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3 reasons why the Temple & Webster share price could be a buy

There are some interesting reasons why the Temple & Webster Group Ltd (ASX:TPW) share price could be a buy. One is the fast growth.
The post 3 reasons why the Temple & Webster share price could be a buy appeared first on The Motley Fool Australia. –

living room with sofa, cushions and coffee table and decor items

There are some interesting reasons why the Temple & Webster Group Ltd (ASX: TPW) share price could be a buy right now.

What is Temple & Webster?

Temple & Webster describes itself as Australia’s online retailer of furniture and homewares.

It has over 200,000 products on sale from hundreds of suppliers. The business runs a drop shipping model where products are sent directly to customers by suppliers, enabling faster delivery times and reducing the need to hold inventory, allowing for a larger product range.

The drop ship range of products is complemented by Temple & Webster’s private label range which is sourced directly from overseas suppliers.

Why the Temple & Webster share price could be interesting

1: Fast revenue growth

Temple & Webster continues to generate fast revenue growth, particularly since the COVID-19 pandemic came along.

In FY19 the company generated revenue growth of 41% to $101.6 million. In FY20 the online business made $176.3 million revenue, up 74%. In the FY21 half-year result it saw revenue climb by 118% to $161.6 million.

The recent half-year result included trade and commercial division revenue growth of 89% year on year. Private label sales has increased as a percentage of total sales, up to 25% of total sales, an increase from 18% in the first half of FY20.

Management revealed that the second half has started strongly with January’s revenue growth being more than 100%.

2: Increased customer demand and growing market share

The number of customers increased by 102% over the period to 687,000.

Temple & Webster’s CEO Mark Coulter explained the benefits of gaining market share during the most-affected COVID-19 months: “The NAB online sales index suggests our category grew around 57% during the months of April to July, while we grew around 150% for the same period. We believe this is due to the increasing benefits of scale as we get larger. We are forging closer relationships with our suppliers as we become a more significant part of their business which allows us to obtain stock security, better terms and exclusive product ranges. We are also making larger investments in areas such as technology and data, brand awareness and our private label products; and we can produce more content by having more creative resources. In effect, the bigger we get, the better and strong our customer proposition becomes, which is a virtuous cycle.”

The e-commerce business also said that the amount of dollars per active customer increased by 6% to $401 due to higher repeat purchasing.

The company’s customer satisfaction score, the NPS, has seen consistent year on year growth thanks to increase in the improvements in quality, range and service.

3: Rising profit margins

Whilst the FY21 half-year revenue went up by 118%, the earnings before interest, tax, depreciation and amortisation (EBITDA) surged by 556% to $14.8 million.

Temple & Webster explained that a large part of its margin improvement came about from the growth of private label products.

Fixed costs as a percentage of revenue decreased to 7.5%, down from 11.6% last year.

The gross profit margin increased from 44.2% to 45.5% in the result and the EBITDA margin grew from 3.1% to 9.2%.

Valuation

The Temple & Webster share price has fallen by almost 20% since 25 January 2021. According to Commsec, it’s now trading at 39x FY23’s estimated earnings.

In terms of the outlook, the ASX share’s leadership think there are still strong tailwinds including: the ongoing adoption of online shopping due to structural and demographic shifts, an acceleration of these trends due to COVID-19, an increase in discretionary income due to travel restrictions and the continued recovery of the housing market and unemployment levels.

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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 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.

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

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