3 reasons why the Temple & Webster (ASX:TPW) share price could be a buy

There is a selection of reasons why Temple & Webster is a promising business.
The post 3 reasons why the Temple & Webster (ASX:TPW) share price could be a buy appeared first on The Motley Fool Australia. –

Temple & Webster Group Ltd (ASX: TPW) could be a good ASX share to think about for a few different reasons.

If you haven’t heard of Temple & Webster before, it’s a leading pure play online retailer of furniture and homewares in Australia. It has a wide product catalogue and the model is that items are shipped directly to customers by suppliers, which helps with faster delivery times and reduces inventory requirements. Temple & Webster does have its own private label range sourced from overseas.

But the business could be one to think about for the following reasons:

Tailwind of online shopping

The company believes that COVID-19 has permanently accelerated online adoption in the Australian furniture and homewares market.

Temple & Webster estimates that more than 20% of furniture and homewares was bought online in the US during the COVID-affected year of 2020. The company believes Australia is following the same trajectory.

The ASX share has estimated that in 2020, around 9% of Australian furniture and homewares were bought online, an almost doubling of the 5% bought in 2019. It’s expected that online penetration in both markets is expected to continue to increase significantly.

Investing to achieve greater scale

Temple & Webster has a plan to capitalise on this e-commerce opportunity. Management believes there is potential for significant online market growth and longer-term returns.

There are a number of different things that the business is focused on.

It wants to build strong brand awareness to achieve national brand status within the next three years by investing in mainstream media to drive both first time and repeat customers. The company wants to increase its conversion rate of customers.

Temple & Webster wants to improve its customer experience through better technology, data and personalisation, and delivery experience. This will include improve its 3D and artificial intelligence capabilities to make the customer shopping journey easier.

The company wants to grow its business to business sales and operational teams so that it can win market share in the commercial sector.

A final focus is improving its product range with new category additions, private label expansion, new products and exclusive ranges from suppliers.

Rapid growth

Temple & Webster is expecting to see a low single digit earnings before interest, tax, depreciation and amortisation (EBITDA) margin as it grows. But it’s still expecting “strong double digit revenue growth” during this investment period.

Growth had continued into the 2021 calendar year after a high level of growth in 2020. The third quarter of FY21 saw revenue growth of 112% against the prior corresponding period. April 2021 revenue rose more than 20% year on year, despite April 2020 being a big month for e-commerce sales.

After a few years of growth at low EBITDA margins, Temple & Webster is then expecting higher longer-term profit margins with advantages like better supplier terms, more repeat customers (lowering advertising costs), a slowing investment in fixed costs and higher gross profit margins from a higher percentage of exclusive products.

Temple & Webster CEO Mark Coulter said:

You only need to look at the US to see how the e-commerce market is playing out, and why we remain bullish about the shift from offline to online. We are at the start of this once in a generation shift, and now is the time to put our foot down to secure market leadership and ensure we are the brand for the next generation of furniture shopper.

The post 3 reasons why the Temple & Webster (ASX:TPW) share price could be a buy appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Temple & Webster Group Ltd. The Motley Fool Australia has recommended Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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