Temple & Webster Embraces The Future

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An exceptional earnings beat from Temple & Webster was driven by a simultaneous increase in both revenue and margins, with a little help from AI.

-Temple & Webster ‘s H1 blew away earnings forecasts
-Revenues and margins both higher despite marketing spend
-AI the primary driver behind margin expansion
-Cash flow offers balance sheet flexibility

By Greg Peel

The highlight of online furniture and homewares retailer Temple & Webster’s ((TPW)) first half result was the company’s capacity to grow both revenue and margins over the period, leading to an earnings result that blew analysts’ forecasts out of the water, and led to a 12% share price jump on the day.

A key concern for investors, Jarden notes, heading into the release, was marketing spend that would typically weigh on margins. But it was not to be.

Revenues grew 24% year on year in the first half, 1% ahead of consensus forecasts, and ahead of 21% guidance provided in October, but cost of doing business came in -6% below. Earnings grew by 76% –47% ahead of consensus– while margins came in 4.2%, above guidance of 1-3%.

How did they do it? Well, the future, it seems is here.

Over the period, more than 60% of all customer interactions were handled by AI, Macquarie notes, resulting in a -50% reduction in customer care costs since the first half of FY23. AI improved revenue per visit by 3% and increased shipping price accuracy by 17%, supporting margin improvements.

Fixed cost as a percentage of revenue declined to 10.5%, below 11% year ago. Management reiterated long-term guidance of less than 6% of sales for fixed costs, a target Macquarie expects to be reached by FY30.

Further highlights for Jarden include: Exclusive Product & Private Label up to 45% of sales (versus 37% a year ago), with exclusive label only accounting for 24% of total Home Improvement sales; marketing reducing as a percentage of sales (from 16.1% to 16.0%); repeat orders increasing by 1.8% to 58% and likely to be a significant contributor to growth as Temple & Webster increases its focus on building brand awareness to reach its long-term target of 80% repeat orders; and, as noted, AI driving cost stabilisation, particularly in customer service costs.

Can it Last?

Temple & Webster’s product offering and range is resonating with a more value-conscious consumer, Canaccord Genuity concludes, in a tough macroeconomic environment and a weaker homewares and furniture market, which has seen the company’s share of the $19bn-plus Australian market increase to 2.9% from 2.3% in October 2024.

Yet, while the company grew revenues in the first half by 24%, and by 27-28% over November/December, the first six weeks of the second half saw revenues only grow by 16%, compared to 22% consensus, when January, notes UBS, is a seasonally important month.

Was it all just a dream?

Is January still a seasonally important month? Retail sales data have been shifting in the past couple of years to peak growth in November (Black Friday) and away from the traditional December Christmas rush and Boxing Day/January sales period. Temple & Webster did not shy away from Black Friday deals in 2024.

Brokers are not too fussed. Sales growth did accelerate in the first ten days of February to 19%, and revenues were cycling 35% growth in the year before. Comparables get easier to cycle through the remainder of the year, Citi notes.

Temple & Webster has the marketing budget flexibility to help drive revenue growth, Jarden suggests, and revenue per available customer will no longer be a headwind, having returned to growth of 2% year on year in the first half compared to -3% seen in FY24.

Guidance has been maintained for FY25 earnings margins of 1-3% and revenue of $1bn between FY26-FY28.

Citi sees potential for the company to accelerate its marketing investment in the second half, given the opportunities that will arise from an improving consumer backdrop. The prospect of multiple RBA rate cuts in 2025 presents a good consumer backdrop for Temple & Webster to invest in brand and marketing to drive further top-line growth, Citi suggests.

Multiple rate cuts may yet depend on developments across the ocean.

Capital Management?

Margins were the highlight of the first half result, and so was free cash flow. The business continues to generate material free cash flow, UBS notes, which will support the share buyback in place.

Free cash flow of $33m versus earnings of $13m is a good reminder of the benefits of a negative working capital and capex-light business model, Morgans Stanely points out.

The company ended the half $139m net cash, providing flexibility, Macquarie suggests, for both organic and inorganic opportunities.

Bell Potter continues to be very positive on the outlook for Temple & Webster as a nimble e-commerce retailer offering growth ahead of peers and with the potential for accretive capital management or as an executor of longer-term opportunities in channels and/or regions given the strong cash balance.

Targets Surge

The consensus target among the six brokers monitored daily by FNArena has increased to $16.95 from $12.52. That’s a big jump, but the share price has rallied even harder, with the shares currently trading around $18.23.

Outside of daily coverage, Jarden has lifted its target to $18.65 from $14.01, and Canaccord to $17.50 from $13.00. RBC Capital continues to rate the stock an Outperform (equivalent of Buy) and has upgraded its price target to $19 from $16.

Macquarie, Morgan Stanley and Citi all have Buy or equivalent ratings, as does Jarden.

Temple & Webster achieved strong sales growth supported by increasing active customers, improved sales conversion (leads converting to sales) and increased revenue per customer. Going forward, Macquarie expects AI to drive further revenue growth and margin expansion.

The key highlight of the result for Morgan Stanley was the 4.2% earnings margin, which is another step towards management’s long-term margin target of 15%-plus. This broker is increasingly confident Temple & Webster can achieve all targets.

The first half margin beat should allay some investor concerns, however Morgan Stanley expects long-term margins to remain the key investor pushback. This will take time to prove.

Home improvement sales have now doubled over the last two years (albeit off a small base). This is a big market, Morgans Stanley notes, featuring a total addressable market of $17bn, with online migration tailwinds and no dominant online player. The broker thinks Temple & Webster is well positioned to succeed in this adjacency.

AI benefits have been very tangible on the cost side and Morgan Stanely expects the next phase of AI investment to focus on growing sales with the company set to launch its “personalised store” in the second half. A more customised website, based on a user’s preferences, should drive higher sales conversion rates.

Positive observations around top-line growth and margin expansion in the long run overshadows the weaker-than-expected trading update, Citi suggests. Dynamics allowing the company to continue to take market share remain intact. Citi remains positive on Temple & Webster heading into a consumer environment likely supported by multiple rate cuts.

We can but hope.

Management is looking towards an earnings margin in excess of 15% in the long term. Jarden is more conservative, applying a 12.3% estimate. Yet when adopting Temple & Webster’s margin targets, there is 30%-plus upside from the current share price and Jarden sees further upside if the retailer is able to reaccelerate sales when interest rates fall and/or by increasing marketing spend.

Jarden reiterates its Buy rating, as confidence in the long-term thesis grows.

Ultimately, Canaccord Genuity believes Temple & Webster has never been in a better place financially and operationally with core metrics on traffic, website conversion, NPS and brand recognition setting itself up for long-tailed growth where it currently retains a small market share (2.9%).

In game theory, strategic dominance refers to a situation where one player has superior tactics regardless of how their opponent may play, Canaccord notes, leading the broker to posit: With $139m cash on hand and a market-leading position in online who is going to beat it?

Barrenjoey might be most conservative in the market right now, having lifted its price target to $13.15 from $11.50 alongside an unchanged Neutral rating.

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