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Temple & Webster (ASX:TPW) share price sinks 15% lower: Is this a buying opportunity?

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One of the worst performers on the Australian share market on Wednesday has been the Temple & Webster Group Ltd (ASX: TPW) share price.

The high-flying online furniture and homeware retailer’s shares have come under significant pressure today following the release of a trading update.

In afternoon trade the Temple & Webster share price is down a sizeable 15.5% to $11.88.

How is Temple & Webster performing in FY 2021?

Today’s trading update revealed that Temple & Webster’s strong growth has continued in FY 2021.

As of 19 October 2020, financial year to date, Temple & Webster’s revenue was up 138% on the prior corresponding period.

Growing at an even quicker rate was the company’s earnings thanks to a contribution margin above its 15% target. This is the margin after all variable costs, including advertising and customer service costs.

Temple & Webster reported first quarter earnings before interest, tax, depreciation and amortisation (EBITDA) of $8.6 million. This is more than the entire EBITDA it generated in FY 2020.

How does this result compare to expectations?

Based on the share price reaction, you might think that this update fell short of expectations.

However, a note out of Goldman Sachs reveals that Temple & Webster’s update has significantly outperformed its forecasts.

It commented: “YTD revenue (1 July–19 Oct) is up +138% vs. pcp with October revenue growth still >100% which is positive given TPW has now entered its peak trading months. Current revenue run rates are materially ahead of our forecast for 1H21 (+70.3%, A$126.2mn).”

The same applies to its earnings, thanks to its higher than expected contribution margin.

“Contribution margin continues to run ahead of a 15% target, despite the launch of a second TV campaign at the end of Q1 which we expect would have been slightly dilutive to contribution margins.”

“This compares to our expectation for contribution margin of 14.8%. Operating leverage is strong, and EBITDA is well ahead of our expectations, with 1Q21 EBITDA of A$8.6mn ahead of our 1H21 forecast of A$7.3mn and, for context, we forecast A$18.9mn EBITDA for FY21,” Goldman explained.

Is this a buying opportunity?

At present Goldman Sachs has a buy rating and $11.50 price target on the company’s shares.

However, I suspect that it will revisit its valuation in the coming days and, given its outperformance, is likely to lift its price target higher.

This could make today’s sizeable decline a buying opportunity for investors. Though, it may be best to let the dust settle before jumping in.

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Returns as of 6th October 2020

James Mickleboro 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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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