Some high-flying ASX stocks could be key for creating wealth over the long-term. I'm excited by the potential of Temple & Webster Group Ltd (ASX: TPW) to grow into a much bigger business and help Aussies get closer to millionaire status.
Now priced at $11.81, shares in the online retailer have climbed around 7,300% since 6 January 2017. This would have turned a $10,000 investment into $740,000.
I'm not expecting another 7,000% in the next seven years. However, over the long-term, I do believe that the company has significant growth potential to become a much larger and more profitable business.
This online retailer of homewares and furniture has experienced considerable volatility over the past five years, and there could be plenty more to come. But I'm excited about its future for several reasons.
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Trends and strategies
Temple & Webster estimates it had a market share of just over 0.5% of the Australian furniture and homewares market in FY19, and this has grown to 2.3% in FY24.
Part of its success is that, by being online, it's able to offer a huge product range – more than 200,000 products, in fact. Many are shipped directly by suppliers, which means the ASX stock doesn't require the warehouse or inventory investment to facilitate those sales. This enables the business to have an asset-light model.
Temple & Webster notes that its category is experiencing a once-in-a-generation shift from offline to online. According to the company, millennials and Generation Z are driving online channel adoption. The Australian level of online penetration for furniture and homewares is approximately 20%, noticeably lower than the United States, United Kingdom, and other higher-penetrated categories.
If the company can simply maintain its market share of online sales, then it should do well out of the e-commerce migration.
As it becomes larger, its customer offering can improve around its range, pricing, data and personalisation, content, service and delivery experience.
Strong and long-term revenue growth from the ASX stock
Temple & Webster has already delivered a lot of revenue growth. In FY24, it achieved $498 million which was 26% higher than the year before. Its revenue has grown at a compound annual growth rate (CAGR) of 34% since 2017. That's impressive, in my opinion.
Depending on its growth rate, the company aims to reach at least $1 billion in annual sales between FY26 and FY28.
Within that $1 billion target, it is targeting a market share of 4.2% (up from 2.3% in FY24). The company expects its online market share to grow to 15%. Overall, its core furniture and homewares segment is aiming for at least $800 million of the $1 billion sales target.
The ASX stock also has multiple 'growth plays'. One is its business-to-business offering, and the other is its home improvement segment called TheBuild, where it sells products like plumbing, kitchen appliances, sinks, curtains and blinds, tiles, heating and cooling, wallpaper, and so on. Management hopes this segment will contribute at least $200 million of the $1 billion sales target.
Profit margin improvement
I expect revenue to continue growing strongly to 2026 and beyond, but even more importantly, I believe profit margins can climb. This will enable the bottom line profit to climb significantly.
As the business grows, its fixed costs as a percentage of revenue are expected to decrease. In FY24, fixed costs decreased to 11% of revenue, down from 12% in FY23. It has a target of 6% of revenue by 28%.
Another margin-improving move by the company is utilising AI for product content generation, recommendations, and live chat. This has led to an improvement in conversion and a $4 million improvement in annualised cost of doing business (CODB) savings. Growing its level of orders from repeat customers is expected to help lower marketing costs of overall revenue.
In FY24, the ASX stock achieved a business as usual (BAU) operating profit (EBITDA) margin of 4.6%. It's aiming for a BAU EBITDA margin of at least 15% in the long term.
If the company can deliver on its margin improvement goals, it'll become a pleasingly profitable business with much higher revenue, which could drive the Temple & Webster share price higher.
