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

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There are a few different reasons why the Temple & Webster Group Ltd (ASX: TPW) share price could be worth considering.

What’s Temple & Webster?

The company describes itself as Australia’s leading online retailer of furniture and homewares.

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

The drop ship range is complemented by a private label range which is sourced directly by Temple & Webster from overseas suppliers.

FY21 half year result

Temple & Webster revealed its half-year result yesterday for the six-month period to 31 December 2020.

The company’s revenue increased by 118% year on year to $161.6 million. The online retailer said that it achieved its first day of around $3 million of checkout revenue in November.

It generated $14.8 million of earnings before interest, tax, depreciation and amortisation (EBITDA), which was growth of 556%.

The business said that its active customers increased by 102% and in the trade and commercial division it saw growth of 89% year on year.

In terms of cashflow and the balance sheet, it ended with a cash balance of $85.7 million (including proceeds from the $40 million placement) and it was cashflow positive.

Temple & Webster CEO Mark Coulter said: “While 2020 remained a challenge for the country, we are proud that many Australians continued to turn to Temple & Webster for their furniture and homewares needs. It is great to see our revenue growth translating into operating leverage and significant profit growth. This allows us to accelerate our investment into areas such as data, technology, private label and brand awareness to further differentiate our proposition.”

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

1: Fast growth

Businesses that grow the most have a good chance of producing outsized shareholder returns.

The company reported a lot of numbers in this report that demonstrated growth. Revenue rose 118%, active customers grew 102% and so on.

Temple & Webster believes that demographic and structural changes will drive strong market growth for years to come. For example, millennials are starting to enter the core spending age of 35 to 65.

The company pointed to several structural changes in its favour: physical store closures, new consumer habits being formed during lockdowns, faster internet and mobile speeds like 5G, new market entrants like Amazon are accelerating online shopping take-up and new technologies are improving the experience for shoppers (eg augmented reality).

In January the company saw revenue growth of more than 100% with the continuing growth of online shopping.

2: Rising margins

Stronger profit margins mean that more of the revenue falls to the profit line of the accounts.

Temple & Webster’s fixed cost as a percentage of sales decreased from 11.6% to 7.5%, showing the economies of scale of the business.

The company showed that its EBITDA margin increased from 3.1% to 9.2% as EBITDA jumped from $2.3 million to $14.8 million.

Its contribution margin of 17% is tracking above the short to mid-term target of 15% as a result of its delivered margin improvement.

The company reported that it had a cashflow positive half during the first six months of FY21.

3: Growing market position

Temple & Webster said that it will continue its reinvestment strategy, investing into growth areas of the business to cement its online market leadership and drive market share.

Marketing as a percentage of revenue increased from 11.1% to 12.8%, primarily driven by investment into brand building channels such as TV.

The company said that its revenue per active customer increased by 6% to $401 due to a higher repeat rate.

Valuation

At the current Temple & Webster share price, it’s valued at 36x FY22’s estimated earnings.

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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.

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