Beauty’s incredible run of growth during the pandemic would soon wane, as house-bound customers returned to shopping strips and centres and interest rate rises dented the earnings growth expectations for the stock.

There were also concerns that Adore Beauty had been valued in its IPO by investment bankers as a technology company when it looked and acted a lot more like a retailer, and its float was priced by its investment bankers to time with the peak of the e-commerce boom.

The poor performance of the company’s shares would raise questions about whether Adore Beauty was ever suited to being a listed entity or better off away from the sharemarket, under the close watch of Morris, where its quarterly and half-year sales results could be treated more forgivingly.

In November, Adore Beauty had an opportunity to end its time on the ASX. It revealed it had received – and rejected as too low – a takeover approach from a London-listed health and beauty online retail behemoth that runs a similar but much larger business to Adore Beauty. The offer, at $1.25 to $1.30, helped lift Adore Beauty’s shares in the weeks since to $1.35.

It appears that for the time being – or for the current price on offer for its shares – Adore is not yet ready to disappear from the ASX.

Increasingly attractive

Adore Beauty began as a small business more than 20 years ago, driven by Morris’ desire to make beauty products more accessible via an online platform offering thousands of high-end and high-street beauty products.

The website’s product reviews and educational materials became a sort of beauty bible for many Australians looking to learn about new products. The business attracted hundreds of thousands of new customers by offering steep discounts on products and its popular seasonal sale campaigns.

As Adore Beauty grew, it attracted more interest from bigger businesses.

In December 2014, Woolworths bought a 25 per cent stake in the group. According to documents filed with the corporate watchdog, the paid-up value on the 250,000 shares Woolworths acquired was $1.25 million. The relationship was relatively short-lived, with Adore Beauty buying back the stake nearly exactly two years later.

In 2019, Adore Beauty began again looking for a new partner to help clear out its debt with the Commonwealth Bank.

One of those parties was THG, or The Hut Group – the e-commerce group that is now circling the once-adored online beauty retailer.

According to documents filed by the company with the Australian Securities and Investments Commission, THG and Adore Beauty in July 2019 agreed to a deal for the UK group to provide “financial assistance”.

The document states that under the deal, THG “will advance to the company an amount equal to the aggregate amount required to be paid by the company in connection with the cancellation of the share options and the repayment in full of the CBA debt”.

Sources aware of the transaction but not permitted to speak on the record said the document was a draft agreement and never went ahead.

Instead, Adore Beauty in October that year inked a deal with Australian investment group Quadrant Private Equity. ASIC documents show the deal resulted in Adore Beauty having paid up capital of $85 million – valuing Morris’ and Height’s stakes at $17 million each and Quadrant’s investment at $51 million.

In 12 months – and with a bit of investment banking magic and market hype – Adore Beauty would be valued in its share market float at $650 million. Along with a jaw-dropping increase in its valuation, the company also had a new CEO in Tennealle O’Shannessy, while Morris and Height stepped into executive director roles.

Within four months of the IPO, Adore Beauty’s share price steadily and surely started to fall as the e-commerce sector fell out of favour and its revenue and customer numbers, while still strong, fell below market expectations despite hitting company forecasts.

The gloss wears off

Maja Obirek is one of the many retail investors who bought shares in Adore Beauty as an early-stage sharemarket investor who believed the stock would be a good way to invest her savings.

“I was super-new at investing at the time and made a silly decision. I guess it was emotional-based because I liked the company and I’d read articles about Adore Beauty – about the IPO – and the whole hyped story of this female-led company,” the 31-year-old from Surry Hills in Sydney says.

Obirek also kept up with the company’s announcements and was concerned about its performance. As the sector developed, she saw greater competition from rivals, including in Korea, offering cheaper prices or a better range.

“I had invested as well into ETFs [exchange traded funds] that were performing quite solidly. And I kept seeing the Adore price tumble, thinking it would improve after one year, it didn’t – so I figured I’d cut my loss and reinvest the amount I still had into an ETF,” she said.

“Adore Beauty is the only share I’ve ever sold. Everything else I have held on to because I realise, generally speaking, it’s a long-term thing. I’m not trying to make a quick dollar.”

At the top end of town, institutional shareholders who have dumped their shares after booking losses on their Adore Beauty holdings have a similar story. They all asked not to have their names associated with what they now regard as a poorly timed investment.

“It wasn’t one of our better investments,” says one fund manager. “Obviously the growth story was not sustainable.”

Another chief investment officer at a well-known investment house said: “We certainly underestimated the COVID boost that they got before listing, we had thought a percentage of that growth was organic.

“It’s a great business but it doesn’t make much money. It also had a private equity shareholder and there is a bad history of private equity and ASX floats. You could call it ‘dressing up’, they put a bit of make-up on it – if you can excuse the pun.”

Adore Beauty was sent a series of questions about its share price performance, the hype around its float, its plans for the future and its prior negotiations with THG. Morris, who is no longer in an executive role but remains a director and shareholder, was also sent questions.

In response, a spokesman for Adore Beauty said: “Over the past 23 years, Adore Beauty has grown from being one of Australia’s first e-commerce companies to the number one pure-play online beauty retailer in the country. Adore Beauty has met or exceeded all forecasts that were included in the IPO prospectus.

“More recently, like many consumer-facing companies, we have seen challenging trading conditions, including a period of high inflation, rising interest rates and tighter household budgets.

“Despite this, Adore Beauty delivered revenue of $47.5 million for the first three months of FY24 [full-year], up 4.7 per cent on the prior corresponding period.”

It’s those sorts of revenue figures that are attractive to some institutional investors who have bought in at Adore Beauty since its share price rout. These investors are confident new-ish chief executive Tamalin Morton (who replaced O’Shannessy earlier this year). A new company strategy will recharge the group’s share price.

Spheria investment management this month increased its stake in Adore Beauty to six per cent after first buying into the company earlier this year. Portfolio manager Matthew Booker says the investment is in Spheria’s microcap fund and they believe there’s a good opportunity for the share price to increase.

“It’s grown its customer numbers back up to where they were in the pandemic. We think there are good bones in there, we think it’s a good business and the share price was a good opportunity for us,” Booker said.

“The brand has been validated and they are achieving significant scale.

“Obviously the business peaked during COVID, but customer growth has come back now; the business is a very recognisable brand in a key demographic and we think it will continue to grow.”

The big question is whether these new fans of the group will budge if THG returns with a higher offer. One institutional investor suggested they would be more comfortable with an offer price of between $1.75 and $2.

Another person familiar with the company but not permitted to speak on the record said the big question about whether Adore Beauty would accept any future offer from THG came down to how Quadrant viewed the offer. The source said that while Quadrant had made good money on the IPO, the value of its remaining holding of 37 per cent in the group had taken a major battering, as had its reputation.

“I think the boys at Quadrant have been left pretty bruised by all of this,” the source said. “They might well be looking for an exit.”

Quadrant did not respond to inquiries.

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