The Temple & Webster Group Ltd (ASX: TPW) share price looks like a bargain to me after its large fall over the last few months.
Since the beginning of 2022, shares of the company have dropped around 65%. There has been a lot of volatility across the ASX share market this year, but this decline is one of the larger falls.
With investing, it's important not to anchor ourselves to previous share prices. Just because the Temple & Webster share price was above $10 at the start of the year doesn't mean it's going to rapidly get back there.
The company claims to be Australia's largest pure-play online retailer of furniture and homewares.
It sells more than 200,000 products from hundreds of suppliers. It runs a drop-ship model where products are sent directly to customers by suppliers. Temple & Webster says this enables faster delivery times and reduces the need to hold inventory, allowing for a larger product range.
Temple & Webster also has a growing private label range of products.
Not only that, but the company recently launched The Build, a website for home improvement products. The move into home improvement is one factor that makes me believe the company's shares are worth buying at the current Temple & Webster share price of $3.79.
Home improvement market
The company's expansion into home improvement opens up a big new market for the business.
Management said this adds a further $16.4 billion to its addressable market. However, only 5% of this market has moved online, so online adoption could help drive demand and revenue for this segment.
The kinds of products we're talking about here include tools and equipment, garden and landscaping, paint and supplies, window furnishings, flooring, and plumbing fixtures.
Online adoption of core category
Its furniture and homewares category is also worth around $16 billion.
Management pointed out that more and more households are using online shopping. We could look to the US to see how the e-commerce adoption curve can develop.
In 2019, 15.2% of the US furniture and homewares market was online. This grew to 25.3% in 2020 in the first year of COVID-19.
However, Australia's e-commerce journey is significantly behind. In 2019, 5.1% of Australia's furniture and homewares category was online. This increased to somewhere between 7% and 9% in 2020. Even reaching the US's 2019 level of 15.2% is quite a way off, giving Temple & Webster a good growth runway in my opinion.
But it's growing strongly. In the period of 1 January 2022 to 30 April 2022, revenue rose 23% year on year.
Scale to boost operating leverage
Temple & Webster is re-investing its growing revenue and cash flow into areas like marketing, technology, product range, and the overall customer experience.
In time, the company plans to utilise its leadership position to achieve and bank those scale advantages which will help with better unit economics. It could lead to cost advantages in product sourcing, logistics, and marketing. It also won't need to invest as much, particularly in terms of its fixed costs, which should help profit margins.
I think that when investors see rising profit margins, this will boost investor sentiment and help the Temple & Webster share price.