Temple & Webster Spends Up For A Bigger Share

This story features TEMPLE & WEBSTER GROUP LIMITED. For more info SHARE ANALYSIS: TPW

Temple & Webster seems destined for strong growth, but at a lower margin as spending increases to grab more market share.

-Strong FY23 earnings for Temple & Webster
-Bullish medium-term revenue target
-Short term margins sacrificed for market share
-Jarden notes relative protection from the Amazon threat

By Mark Woodruff

Following FY23 results for Temple & Webster ((TPW)), analysts have raised 12-month target prices on bullish projections by management at the online retailer for longer-term sales and a targeted earnings margin of 15%. However, guidance for slimmer margins in FY24 and FY25 has somewhat dampened the mood.

Despite a weak demand environment, analysts feel the online furniture and homewares retailer is well positioned to continue taking market share as consumers trade-down.

While revenue of $396m was broadly in line with the consensus forecast, earnings (EBITDA) of $14.8m beat expectations due to higher-than-anticipated gross margins.

The new financial year is off to a flyer with the first six weeks of trading showing a 16% rise for sales, albeit the first quarter is cycling a relatively supportive comparison after a fall of -18% in the previous corresponding period.

This early trading clearly shows the company is outperforming the category. UBS notes the easing of several key revenue tailwinds including price inflation, as well as growth in both average order value (AOV) and revenue per customer.

While management lowered earnings (EBITDA) margin guidance for FY24/25 due to an additional spend on marketing to increase brand awareness and market share, the long-term earnings margin guidance of more than 15% was reiterated, albeit with no specific timeline.

This strategy of reinvesting in a period of cyclical weakness makes strategic sense and strengthens Morgan Stanley’s long-term positive thesis for the company based on scale benefits, share gains and margin upside. Unfortunately, the reinvestment will result in a sacrifice of near-term margins for sales growth in a period when competitors are challenged.

An updated revenue forecast was also issued with a three-to-five-year target of more than $1bn.

Macquarie forecasts a 20% compound annual growth rate (CAGR) for revenue over five years, in line with the bottom end of guidance.

The company’s three-to-five-year CAGR guidance is driven by core business growth of 19-34% for the Business-to-Consumer (B2C) and Homewares category, along with growth of between 27-49% for the expanding Business-to-Business (B2B) and Home Improvement segments.

Artificial intelligence (AI) is also expected to play its part. Management is expecting improvements via productivity gains and customer conversion from the technology resulting in guidance for fixed costs (employees and overheads) falling to less than 6% of sales in five years time, from around 12% currently.

As a result of AI employment, Macquarie allows for increased AI-led opex leverage in the latter years of its forecast period.

The customer conversion rate for Temple & Webster fell to 2.8% from 3.2% in FY23, while revenue per active customer rose by 6% to $477 from $451 in the year prior.

The company has completed $12m of the current $30m buyback, which was initiated in March 2023, when shares were trading at around $3.40 per share versus $6.46 at the time of writing.

The balance sheet is strong, observes Macquarie, with a 30-June net cash balance of $105m and free cash flow (FCF) of around $12.3m post buy-back. Management has "room to deploy funds" to support organic and inorganic growth plans though will do so in a "disciplined way, remaining profitable at all times."

The Amazon threat

Jarden expects online penetration to reaccelerate through FY24, aided by increasing focus on value, improving industry logistics capabilities and a growing focus on convenience.

While there is the ever-present sector risk from Amazon, the analysts believe Temple & Webster is better placed than peers owing to its specialised market offering, bulk exposure and balance sheet position.

To upgrade from its current Neutral rating, the broker would like to see evidence of a sustained reacceleration in market share (as occurred in July) and a return on investment from the increased marketing spend.

Outlook

Management commentary suggests to Macquarie any potential acquisitions will be focused on either disruptive technology, or businesses in the Home Improvement or B2B categories.

While Bell Potter believes the longer-term opportunities and ability for management to execute far outweighs peers, the total expected return forecast (at the broker’s unchanged $6.40 target price) is still less than 15%, so a Hold rating is maintained.

Earnings momentum has been a key driver of the share price to date, according to UBS. A combination of an elevated valuation and expected double-digit medium-term consensus earnings downgrades (due to the opex and marketing costs) keeps this broker Neutral rated.

FNArena’s daily monitoring consists of four brokers who actively cover Temple & Webster. The average target price of these four brokers rises to $6.58 from $5.15, which suggests only 1% upside to the latest share price. With the shares trading well above target in the three months prior to this week's result release, targets have merely caught up with the shares, including a positive response post market update.

Neutral-rated Jarden and Canaccord Genuity (Hold) are not monitored daily. Canaccord has a target of $5.20 but is yet to update its research for the FY23 result, while Jarden has increased its target to $6.50 from $3.88.

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