The e-commerce ASX share sector could be a good place to look for opportunities.
Businesses in the online retail world can develop good profit margins thanks to the lack of a physical retail store network and the benefits of network effects.
Once a website has been developed, the increasing sales volumes are likely to lead to fixed costs becoming a smaller percentage of revenue.
Here are two to think about:
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Temple & Webster Group Ltd (ASX: TPW)
Temple & Webster is one of the leading furniture and homewares businesses. It sells more than 200,000 products from hundreds of suppliers.
It operates through a drop-shipping model. This means the products are sent directly to customers by suppliers, which helps with fast delivery times and also means that Temple & Webster doesn't need to hold as much inventory. It does actually have a private label range though.
The e-commerce ASX share says that it has a large addressable market with accelerating online adoption. Excluding business to business, in Australia the estimated market is worth around $16 billion, with less than 10% of that sold online (between $1.1 billion and $1.4 billion).
Temple & Webster also points out that it's profitable with strong revenue growth, it's capital light and debt free.
That revenue has grown really quickly, with an acceleration during COVID-19. FY21 revenue surged 85% higher to $326.3 million. Revenue per active customer increased 12% year on year because of customers buying more often and spending more when they do. In the first couple of months of FY22, revenue had grown another 49%.
Management point to the benefit of the tailwind with the ongoing adoption of online shopping because of structural and demographic shifts.
Adore Beauty Group Ltd (ASX: ABY)
Adore Beauty is another e-commerce ASX share that is benefiting from the high demand for products and services online.
It's a retail platform that sells almost 11,000 products from 260 brands.
With the release of its FY21 result, it said that:
Adore Beauty is executing a clear and robust growth strategy to cement its online market leadership position, and it is well positioned to capture market share in a large and growing market benefiting from structural tailwinds.
Just like Temple & Webster, the business is also its average customer spend more. Annual revenue per active customer rose by 7% to $219, driven by "strong" customer retention and increasing average order value.
The business is experiencing higher levels of profitability. Whilst FY21 revenue grew 48% to $179.3 million, beating guidance, the gross profit margin increased by 1.2 percentage points to 33.1%. Despite the heavy levels of investing, earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 53% to $7.6 million.
The e-commerce ASX share expects to maintain a 2% to 4% EBITDA margin in the short-term to medium-term while re-investing to drive above market growth. In the long-term, scale benefits are expected to increase operating leverage and deliver further EBITDA margin expansion.
In the first few weeks of FY22, Adore Beauty saw a revenue increase of 26% year on year.
It's currently rated as a buy by the broker Morgan Stanley. The price target is $6. The broker is attracted to the potential of the business over the long-term.
