ASX better buy: Temple & Webster or Kogan shares?

Some of the ASX's biggest stars in 2020 were e-commerce businesses, which experienced unprecedented demand as COVID pulled forward online penetration rates.

This saw Temple & Webster Group Ltd (ASX: TPW) and Kogan.com Ltd (ASX: KGN) shares soar to lofty heights, only to slink back down as ASX online retailers lost their shine.

Let's take a look at which of these two popular ASX e-commerce shares could be a better buy.

Compare the pair

Before I present a bull case for each company, here's a quick summary of how these two ASX e-commerce shares stack up across some headline metrics.

As you can see, even though Kogan generates substantially more revenue, Temple & Webster's superior gross margins mean that more dollars filter through to gross profit.

The case to add Kogan shares to your cart

The simplest bull case for Kogan is that shares have been oversold. The Kogan share price has been slashed by 59% this year. It's currently sitting at $3.55, a painful 86% lower than the all-time high of $25.10 it reached in October 2020.

In hindsight, it's easy to see the market lapped up the COVID hype and got well and truly carried away.

But Kogan shares have fallen so far from grace that they're now down more than 50% compared to pre-COVID levels.

This is despite the retailer bringing in $280 million more revenue and having 2.4 million more customers compared to FY19. But crucially, what hasn't grown is the company's bottom line.

Nonetheless, Kogan's growth story has long been underpinned by taking a bigger slice of the pie out of a fast-growing market.

The e-commerce tailwind will likely propel the industry for years to come, all the while Kogan's market share has plenty of room left to run.

NAB estimates that in the 12 months to June 2022, Aussies spent $55.72 billion on online retail, representing 14.5% of total retail sales.

Meanwhile, Kogan's market share sat at just 2.7% in FY21, up from 2.4% in 2020 and 2.1% in FY19.

Temporary blip

Management took a bet that COVID-accelerated demand would be the new normal. Kogan has since candidly admitted it got it wrong, which led to widely reported inventory woes. 

Bulls will argue this was merely a blip and that the long-term growth story remains firmly intact. If not stronger than ever, supported by a growing, loyal customer base and various growth levers at the company's disposal.

Importantly, the ASX retailer has proven its business model can be profitable and it's shown potential for operating leverage to kick in.

The company has set an ambitious target of achieving $3 billion of gross sales in FY26, which translates to an annual growth rate of 26%. 

It's also aiming for one million Kogan First subscribers, which would bolster customer loyalty and repeat purchases while providing a meaningful recurring revenue stream.

If the founder-led management team can deliver on these medium-term goals, without eating into margins, the business could be worth multiples of what it is today.

The case to furnish your portfolio with Temple & Webster shares

Similarly to Kogan, Temple & Webster is benefitting from the shift to online. But the tailwinds blowing at Temple & Webster's back are arguably stiffer. 

COVID accelerated a lot of growth and saw people shopping for furniture online for the first time. Anecdotally, it's easy to see Temple & Webster's rise in prominence as family and friends turn to the company as a destination site for ease and convenience.

But the industry is still in the early stages of online penetration.

The Australian furniture and homewares market lags the online penetration seen in other western countries. In 2021, online penetration was in the range of 15-17% in Australia. But in the UK and US, penetration rates were above 25%.

As we play catch up and more of the market moves online, Temple & Webster, as the largest online player in Australia, is in a prime position to pounce.

In FY22, its market share of the total furniture and homewares market in Australia sat at just 2.3%. That leaves a long runway for growth, especially as the company aims to increase its brand awareness from 61% to 80%.

What else is there to like?

Operationally, Temple & Webster also has a myriad of factors working in its favour.

Importantly, it's won over consumers, boasting swarms of positive reviews on websites like Trustpilot with ratings higher than its competitors.

The company is known for its expansive range, offering more than 240,000 products from 500 suppliers across 210 categories.

This is made possible by a diverse and reliable supply chain and distribution network. 

Unlike Kogan, Temple & Webster utilises a drop-shipping model for third-party products so it's largely shielded from inventory risk.

This means that instead of buying all of the products upfront, paying money to store them in warehouses, and dispatching them when a customer makes an order, this is all handled by third parties. Plus, it means that Temple & Webster doesn't carry the risk of products not being sold.

In FY22, 73% of the company's sales went through the drop-shipping network. The remaining 27% were higher-margin private label products, where Temple & Webster takes on the inventory risk and fulfils distribution duties.

Operating in the furniture space also comes with advantages over other retail categories. Furniture is a higher margin category compared to, say, consumer electronics and appliances. 

And most of the category is sold under the retailer's brand rather than the supplier's. This allows for more catalogue differentiation and means there's more opportunity for higher-margin initiatives, such as private label products. 

Looking ahead, the company has been ploughing money back into the business to invest in its digital capabilities and expand into new verticals, such as home improvement and trade and commercial.

Prudently, the company recently heightened its focus on profitability, upgrading its FY23 EBITDA margins to 3-5%.

Better ASX e-commerce buy

Both Kogan and Temple & Webster are benefitting from the structural shift to e-commerce.

But for me, it's hard to go past the number one player in a more targeted industry growing at a faster clip. And that player is Temple & Webster.

The current environment will likely continue to be volatile as we battle soaring inflation, rising interest rates, and a precarious housing market.

But taking a long-term view, I'm confident that a sizeable portion of the furniture and homewares market will be online. 

And I believe Temple & Webster is in a strong position to capitalise on its first-mover advantage and gobble up more share of what is already a very big addressable market.