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Too Harsh On Temple & Webster?

Australia | Feb 15 2023


Temple & Webster has suffered a weak start to the second half, but is it worth yesterday’s share price shellacking?

-Temple & Webster’s first half in line
-Second half starts poorly
-Management outlook cautious
-Is it worth -27%?

By Greg Peel

Online furniture & homewares retailer Temple & Webster ((TPW)) rose from obscurity into a rollercoaster ride through covid and out again. Trading at 15c at end-2016, the share price quietly climbed to $2.75 by end-2019. From there it rose 400% to October 2020, when locked-in Australian households undertook a home renovation/spruce-up spree.

The company then struggled with supply constraints, and then with excess inventory, before lockdowns ended and everyone had bought whatever they were going to, switching spending to travel and entertainment in 2022. The share price fell -70% to June.

(Note: that falls trims the earlier 400% gain to a mere 120%)

The stock managed a small recovery up until yesterday, when it fell -27% following its first half FY23 earnings result release. It was a rather severe response, given brokers found Temple & Webster’s first half numbers to be in line with or better than expectation.

Different Story Ahead

But it was not the result that spooked the market. It was a decline in sales of -7% for the first five weeks of the second half, and a surprisingly cautious outlook from management.

It is of no great surprise the outlook for the Australian consumer is a lot more dire in 2023 following a total of 325 basis points of cash rate hikes from the RBA, translating into mortgage stress for many. Westpac’s consumer confidence index has collapsed in February, with lower readings only ever seen in recessions. The measure of attitude towards major household purchases fell to the fourth lowest level in 48 years.

Whether or not a couch or wardrobe is considered a “major” purchase, a lot of couches and wardrobes were acquired in the near-zero rate environment of 2020-21. To that end, the company’s “active customers” declined by -11% half on half in the period.

Yet revenue per active customer was up 7%, driven by average order value growth and growth in repeat orders. Repeat customers also increased to 57% versus 55% in FY22.

Other numbers that stood out for brokers were a cut in marketing expenditure in the first half to 11.8% of revenue compared to 13.6% a year ago. The headcount was reduced by -10%. And FY23 guidance for investment in “The Build” has been cut to $6m from a prior $8m.

“The Build by Temple & Webster”, announced in March last year, was an expansion by the company into the home improvement market, riding the home renovation wave.

Management did retain earnings margin guidance of 3-5% for FY23, and continues to expect a return to double-digit sales growth, albeit no mention of when.

A Bit Harsh?

Temple & Webster is no stranger to sharp daily share price moves, up or down. But is yesterday’s -27% justified?

Goldman Sachs notes early 2023 laps the omicron outbreak of early 2022, when we weren’t in official lockdown but many Australians chose to lock down anyway. Over the same five-week period Temple & Webster’s sales rose 26%, compared to this year’s -7% decline. Goldman does thus not believe the decline is a reflection of underlying trends.

The broker retains a Neutral rating.

While the trading update was below Morgan Stanley’s expectations, the broker retains Overweight, citing easier comparable numbers to cycle from a year ago, reiterated margin guidance and balance sheet optionality for either organic or M&A growth.

Brokers have generally acknowledged the company’s strong balance sheet position, including $102m in cash and no debt, and echo Morgan Stanley’s view on the matter. But is does bring into question why management need reduce investment in “The Build” at this time.

Macquarie weighs up the balance sheet against near-term macro headwinds for furniture retailers given rising rates and slowing housing turnover, and against yesterday’s share price thumping. The result is an upgrade to Neutral from Underperform.

Barrenjoey believes Temple & Webster’s long-term thesis is intact and agrees M&A optionality remains, but believes the stock lacks catalysts given near-term revenue downside risks. The broker remains cautious on retail, with headwinds just starting to bite. On valuation Barrenjoey retains a Neutral rating.

As does Credit Suisse, and UBS.

UBS suggests headwinds may prove largely shorter term in nature driven by a challenged consumer macro outlook, and acknowledges yesterday’s share price de-rating, but believes there is a risk the macro outlook drives moderating active customer numbers which produces a leveraged slowdown in revenue and earnings.

Given the negative short-term momentum in sales and uncertainty with respect to second half consumer spending generally, Credit Suisse does not think investors need to “rush into” the stock at this stage.

Perhaps the most telling is a consensus target price cut in the FNArena database to $4.66 from $5.37. But that suggests 28% share price upside from the current trading price.

Barrenjoey has cut its target to $4.80 from $5.60, while Goldman Sachs has cut its target by -14.5%.

To $6.50.

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