Australia | Mar 16 2021
This story features TEMPLE & WEBSTER GROUP LIMITED. For more info SHARE ANALYSIS: TPW
Temple & Webster is expected to dominate the online furniture space and therein lies an investment opportunity, although growth rates may ease back in the short term
-Leading position in a structural growth story
-Reinvestment may hamper profitability in the short term
-Highly scalable platform
By Eva Brocklehurst
Temple & Webster ((TPW)) is a distinctive business at the forefront of the nascent Australian online furniture market, with a track record of high revenue growth even before the pandemic hit.
There is some uncertainty as to how the company can cycle strong comparables throughout 2021, and this may drive volatility in the share price. Yet, while not brushing aside the risk, several brokers consider the medium-long-term opportunity substantial.
There is a structural tailwind and the company has a leading position within its category which should deliver above-market revenue growth, Goldman Sachs asserts, underscoring its Buy rating and $12.45 target, which implies a potential return of more than 18%.
Morgan Stanley initiates coverage with an Overweight rating and $14.00 target, believing current weakness is a buying opportunity, and setting aside the fact that as the business reinvests for the long-term this will affect short-term profitability.
Nevertheless, revenue growth percentages will taper off as 2021 progresses, while permanent gains from an acceleration in the online space have already been captured during the pandemic, in Macquarie's view.
The broker notes private label is now 25% of revenue which helps gross margin and fills the gaps in the ranges on offer, assessing that over the longer term private label could reach 30% of sales.
The company has called out an incremental $13m investment in inventory to drive the private-label strategy yet Goldman Sachs highlights Temple & Webster's strong balance sheet and ability to fund its growth strategy.
Sales in January were up more than 100%, Bell Potter notes, the broker forecasting sales growth of around 69% for the second half, which takes into account the cycling of significant comparables in the fourth quarter.
Still, reinvestment into growth initiatives will ratchet higher as the company adds depth and breadth across its core categories and expands its private label. The opportunities may be significant but Bell Potter sticks with a Hold rating and $11.75 target based on valuation.
Morgan Stanley assesses the degree of opportunity stems from the potential size of the online market, estimating this will be worth $2.6bn by FY25 and implying penetration of 14.6% compared with the current 5.7%. This compares with the US and UK homewares which already have online penetration rates in that vicinity.
The broker believes temporary store closures have accelerated the migration to online purchasing. Moreover, millennials are now at the stage of establishing homes and they are more likely to purchase these products online, having grown up with the internet.
Morgan Stanley also dispels the counter argument that consumers wish to feel and experience furniture and furnishings before purchasing, asserting this is less important for categories that Temple & Webster sells, such as artworks, rugs and lighting.
Increasingly sophisticated digital content and ubiquitous customer reviews make a purchase decision online easier as well. Goldman Sachs points to broadening categories including trade & commercial as well as technologies such as mobile apps and 3D libraries.
Macquarie acknowledges longer-term earnings potential and the prospect of expanding ranges and entering new verticals and agrees, in this area, Temple & Webster has a highly scalable platform and can handle multiples of existing units.
Yet the broker has a Neutral rating and $10.90 target and remains cautious based on the level of expenditure in the category, anticipating traditional bricks & mortar operators may accelerate their online market presence as expenditure in the category normalises.
Morgan Stanley also suspects, while the Australian population is more sparse, logistics costs should come down over time as more operators enter the market and traditional retailers invest online. Then, as Temple & Webster is a dominant online operator in this segment in Australia, it is positioned to take an outsized share of the market, already having one of the more compelling offerings.
In comparing the business to the trajectory of peer Wayfair in the US, Morgan Stanley finds that being the dominant operator helped that company experience outsized growth, and Temple & Webster has even more scale than Wayfair had at this stage in the adoption curve.
Temple & Webster offers 210,000 products or more from over 500 suppliers and Goldman Sachs agrees its networks are unlikely to be matched by competitors, in the short term at least.
Morgan Stanley forecasts margins to increase to 32.5% by FY30 from 30.6% in FY20, reflecting the benefit of distribution costs declining to 12.9% from 14.0% because of greater scale.
The broker acknowledges e-commerce is rapidly growing and this may place pressure on logistics although the company could also invests in parts of the logistics network that would drive down long-term unit costs.
See also, Temple & Webster Stacks Up In Furniture on February 3, 2021.
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