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Is Temple & Webster (ASX:TPW) the best ASX retailer?

Shares in Temple & Webster Group Ltd (ASX: TPW) reached an all-time high of $15 yesterday. Is it the best ASX retailer?

Shares in online retailer Temple & Webster Group Ltd (ASX: TPW) reached an all-time high of $15 yesterday, just two days after the company released an FY22 trading update.

TPW share price

Source: Rask Media TPW 1-year share price chart

For a full breakdown of TPW’s recent update, click here to read my colleague, Jaz Harrison’s article: Temple & Webster (ASX:TPW) share price surges on strong FY22 update.

The update follows the retailer’s strong FY21 results. Here are the main points in case you need a refresher.

  • Record FY21 revenue of $326.3 million, up 85% on FY20
  • Q4 revenue up 26% despite cycling against even stronger Q4 FY20 comps
  • Record earnings before interest, taxation, depreciation and amortisation (EBITDA explained) of $20.5 million, up 141% on FY20
  • Net profit after tax of $14 million
  • Cash balance of $97.5 million and no debt

Accelerated investment

As of 30 June 2021, Temple & Webster now has over 778,000 active customers, or an increase of 62% on FY20. Realistically, a lot of these newly added customers will likely churn when international borders open as spending gets redirected back into the travel sector.

However, management is using this opportunity to accelerate investment into things like marketing, new staff hires, data analytics, and augmented reality to help drive conversions.

It might sound counter-intuitive to focus on marketing when the company has already had a heap of free exposure from the pandemic. But if it can reinforce its brand image soon after attracting lots of new customers, it can further strengthen its first-mover advantage, which could drive repeat sales.

Customer acquisition costs (CAC) rose from $46 to $58 in FY21 in light of higher TV advertising.

However, this was still far below the average revenue per customer of $426 which was a 12% gain on FY20.

My take

Sacrificing short-term profitability to drive longer-term growth is an approach that’s been taken by other ASX companies recently, including Redbubble Ltd (ASX: RBL) and Kogan.com Ltd (ASX: KGN).

In Temple & Webster’s case, this seems to be appropriate capital allocation from what I can see. While retail doesn’t have a whole heap of obvious competitive advantages, a first-mover advantage can lead to significant scale benefits, which makes it increasingly hard for other players to enter that can’t boast the same strong unit economics.

Management is aiming for around $1 billion in revenue over time as online shopping is further adopted. It also flagged the possibility of international expansion in its recent update, which is something else worth monitoring.

I think Temple & Webster is one of the better retailers on the ASX, but I’m not rushing in to buy shares at the moment. With COVID pushing up sales to the extent that it has recently, I find it difficult to get a sense of how things will normalise post the international borders reopening, whenever that may be.

I’d rather be looking at companies now that aren’t facing potential large headwinds in the near future. Temple & Webster is a hold for me.

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.
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