I like buying shares as cheaply as possible. The 2.6% fall of the S&P/ASX 300 Index (ASX: XKO) yesterday has opened up plenty of opportunities to buy some shares at a cheaper price that have long-term growth potential. I'm looking at the Temple & Webster Group Ltd (ASX: TPW) share price and believe it's worth buying.
What does it do?
Temple & Webster is a large online retailer of furniture and homewares. Indeed, it sells more than 200,000 products from hundreds of different suppliers. Products are sent directly to customers by suppliers, enabling faster delivery times and reducing the need for the company to hold inventory, allowing for a larger product range. The business also has a private label range sourced from overseas suppliers.
Why is the Temple & Webster share price falling?
The Temple & Webster share price fell around 4% yesterday and it's down almost 50% in 2022. A lot of that decline could be attributed to investor uncertainty relating to inflation and rising interest rates.
FY22 was a solid year for the business. Its revenue increased by 31% to $426.3 million. The earnings before interest, tax, depreciation and amortisation (EBITDA) margin was 3.8%, which was at the top end of its 2% to 4% target range.
That EBITDA margin includes an investment of $1.7 million in its new home improvement site, The Build. Temple & Webster points to a large, addressable market of $16 billion in the home improvement area. The expansion means customers can buy items like tools and equipment, gardening, paint, flooring, plumbing fixtures, and so on.
The Build is on track to achieve revenue of between $10 million to $15 million in the first 12 months of operation. Home improvement revenue across the company grew by 61% year over year, contributing 5% of FY22's total revenue.
However, when the company gave its trading update for FY23, it said that the timing of lockdowns in FY22 will make year-over-year growth comparisons "volatile". July trading was down 21% year over year, while August trading (to 14 August) was down 17%.
Why I'm optimistic about the Temple & Webster share price
Importantly, Temple & Webster said that its early FY23 trading was ahead of internal estimates. It's expecting to return to double-digit revenue growth during FY23 once it has finished lapping lockdowns from the prior year.
I'm excited by the potential of the home improvement side of the business. I think investing in 'The Build' will pay off.
The ASX 300 share is also focused on growing its trade and commercial division, which saw revenue growth of 39% in FY22.
Its customer metrics for the long-term are looking very promising my opinion. In FY22, active customers grew by another 21% to 940,000, while revenue per active customer increased 6% — this was the eighth consecutive quarter of growth.
I believe that the ongoing adoption of digital shopping will be a useful tailwind for the business. In 2021, online market penetration of furniture and homewares was between 15% to 17% in Australia, compared to 25% to 27% in the US.
In the long-term, it's expecting that its EBITDA margin can increase to more than 15% as it benefits from scale, repeat customer orders and investment. The fact that it's "targeting an increase in our unit economics each year" is a positive sign.
With no debt and a strong growth outlook, I think the Temple & Webster share price looks attractive.
