Small Caps | Jul 28 2021
This story features TEMPLE & WEBSTER GROUP LIMITED. For more info SHARE ANALYSIS: TPW
One of the companies to benefit from mobility restrictions, online furniture retailer Temple & Webster has produced a robust FY21 and FY22 is shaping up just as strongly
-Sales growth strong in June quarter despite tough comparables
-Temple & Webster driving share gains with reinvestment strategy
-Marketing leverage likely to be driven by launch of the mobile app
By Eva Brocklehurst
Customer satisfaction keeps them coming back to order furniture online from Temple & Webster ((TPW)). The pandemic has played into the company's hands and, with the June quarter presenting the first major comparable, the business has sailed through, reporting a sharp increase in sales.
The early benefits of the "foot down" strategy is evident in the sales in the last quarter of FY21, Bell Potter asserts, and positive momentum continued into July, although sales acceleration was buoyed by recent lockdowns.
While lockdowns in Melbourne and Sydney may well be underpinning sales, Credit Suisse points out sales growth is also occurring across all states. Operating earnings (EBITDA) margins in the second half were well within the target of 2-4%.
Morgan Stanley welcomes the company's ability to improve on the tough comparables, which was its key concern heading into the results. This is a structural growth market and Temple & Webster a leader, the broker estimating it is on track to reach $1bn in revenue in 4-5 years.
Still, while recent trading has most likely benefited from lockdowns, July and August data will be critical as these were significant sales months in 2020. While not key to Morgan Stanley's view, any extension of lockdowns is expected to be positive for short-term demand.
Otherwise, the stock could be volatile over the next 6-12 months amid uncertainty on a number of fronts including house prices and store closures.
FY21 revenue was up 85% and EBITDA up 141%. Active customers are now over 778,000. Revenue growth in FY21 was driven by active customers and average revenue per customer was up 12%.
This is the aspect that interests Macquarie, as active customers were up 62% and repeat orders exceeded first-time orders for the first time. The company has pointed out more recent customer cohorts are spending more per transaction and buying more frequently than older cohorts, which Jarden suggests is a good underlying indicator of customer quality.
Morgan Stanley, too, notes greater consumer engagement thanks to larger basket sizes and repeat orders. Private label is now 26% of revenue, up from 19% in FY20, and this has supported margins.
Moreover, growth has been aided by increased numbers of purchasing and compliance personnel and the establishment of five warehouses.The reinvestment strategy is driving market share gains and improvement in brand awareness is expected to support revenue.
Yet Macquarie suspects revenue growth will taper as FY22 progresses and believes the company has captured the permanent gains from the acceleration through the pandemic. The main issue for the broker, therefore, is the longer-term potential and the timeframe over which expansion can be delivered.
The main issue Macquarie had with the results was the one-off distribution costs in the second half because of shortages in available warehouse space and port-related problems. Jarden is more confident and suspects the structural and cyclical factors underpinning the company's success will endure.
The company has a range of initiatives on the go such as after hours/weekend delivery and data integration for AI-assisted self-service. A mobile app has been launched and Morgan Stanley expects this will drive marketing leverage over time with app users appearing to be more engaged compared with the group average.
The company is targeting its marketing at residential property and regional hospitality sectors. The scale of the business is providing scope for continued investment and Jarden expects Temple & Webster will comfortably fund its growth strategy.
There is a significant opportunity ahead, in what the broker calculates is a $16bn market in the early stages of shifting to online. Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, envisages upside risk to long-term forecasts from a higher rates of penetration in the online category and retains an Overweight rating with a $13.87 target.
Assuming around 26% growth in furniture/homewares retail sales from a 2019 base, and 8% online penetration further this category, Credit Suisse calculates the company's online market share would be close to 24% in the second half. In contrast, market share for total furniture/homewares retail is estimated to be less than 2%.
Bell Potter, also not one of the seven, agrees the opportunities are significant yet retains a Hold rating with a $12.40 target based on valuation, remaining cautious about the short-term outlook for discretionary retail.
The database has two Buy ratings and one Hold (Macquarie). The consensus target is $14.41, suggesting 18.8% upside to the last share price. Targets range from $12.60 (Macquarie) to $16.00 (Morgan Stanley).
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