4 factors that could make the Temple & Webster (ASX:TPW) share price a buy

Temple & Webster is an interesting business and could it be a compelling idea.

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The Temple & Webster Group Ltd (ASX: TPW) share price could be an interesting one to think about for a few different reasons.

Here are some of the factors why the Temple & Webster share price could be one to monitor:

Temple & Webster's interesting business model

Unlike other ASX home product retailers like Nick Scali Limited (ASX: NCK) and Adairs Ltd (ASX: ADH), Temple & Webster is an online-only business.

Indeed, the company describes itself as Australia's leading pure play retailer of furniture and homewares. It retails over 200,000 of products from hundreds of suppliers. Those products are sold to customers and directly shipped by the suppliers. That model means that there's faster delivery times and it reduces the need to hold inventory, allowing for a larger product range. Temple & Webster also has a private label range, sourced from overseas.

Permanent shift up the online adoption curve

Temple & Webster believes this trading suggests COVID-19 has permanently accelerated online adoption in the Australian furniture and homewares market.

The company has estimated that more than 20% of furniture and homewares was bought online in the US during 2020. Management believe Australia is following the same trajectory. It's estimated that in 2020, around 9% of Australian furniture and homewares were bought online, an almost doubling of the 5% bought in 2019.

Temple & Webster said that online penetration in both markets is expected to continue to increase significantly.

Investing for growth

The e-commerce business plans to invest heavily to capture as much as this market opportunity as it can.

Management believe that it has a strong balance sheet and scope to achieve longer-term returns.

This will involve building 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.

It's going to use tactical pricing and promotions to increase the conversion.

Temple & Webster is strengthening its customer experience through enhanced technology, data and personalisation and delivery experience.

The company is also investing into its 3D and artificial intelligence capabilities to make the customer shopping journey easier.

Temple & Webster is adding new categories, expanding its private label range, new product development and launching exclusive ranges with suppliers.

The final area of focus is growing its business to business sales and operational teams to capitalise on the returning demand in the commercial sector.

Higher margins in the longer-term

During this period of investment, Temple & Webster is expecting "strong" double digit revenue growth, whilst the earnings before interest, tax, depreciation and amortisation (EBITDA) margin is expected to be between 2% to 4%.

But in the longer-term, it's expecting higher levels of profitability than have been previously achieved due to greater scale benefits.

There are four areas of benefits. There's improved supplier terms. Next, there is more repeat customers which will reduce marketing expenses. Another benefit would be the slowing investment in fixed costs. Finally, it's expecting a higher percentage of sales to be exclusive products with higher gross profit margins.

Temple & Webster expects to achieve higher profit margins than offline peers in the longer-term.

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's parent company Motley Fool Holdings Inc. has recommended ADAIRS FPO. The Motley Fool Australia owns shares of and has recommended ADAIRS FPO. 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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