The e-commerce ASX share sector could be a good place to look for opportunities.
Businesses in the online retail world can develop good profit margins thanks to the lack of a physical retail store network and the benefits of network effects.
Once a website has been developed, the increasing sales volumes are likely to lead to fixed costs becoming a smaller percentage of revenue.
Here are two to think about:
Temple & Webster Group Ltd (ASX: TPW)
Temple & Webster is one of the leading furniture and homewares businesses. It sells more than 200,000 products from hundreds of suppliers.
It operates through a drop-shipping model. This means the products are sent directly to customers by suppliers, which helps with fast delivery times and also means that Temple & Webster doesn’t need to hold as much inventory. It does actually have a private label range though.
The e-commerce ASX share says that it has a large addressable market with accelerating online adoption. Excluding business to business, in Australia the estimated market is worth around $16 billion, with less than 10% of that sold online (between $1.1 billion and $1.4 billion).
Temple & Webster also points out that it’s profitable with strong revenue growth, it’s capital light and debt free.
That revenue has grown really quickly, with an acceleration during COVID-19. FY21 revenue surged 85% higher to $326.3 million. Revenue per active customer increased 12% year on year because of customers buying more often and spending more when they do. In the first couple of months of FY22, revenue had grown another 49%.
Management point to the benefit of the tailwind with the ongoing adoption of online shopping because of structural and demographic shifts.
Adore Beauty Group Ltd (ASX: ABY)
Adore Beauty is another e-commerce ASX share that is benefiting from the high demand for products and services online.
It’s a retail platform that sells almost 11,000 products from 260 brands.
With the release of its FY21 result, it said that:
Adore Beauty is executing a clear and robust growth strategy to cement its online market leadership position, and it is well positioned to capture market share in a large and growing market benefiting from structural tailwinds.
Just like Temple & Webster, the business is also its average customer spend more. Annual revenue per active customer rose by 7% to $219, driven by “strong” customer retention and increasing average order value.
The business is experiencing higher levels of profitability. Whilst FY21 revenue grew 48% to $179.3 million, beating guidance, the gross profit margin increased by 1.2 percentage points to 33.1%. Despite the heavy levels of investing, earnings before interest, tax, depreciation and amortisation (EBITDA) jumped 53% to $7.6 million.
The e-commerce ASX share expects to maintain a 2% to 4% EBITDA margin in the short-term to medium-term while re-investing to drive above market growth. In the long-term, scale benefits are expected to increase operating leverage and deliver further EBITDA margin expansion.
In the first few weeks of FY22, Adore Beauty saw a revenue increase of 26% year on year.
It’s currently rated as a buy by the broker Morgan Stanley. The price target is $6. The broker is attracted to the potential of the business over the long-term.
The post 2 leading ASX e-commerce shares that could be buys in October 2021 appeared first on The Motley Fool Australia.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Temple & Webster Group Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Adore Beauty Group Limited. The Motley Fool Australia has recommended Temple & Webster Group Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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