Temple & Webster is on a High, But Competition is Catching Up

Summary

• Temple & Webster has completed fresh equity raise of $40 million via a fully underwritten offer.
• TPW would use the funds to provide balance sheet flexibility and capitalise on arising opportunities.
• It has agreed for a small investment in an offshore start-up, which develops artificial intelligence interior design tools. A long-term contract was also signed to use the services.

Online furniture and homeware retailer, Temple & Webster Group Ltd (ASX:TPW) has joined the list of companies that raised equity capital when their share prices were near to life-time high levels.

TPW has completed an equity raise of $40 million. The fully underwritten institutional placement was conducted at an offer price of $5.70 per share. Under the capital raising plan, the company would be issuing around 7 million new shares, which are expected to be settled on 7 July.

Funds would be used to pursue strategic growth initiatives, capitalising on the structural shift towards online shopping. The company seeks to undertake the enhancement of its digital platform, in addition to further strengthening of the product and service offering.

In June, strong sales growth momentum continued, with gross sales growing 130% year-on-year to 28 June 2020. The company expects EBITDA to be over $8 million for FY20.

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Management believes that it is appropriate to strengthen the balance sheet through fresh capital, which would be used to benefit from any organic or inorganic growth opportunities when they arrive.

Temple & Webster has come across several opportunities for additional investments, and these include areas that could enhance its digital capabilities, as well as product and service offering. Among these opportunities, one is a start-up that develops artificial intelligence interior design tools.

The company has agreed for a small investment in the offshore start-up and entered a long-term contract to bring those artificial intelligence features to Australia in a market-first move.

Australian Market Opportunity

Temple & Webster noted that excluding appliances and DIY, furniture and homeware market size is around $13.9 billion. Online penetration in the furniture and homeware market of Australia lags other international markets.

The company believes that demographic and structural changes would drive strong market growth for years to come. Core demographic of the furniture and homeware market is between the age of 35 and 65 years; Temple & Webster noted that millennials are entering its core demographic.

According to TPW, some structural changes that are in favour of the business includes offline exits/store closures, new consumer habits, faster internet and mobile speeds, market entrants accelerating online shopping take-up, and new technologies improving experience and conversion.

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For market share growth, TPW intends to focus on:

• Adding depth and breadth across its core and adjacent categories; grow private label (import) division.
• Expanding digital capabilities: data, personalisation, AI, augmented reality.
• Increasing brand awareness from 35% to +80% through digital and non-digital channels.
• Adding inspirational content and service: video; 3D; AR/VR; design help.
• Exceptional customer service and a great delivery experience to drive repeats.
• Inorganic investments to strengthen T&W’s technology, product and service offering.

For year-to-date period ended 31 May 2020, the company recorded revenue of $151.7 million against $90.4 million in the previous year, while adjusted EBITDA was $7.9 million, compared to $1.9 million in the same period last year. Gross margin improved to 67.7% from 40.4% in the same period last year. Contribution margin is tracking above the target of ~15%, reaching 24% from 14.5%.

Will the sharks let Temple & Webster fish alone?

Furniture and homeware boast a number of large-scale players in Australia, including Bunnings, Harvey Norman, Nick Scali, Adairs, and Greenlit Brands. International brands like IKEA are also present in the country.

The list doesn’t stop there. TPW’s competition will also include many small businesses that sell furniture and homeware individually as well as store chains that we have not named.

Since COVID-19 forced businesses to shut their shops, businesses are increasingly willing to embrace the digitisation of their businesses, be it a small business or large-scale retailers. More established retailers in the furniture and homewares market have already launched their digital capability extensively.

Good Read: Significant Shift Towards e-retailing, Is Brick-and-Mortar Model at Perpetual Risk?

Over the course of future, there might be sustainability of competitive advantages of TPW. Established retailers would likely start responding more proactively if they were to experience sharp deterioration in their market share.

Incumbent large furniture and homeware retailers have a value proposition for customers, which Temple & Webster cannot offer: omnichannel experience. If customers intend to check/see the products before making a purchase, TPW could not offer that, but other retailers who have stores can offer.

Likewise, it would be hard for disruptive companies/new businesses to attract customers that have brand loyalty with an incumbent furniture and homeware retailer. It is expected that contribution margin of new companies will likely remain elevated to attract customers that are seeking value.

Of late, Kogan.com Ltd (ASX:KGN) has also jumped into the furniture and homeware ship, following its acquisition of Australian retailer Matt Blatt.

On 2 July 2020, TPW settled the day’s trade at $7.440, up by 17.908% from the previous close.

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