The S&P/ASX 300 Index (ASX: XKO) share Temple & Webster Group Ltd (ASX: TPW) has surged 30% in the past month. Most of that happened yesterday, with a 23% rise after the company reported its FY24 result.
The e-commerce business sells a wide array of homewares, furniture, and home improvement products. You'd think this area of the market might be suffering during this period of high household costs of living. According to Temple & Webster, the overall furniture and homewares market saw a decline of 4%, but the ASX share reported a 26% revenue increase to $498 million in FY24.
Investors were mightily impressed by what the company reported for the 12 months to 30 June 2024.
We're seeing the company significantly increase its market share, which is exciting for both the short term and the long term.
It's certainly not cheap, but I'm excited by the ASX 300 share's future for a few different reasons.
Image source: The Motley Fool
Strong revenue growth
The company reported revenue growth of 26.6% to $424 million in its core furniture and homewares business and 21% to $74 million in its growth plays, currently business-to-business and home improvement.
Temple & Webster aims for at least $1 billion in group revenue within the next two to four years. It also targets at least $800 million of core business revenue and at least $200 million of 'growth play' revenue.
What could help drive it towards that goal?
Millennials and Gen Z are driving online channel adoption, which is a good tailwind. Australian online penetration for furniture and homewares is around 20%, which is lower than the United States and the United Kingdom and below other higher-penetrated categories. There's room for growth.
As the ASX 300 share gets bigger, it will have more resources to increase its market share. The company said the customer proposition could improve around the breadth and depth of its range, pricing, data/personalisation, content, service and delivery.
AI and margins
Temple & Webster has been adding to its AI team and adding a number of tools across the business, which is delivering results for customers and the business.
Product content generation and recommendations, as well as live chat, are driving conversion improvements. AI and technology are handling around 40% of customer sales support interactions, resulting in around $4 million in annualised cost savings.
In FY24, the business achieved an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 2.6%, which was at the high end of its target range of between 1% to 3%.
In the long-term, the ASX 300 share is aiming for a 'business as usual' EBITDA margin of at least 15%. Repeat orders growing to 80% should come with a lower marketing cost, while scale benefits and AI should help with profit margins throughout the business even more over time.
Much stronger margins on higher revenue would be a compelling combination.
Capital light model
A significant majority of the products sold on Temple & Webster are sent to customers directly by suppliers, which allows Temple & Webster to generate sales without having to hold inventory or own warehouses for those products.
This business model allows the business to generate good cash flow, even if the accounts aren't showing as much net profit after tax (NPAT) yet. In FY24, it made $8.3 million of NPAT and an operating cash flow of $14.8 million.
That cash flow (and a large cash balance of more than $100 million) can be used for a number of useful purposes, such as share buybacks, new growth initiatives, possible acquisitions, or even dividends down the line.
When you put all this together, I think Temple & Webster shares have a very compelling future. The company wants to be the largest retailer of furniture and homewares, and I think it has a great chance of achieving that goal in the coming years with its plans.
