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Temple & Webster Outperforming Peers

Australia | Feb 11 2022


In contrast to recent updates from Temple & Webster's peers, first half results met with approval from brokers and the company will now focus upon an array of growth opportunities.

-Temple and Webster’s first half results were considered positive
-Customers are shopping more often and spending bigger
-The earnings margin is exceeding management’s target
-Strong growth for the B2B and DIY segments

By Mark Woodruff

There has been a relentless share slide for online-only furniture and homewares retailer Temple and Webster ((TPW)) recently.  Since attaining a $15 high just over four months ago, the stock closed at $8.80 yesterday.

Following first half results, brokers in the FNArena database have universally lowered target prices, partly due to higher bond yield estimates but also on management's guidance to greater reinvestment in the business. In light of significant supply chain disruption and cost pressures, the half was generally considered positive.

Indeed, UBS declared the results a clear standout across the broker’s e-commerce coverage, while Canaccord Genuity contrasted a lack of surprises with recent domestic peer announcements.

Bell Potter also sees a more appealing valuation after the share price retreat and upgrades its rating to Buy from Hold, while lowering its target price to $12.10 from $12.75 on a more conservative revenue forecast, in an environment of rising interest rates.

The broker, not one of the seven brokers updated daily in the FNArena database, believes the structural shift to online, M&A prospects and new growth horizons provide potential offsets to risks from the housing cycle.

First half revenue rose 46% year-on-year, while earnings were 15% above the consensus forecast, despite a rise in marketing costs as a percentage of revenue.

Jarden notes that while customer acquisition costs were higher, group operating leverage is still delivering margins in advance of management’s targets, despite an investment phase for the company.

Credit Suisse believes the online furniture and homewares retail sector remains underpenetrated by comparison with the US and UK markets. There’s considered to be a material opportunity for Temple & Webster to both gain market share and achieve long-term operating leverage.  

First half results

The above consensus first half results were achieved via a growing number of active customers, a higher average order value, improving rates for website conversion and category expansion, explains Credit Suisse.

Moreover, repeat customers represented around 33% of active customers in the second half and their number grew compared to the previous corresponding period. The analyst retains an Outperform rating.

Revenue growth resulted in an earnings (EBITDA) margin of 5.1%, which sits ahead of the 2-4% target range for FY22, despite continued reinvestment.

Average revenue per active customer grew by 10%, the sixth consecutive quarter of growth. Meanwhile, business-to-business (B2B) divisional revenue rose 49%, while home improvement climbed by 95%.

Management noted “Strong supply chain diversity has enabled a consistent trading performance over the covid-impacted period of 2020 to 2021.”

New growth horizons

Temple & Webster is seeing strong growth in its expansion categories of Trade & Commercial/B2B and DIY/Home Improvement. For the latter, Canaccord Genuity sees potential for this category to equal the size of the business-to-consumer (B2C) Homewares and Furniture business.

Overall, management’s FY22 growth strategy centres around increasing brand awareness to 80% from 61%.

There will also be a focus upon adding depth and breadth to the growing private label division and expanding digital capabilities through use of artificial intelligence and data personalisation.

The Outlook

In promising signs, sales growth of 26% for the first five weeks of the new calendar year is tracking ahead of Macquarie’s second half growth rate forecast. Further, as this growth is well ahead of widely followed third-party web traffic data, Morgan Stanley feels this comes as a positive surprise for investors.

Jarden points out key risks include increased competition and discounting, as well as supply chain disruption and growth outpacing the company’s logistics capability. Meanwhile Macquarie cites the risk of a reallocation of segment spending to in-store, and a potential swing away from the furniture and homewares category.

Finally, on a positive note, in support of a forecast compound annual growth rate (CAGR) of 29% for revenue, UBS expects accelerated investment in areas such as brand marketing and adjacent product categories. Additionally, it's thought the balance sheet provides some capacity for inorganic growth.

The FNArena database has three Buy ratings and one Hold (Macquarie). The consensus target is $12.26, suggesting 38.8% upside to the last share price. Targets range from $9.70 (Macquarie) to $14.00 (Morgan Stanley).

For those brokers that are not in the FNArena database, Jarden maintains its Overweight rating and reduces its target to $15.09 from $15.81, while Canaccord Genuity maintains a Buy rating and lowers its target to $12 from $16.

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