World domination will have to wait. Temple & Webster’s foray into the lush and leafy homemaker market, valued at $16bn in Australia, will proceed with more caution for now. Bunnings will be relieved.
Revenue of $207.1m for the period was down -12% but the prior period was bloated by pandemic sales. TPW ended the half year with cash of $102.4m and no debt.
TPW wound back its spending during the period in recognition that sales were softening. This has partly buffeted the EBITDA margin which at 3.5% came within the guidance range of 3-5%. TPW reduced its advertising spend by 24% compared to last year.
Meanwhile, TPW’s excitable thrust to enter the home improvement market with its ‘The Build’ online offering has been brought to a canter. The initial $10m capex spend will be lowered to $6m after the company reported it had been a $2.3m drag on 1H23 earnings.
Revenue per active customer increased by 7% but the active customer base shrank to 840k (it was 940k at 30 June 2022). Repeat customers are just over half of the active customer base.
Sales for the first 5 weeks of 2H23 are down -7% although the prior period had been boosted by the Omicron outbreak.
Even so, TPW has tamed its usual enthusiasm and did not mention a return to double digit growth through FY23f.
Investment View
TPW’s moment of stardom seems to have passed. Now the challenge is to keep implementing its strategy and carefully manage its margins in relation to the rate of investment.
We think The Build was a case of trying to run before you walk, so the decision to take things a little more slowly is probably wise.
TPW’s business model is quite clever in that three-quarters of sales orders are delivered directly to its customers, bypassing the need to worry about inventory holding costs. The model is not unique, but TPW has shown in the past that it can execute it profitably.
In a post-pandemic era with consumers tightening spending budgets, TPW will face a more pedestrian pace of progress.
The share price reaction (-26%) suggested that investors are attributing a much higher risk factor to TPW’s earnings. This seems reasonable. The PE ratio historically has been wildly optimistic and must surely begin to reflect a more realistic earnings pathway. TPW certainly uses technology heavily, but fundamentally this is a consumer discretionary business
TPW’s stated long term EBITDA margin goal is 15% but the medium term range is 3-5% This required falling customer service costs and merchant fees, a lower proportional spend on advertising and marketing (one third of expenses), scale benefits with suppliers and operating leverage across the fixed cost base.
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.
Figure 1: TPW’s PE ratio has been overly optimistic
