Why I think the Temple & Webster share price is in the buy zone right now

Temple & Webster shares are seeing a lot of volatility. Now could be the time to jump on the business.

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Key points

  • Today could prove to be a good time to look at the Temple & Webster share price
  • The homewares and furniture retailer is suffering from volatility, but it continues to grow in scale
  • Operating leverage and fast revenue growth could help the business

I think the Temple & Webster Group Ltd (ASX: TPW) share price could be worth a buy today, particularly if it has a rough day.

Overnight, the S&P 500 Index (SP: .INX) fell by 4%. There was a painful drop for Target Corporation (NYSE: TGT) which fell by 25% as inflation influenced the 43.3% fall in adjusted earnings per share (EPS).

While the ASX and Temple & Webster are not exactly the same as the S&P 500 and Target, ASX shares do often follow the lead of the US share market. And it appears that’s what happening to the Temple and Webster share price today, which is down 4.26% to $4.385 in early trade.

I like to take advantage of lower share prices of attractive businesses. Shares of the homewares and furniture retailer have fallen by almost 60% in 2022 so far.

While things are looking tough for some retail businesses in the shorter term, I think the large decline of the Temple & Webster share price means it’s an opportunity for a few different reasons.

Building operating leverage

One of the main things I look for in a business is that it can become increasingly profitable as it grows in size. In other words, I want to see that profit margins are increasing, or can increase when its growth investing slows down.

Temple & Webster says that over the longer term it’s planning to leverage its scale and strategic moat to grow its contribution profit margin percentage. The contribution margin is a company’s profit when looking at revenue, minus the cost of sales, distribution, advertising and marketing, customer service, and merchant fee expenses. But it doesn’t include things such as wages and depreciation.

Management says it will benefit from smarter pricing, better supplier terms due to scale, and higher brand awareness. It thinks it will achieve better unit economics. I think this could be a key driver for the Temple & Webster share price later this decade.

It will also be able to slow its investment into fixed costs as it grows.

For now, the business is using its operating leverage to re-invest for growth into marketing, technology development, product range, and the overall customer experience.

Rapid growth

I think one of the things that can help a business produce good long-term compounding of profit and value for shareholders is growing revenue.

Temple & Webster has grown significantly in scale since the beginning of the COVID-19 pandemic. A few months ago, it announced its FY22 half-year result. It showed that the half-year revenue of $235.4 million was up 46% year on year and up 218% compared to the first half of FY20.

Active customers increased by 34% to a total of 906,000. Revenue per active customer increased by 10%, with the sixth consecutive quarter of growth.

Temple & Webster has continued to scale. The FY22 second half has seen revenue growth of 23% for the period of 1 January 2022 to 30 April 2022. It’s this strong growth that makes me believe the business can become one of the big players in the space, and then benefit from that operating leverage I’ve already talked about.

The company points out that the ‘business to consumer’ furniture and homewares category is worth around $16 billion, which is undergoing a structural shift towards online. In 2019, 5.1% of this market was online, which then grew to between 7% and 9% in 2020.

In the US, which could be a long-term potential guide for the Australian market in the coming years, the online percentage of the furniture and homewares market was 15.2% in 2019 and increased to 25.3% in 2020.

Growing addressable market

The company is looking to grow its business in ‘next growth horizon’ areas such as trade and commercial, and home improvement, which further increases its potential growth runway and this could help the Temple & Webster share price over time.

In HY22, the trade and commercial revenue rose 49%, representing 7% of the total group revenue.

Home improvement revenue rose by 95%, representing 4% of group revenue. This is a market worth around $16 billion for the business, with less than 5% of it online. Some products include tools and equipment, garden and landscaping, paint and supplies, window furnishings, flooring, plumbing fixtures, and more.

Temple & Webster has launched a website called The Build to further grow in this area.

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. has positions in and has recommended 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 Scott Phillips.

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