Last week, Australian e-commerce site Adore Beauty Group reported record revenue and customer numbers for the first half of 2022, but that has been mostly drowned out by the drama volleying back and forth in the Australian news cycle about the business.
So what happened?
Adore Beauty is a classic rag to riches story: in 1999, Kate Morris borrowed $12,000 from her then-boyfriend James Height’s parents (Morris and Height are now married) to start the online cosmetics store out of her Melbourne garage. It’s a gamble that paid off, making the pair more than $100 million since.
In 2015, Morrison sold a quarter of the business to Woolworths to capitalise on the grocer’s size, resources and online retail experience, but bought the stake back two years later. It was a “strategic decision to ready Adore Beauty for more growth and further expansion overseas, and to achieve our core objective – to build a disruptive beauty democracy,” Morris said at the time.
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Adore Beauty set a record for the largest ever IPO featuring a female founder and female CEO, with Adore Beauty’s shares going for $6.75 a piece. Morris, who is now the company’s chief of innovation, was stoked, tweeting that women were reaching out to her about investing for the first time in the company’s stock. “Bloody love it,” Morris said at the time.
However, Adore Beauty shares have tumbled to $2.30 in the 16 months since.
The decline isn’t as simple as Adore Beauty being “punished for being a bad business”, according to Adir Shiffman, executive chairman of Catapult Sports and an investor in a number of other e-commerce businesses.
“Their share price is sliding as it becomes obvious that investor assumptions made during the lockdown boom don’t match reality,” he says.
So why were investor assumptions so far off the mark?
On February 1, The Australian Financial Review columnist Joe Aston described Adore Beauty as little more than “a licensed reseller of someone else’s designer body wash dressed up as a tech stock and sprinkled with chick power”, continuing that “the orgy of gendered PR attached to this float was the most risible part of the entire shakedown”.
Aston’s words attracted a rebuke from ABC’s Media Watch host Paul Barry, who said it’s ironic then that “the AFR has been one of the noisiest promoters of the company and it’s founder”, pointing out that the AFR once called the stock “the hottest listing since Tyro payments”.
Barry says there’s been a noticeable mood shift in the AFR over the years — stories headlined “Beauty queen Kate Morris on her $100m year”, “Adore Beauty irons out last mile wrinkles”, and “No flies on sexy Adore Beauty, rapid IPO planned” have quickly turned sour in the Nine-owned newspaper as the stock declined, with two of the latest reading: “Adore Beauty is bloody hard to love” and “Adore Beauty, bane of womankind”.
“But it wasn’t just the Fin’s adoring prose,” Barry continued, “it was also its suggestion the company was special and seriously valuable”.
He highlighted two stories from the AFR that suggested Adore Beauty’s valuation could be as high as $600 million, despite the company having been valued by at $110 million upon the sale to Quadrant just 10 months earlier. Barry says it shows the perils of “buying the dreams that are sold in the media,” and rapped the AFR over the knuckles for creating the fanfare that it then slammed.
“Was there enough scepticism and critical analysis from journalists in looking at Adore and asking if its lofty price tag was justified? In my opinion, the answer is no,” Barry finished.
But, Shiffman says, it’s not quite as simple as that; the fallout from an inflated valuation “is not unique to Adore”.
“There is also a global thematic where the pendulum has swung away from e-commerce business that don’t generate enough net profit and free cash. Adore only generated a $2 million net profit in the first half of the 2022 financial year and top line revenue growth is no longer enough to support a high valuation,” he explains.
“They also had cash outflow for the half, which was worse on a year-on-year basis.”
The AFR returned serve to the ABC yesterday, saying it would not apologise for providing “more than one storyline” about Morris and her beauty empire, and calling Media Watch “plain wrong” about its coverage of the saga.
“The bigger point ignored by Media Watch is that Adore Beauty floated at a time in the pandemic that other e-commerce stocks — such as Kogan and Redbubble — were similarly inflated,” the AFR editorial continued.
“That reflected the e-commerce and retail sweet spot juiced up by fiscal stimulus and soaring demand for home deliveries in year one of the pandemic.
“Adore Beauty’s share price decline since then has been matched or exceeded by those comparable stocks. That’s in line with the correction in asset prices overinflated by cheap money that The AFR View has repeatedly warned of.”
Not all is lost. Shiffman believes “in the short term money is cycling out until they can prove themselves”, but the retailer may end up being a great business in the long-term if it can generate better margins from its customers.
“Kogan is generally seen as a more robust and diversified business than Adore with the founders still running it, but you’ll need to wait until Friday to see their first-half results,” he says.