TPW has the lofty goal of becoming Australia’s largest retailer of furniture and homewares. Seriously.
TPW’s FY22 revenue grew 31% to $426 million, slightly below what the market had expected, but EBITDA of $16.2 million was a positive surprise. The 3.8% earnings margin, post the $1.7 million investment in ‘The Build’, was 110bp higher than the market had scripted. The beat was attributed to stable gross margin at 45.2%, a reallocation of marketing dollars to higher yielding channels and some operating leverage.
TPW’s long term EBITDA margin of 15% is to be driven by scale benefits with suppliers, falling customer service costs and merchant fees, a smaller proportion of revenue for advertising and marketing costs and better operating leverage across the fixed cost base. All this will take time and TPW can push and pull levers as it deems necessary to achieve it.
There has been a subtle change in approach with margin expansion initiatives and the phasing of investments as opposed to reinvesting operating leverage that curtailed margins to 2-4%. The company has tweaked its margin optimisation and cost management programs so that FY23f EBITDA margin is guided to a range of 3-5%.
Investment view
The share price chart shows the initial exuberance that accompanied TPW’s meteoric rise in active customers and revenue, followed by the onset of growing pains and a dash of realism to its overcooked valuation. TPW’s five year revenue CAGR of 46% pa certainly impressed many investors and it was even more pronounced during the height of the pandemic.
The homewares and furniture market is large and reasonably mature, and consumers are becoming increasingly comfortable with purchasing such items online, which is TPW’s model. When combined with the company’s drop-ship distribution model (73% of orders are delivered direct from suppliers to customers), it has created a clever approach to business. TPW does operate 3 DCs of its own to cater for private label products (27% of orders). The supplier base has grown quickly to more than 500 providing customers with access to over 240k products (was ~180k in FY20). This gives TPW a negative working capital balance with limited inventory risk.
TPW puts extensive effort into the presentation of its product range online via its large in-house team of stylists, photographers and editors. Marketing represents 32% of expenses and grew by 34% in FY22. The average spend per customer is around $438 and 55% of orders (target 80%) are from repeat customers indicating a high degree of satisfaction with product and delivery.
In May this year, TPW launched its own online hardware website, The Build. This is an online-only approach to try and capture a slice of the large home improvement market ($16 billion addressable market for TPW). To date, more than 220 suppliers across 40 categories have agreed to provide products. TPW said it is on track for a modest $10-15 million of revenue in the first 12 months of operation.
TPW’s growth has been impressive but there is no escaping the reality that a more difficult economic environment could stymie its growth trajectory. Higher interest rates could slow consumer spending, and there is already a period of normalisation underway post the COVID lockdowns in 2022 that encouraged online spending more generally.
TPW’s international peers are facing similar headwinds. Wayfair in the US recently announced a 5% cut to its workforce citing slowing furniture and home goods sales. Made.com, a listed UK online homewares and furniture retailer, has revised its guidance as demand for discretionary big ticket items has been severely impacted by lower consumer confidence. Both companies’ share prices have fallen 70% and 93% respectively so far this year.
TPW’s model is already proven to be successful. The challenges are navigating a consumer environment that is presently less optimistic and managing the internal growth initiatives without damaging the cash flow and balance sheet. So far, so good.
Risks to investment view
Rising interest rates could soften the housing market in Australia and reduce demand for TPW’s homewares products. The launch of a new standalone brand targeting the home improvement market brings a new set of risks to the earnings profile of the company.
Recommendation
We have retained our Hold recommendation.
