Temple & Webster gets comfy as furniture sales growth continues through lockdowns

Shares in online-only furniture retailer Temple & Webster (ASX: TPW) rose almost 10 per cent this morning after the Sydney-based company reported strong sales over the past two months, following on from a very comfortable FY21.

The company saw its full-year revenue rise by 85 per cent to $326.3 million, while an active customer base that rose by 62 per cent also spent more on average per person.

EBITDA was up 141 per cent at $20.5 million, but statutory profit was only marginally higher than FY20 at almost $14 million due to high levels of reinvestment as distribution and marketing costs almost doubled.

"While we don’t take for granted how fortunate we are to be able to trade through lockdowns, we believe COVID has accelerated the shift from offline to online that was already in progress," says Temple & Webster CEO Mark Coulter.

"We remain focused on giving our customers a great experience, and hopefully having them enjoy their homes, even just a little bit more, during these tough times."

The momentum has continued in FY22 with 49 per cent revenue growth from 1 July to 27 August. This is much slower than the growth rate of FY21 in its entirety, however most retailers see their sales concentrated in the Christmas period, with TPW having recorded two-thirds of its earnings in the December half.

"While the start of FY22 has been difficult for many Australians, we remain focused on strengthening our customer proposition, built around having the biggest and best range of furniture and homewares, combined with inspirational content and a great customer service experience," Coulter says.

"With the new financial year starting strongly with sales up 49 per cent on last year, it shows the strength of the Temple & Webster proposition."

In a letter to shareholders, Coulter says the growth has been across all major categories, geographies, channels and demographics.

"Our market remains massive and subject to accelerating tailwinds, and we are well positioned to capitalise on our scale," he says.

"This year, we continued our investment in building our brand moat with the goal of becoming the top-of-mind retailer for Australians shopping for their homes.

"While we have a long way to go on this journey, the return on Investment from our experiments with TV advertising continues to be positive. We have expanded our brand marketing team and are now preparing plans for future campaigns."

The cost of acquiring new customers has increased, but Coulter says this has been somewhat offset by a 12 per cent rise in annual revenue per customer which now stands at $425.

Having its own inventory with 'private label' products has been an important strategy for Temple & Webster which has now lifted this segment to 26 per cent of sales.

"We have publicly stated a goal of increasing the share of revenue from these products to ~30 per cent, and it’s great to see the share grew from 19 per cent to 26 per cent in FY21," Coulter says.

"This was done by increasing our buying and merchandise planning teams, diversifying our factories outside of China, adding multiple warehouses (including Sydney), investing in data and analytics to improve forecasting accuracy, and expanding our quality and compliance team."

The company has also launched an augmented reality pilot which opens up the possibility of customers experimenting with how a given piece of furniture would look in their own homes.

"While there are many use cases for augmented reality, one of the more straightforward ones is seeing a product in your home, a feature which is now being piloted. AR can help customers judge the look of the item and its size relative to their room or other pieces of furniture. We believe features such as AR will continue reducing the barriers to buying online," Coulter says.

But this is not the only way Temple & Webster is looking at harnessing new technologies.

"During the year, we launched an artificial intelligence (‘AI’) interior design service. The AI-powered service is another feature unique to Temple & Webster, again designed to make shopping online easier," Coulter says.

"It is in partnership with an Israeli startup, in which we have made a second round of investment after a successful pilot of the service. The first version of the product is a 2D version with flat images, and the next version will use our 3D models to generate photo realistic rooms."

Non-executive chairperson Stephen Heath notes Temple & Webster operates in a furniture and homewares market worth $16 billion, where only 10 per cent has moved online.

"This is well behind other markets such as the US which is up to 25 per cent online penetration and showing no signs of slowing down," Heath says.

"This shift in spend will be driven by millennials as they enter their core furniture and homewares buying years. In addition to our core market, we also operate in the B2B and home improvement markets. These markets significantly increase our total addressable market to more than $30 billion.

"During the financial year, we made the strategic decision to strengthen the balance sheet with a $40 million capital raise. As a result of this raise and our record profit, we finished the year with a cash balance of $97.5 million and we remain debt-free."