Down 32%: Why the Temple & Webster (ASX:TPW) share price could be a buy

The Temple & Webster Ltd (ASX:TPW) share price has dropped 32% in recent times, is it a buy right now for a growth portfolio?
The post Down 32%: Why the Temple & Webster (ASX:TPW) share price could be a buy appeared first on The Motley Fool Australia. –

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

The Temple & Webster Ltd (ASX: TPW) share price has fallen by 32% since 25 February 2021.

It’s worth taking a second (or first) look at a business when the share price falls so much if the company is generating high levels of growth.

What does Temple & Webster do?

Temple & Webster claims to be Australia’s leading online retailer of furniture and homewares.

It now has over 200,000 products on sale from hundreds of suppliers. Temple & Webster also has a private label range of products which the company sources from overseas suppliers.

The company explains how its system works:

Temple & Webster runs an innovate drop-shipping model whereby 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.

COVID-19 impacts

The Temple & Webster share price has been one quite the rollercoaster since February 2021. Between 21 February 2020 and 23 March 2020 it dropped around 50%. It then shot higher by around 570% to $13.70 to the middle of October 2020.

Temple & Webster has seen enormous demand for its online offering since the COVID-19 pandemic began, with consumer shopping habits changing.

3 reasons why the Temple & Webster share price could be interesting

1: Growth continues

Temple & Webster hasn’t seen its demand completely fade away like some other sectors like infant formula. The e-commerce business has continued to experience high levels of customer growth.

Indeed, growth seems to continuing – it gave a trading update that said that year on year revenue growth was 118% for the second half of FY21 to 23 February 2021.

In the first half of FY21 it saw revenue growth of 118% to $161.6 million, earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 556% to $14.8 million and net profit of $12.2 million (up from $2.9 million).

Net profit after tax had an income tax benefit of $0.9 million last year compared to an income tax expense of $2.4 million this year.

Temple & Webster’s customer base continues to rise strongly – active customers went up 102% to 678,000.

2: Increasing profit margins

The various profit margins that the company informed investors about improved over the period. The EBTIDA margin increased by 6.1 percentage points from 3.1% to 9.2%. The fixed costs as a percentage of revenue declined 4.1 percentage points from 11.6% to 7.5%.

Temple & Webster’s gross profit margin didn’t see quite as much of an increase, but that’s not where most of the operating leverage is accruing. The gross profit margin improved from 44.2% to 45.5%.

The company is investing in several areas to improve its margins further. It’s focusing on increasing its online market share, improving efficiencies, smarter pricing, better supplier terms due to scale, making slow investments in fixed costs and it’s being disciplined in its next growth businesses “e.g. international expansion”.  

3: Better valuation from a lower Temple & Webster share price

Temple & Webster is going to continue to invest in itself and grow regardless of whether the share price is higher or lower in any particular month.

However, a lower Temple & Webster share price could mean a better valuation for prospective investors.

According to Commsec, the Temple & Webster share price is valued at 38x FY22’s estimated earnings.

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More reading

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 Down 32%: Why the Temple & Webster (ASX:TPW) share price could be a buy appeared first on The Motley Fool Australia.

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