From viral hit to margin threat: Is inventory a growing risk for Adore Beauty?

In FY25, beauty retailer Adore Beauty Group Ltd (ASX: ABY) displayed a controlled approach to inventory management, but in an industry so influenced by fast-moving TikTok trends, can it stay ahead of the game – and is it a buy right now?

Fast-moving cycles pose a challenge in the sector

Social media, particularly TikTok, has proved a phenomenon for beauty retailers, moving consumers from discovery to purchase in record time. And while this can be a tailwind, it can also lead to short-term aggressive cycles that put pressure on retailers.

They must respond lightning fast to meet demand, making quick inventory decisions that can make or break. Understocking can lead to lost revenue and impact the retailer’s position in a customer’s consideration set. Overstocking can be a pathway to carrying costs, markdowns, and wastage.

Short-cycle social media trends can be hard to predict. They may be based around a specific beauty ingredient, a whole category, or focused on one individual brand, making stock decisions even more complex.

How has Adore Beauty responded so far?

A few years ago, Adore Beauty made investments in AI-driven supply chain management technology to better manage these cycles. That foresight may well have paid off, with the company reporting strong results in FY25, including:

• Record gross margin of 35.3%
• EBITDA of $8.1 million, up 67.8% on the prior corresponding period (PCP)
• Revenue of $198.8 million, up 1.6% on PCP
• New customer growth up 4.9%
• A cash balance of $12.7 million with no debt

In FY25, it also made a move into brick-and-mortar retail. This saw the opening of seven new retail stores, with a reported goal of opening more than 25 stores across its Adore Beauty and IKOU brands.

While many sectors are moving away from physical retail and its heavy cost base, in many ways, it makes sense for Adore Beauty. This play allows it to compete with prominent local beauty retailer Mecca and international powerhouse Sephora by offering similar interactive in-person experiences.

In the last year, Adore Beauty demonstrated that it could perform under these challenging conditions. But as TikTok continues to compress and intensify demand cycles, it will need to remain vigilant and maintain its firm commitment to robust inventory management.

Is Adore Beauty a buy?

Adore Beauty has been on a wild ride since it listed on the ASX in 2020 with an IPO price of $6.75. Over the last five years, its share price has fallen by over 80%.

That said, it has made positive progress recently, and if it executes on its ambitious retail strategy, it could see impressive gains over the next few years. With the company set to release H1 FY26 results on 24 February, it will be interesting to see if its upward trajectory has continued thus far.

It’s definitely one to watch in 2026. For investors with a higher risk tolerance, it may be worth considering now, as I believe it is undervalued at current prices.

The post From viral hit to margin threat: Is inventory a growing risk for Adore Beauty? appeared first on The Motley Fool Australia.

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Motley Fool contributor Melissa Maddison 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.