The Temple & Webster Group Ltd (ASX: TPW) share price should be on your watchlist in my opinion.
The online furniture and homewares business is recently released its FY21 result and that highlighted a few different things for me.
Temple & Webster share price is one to watch
This business is certainly not cheap. But not many high-growth businesses are. When you add strong growth onto strong growth, it can turn into a much larger business over time. Which could mean good share price growth.
I’m a believer in businesses that are riding a long-term trend where they can significantly increase their market share and benefit from economies of scale.
These are some of the reasons why I really like the prospect of Temple & Webster:
Digital adoption
In FY21, the company’s number of active customers increased by 62% year on year to 778,000. But the company believes there is a lot more growth to come.
Management say that its core B2C (business to consumer) furniture and homewares category is worth $16 billion, and it’s going through a structural shift towards online.
In Australia, in 2019, approximately 5% of these items were sold online. In 2020 it may have grown to as much as 9%. But in the US, where online adoption is much further ahead, the online sales percentage of these items was approximately 15% and it had increased to over 25% in 2020. Temple & Webster believes that’s the type of digital adoption that Australia is headed for in the next few years.
It’s going to do what it can to capture and accelerate that opportunity.
Investing for growth
Temple & Webster wants to be number one in the homewares and furniture space (across both online and offline). It wants to offer the biggest and best range, whilst offering the best delivery experience and customer service.
A key demographic, ‘millennials’ are starting to enter the key ages of between 35 to 65.
Other online players are helping speed up the online adoption, such as Amazon. New technologies are also improving the experience and conversion, such as augmented reality.
The company plans to invest in a number of areas to provide a better service including marketing, technology development, product range and the overall customer experience.
Being bigger should bring about a number of benefits.
Scale benefits
A key part of the growth story is that Temple & Webster is hoping to increase its revenue per active customer. In FY21 that rose by 12% thanks to customers buying more often and spending more when they do.
Even in FY21, before the heavy investment period, Temple & Webster was demonstrating its scalability. Whilst revenue went up 85%, EBITDA (EBITDA explained) increased 141% to $20.5 million. The EBITDA margin improved from 4.8% to 6.3%, whilst the fixed costs as a percentage of revenue fell from 10% to 7.9%.
Temple & Webster listed a number of benefits from getting bigger. It said it wants to leverage its scale to improve its contribution profit margin in percentage terms. Being bigger (combined with its investments) can lead to smarter pricing, better supplier terms due to scale and higher brand awareness.
It will also mean that the company can slow its investment in fixed costs. The business also mentioned that disciplined investment could lead to its next horizon growth businesses such as international expansion.
Summary thoughts about the Temple & Webster share price
I think that the Temple & Webster share price is definitely one to watch, particularly if it can keep growing its market share.
There is a lot of benefit to becoming bigger, so I believe short-term (profit) pain is going to be worth the long-term gain.
It is one of the ASX growth shares I have on my watchlist.
