Are Temple & Webster shares a bargain buy following Tuesday’s 27% fall?

a man wearing a business shirt and pants reclines on a leather sofa with his laptop computer resting on his stomach as he looks concerned at what he's reading on the screen.

a man wearing a business shirt and pants reclines on a leather sofa with his laptop computer resting on his stomach as he looks concerned at what he's reading on the screen.

The Temple & Webster Group Ltd (ASX: TPW) share price suffered a massive sell-off after the company announced its FY23 half-year result yesterday. It fell by 27%.

Reporting season gives investors a true insight into how a business is performing, replacing the guesswork since a company’s last update.

With everything that’s going on with the economy, it’s understandable why the market is uncertain about a number of ASX retail shares, including an online homewares and furniture retailer.

However, with the release of Temple & Webster’s report, it’s not just overall market sentiment that’s hurting the company’s share price. There were also some downsides within the result.

The negatives in the update

The ASX share said that revenue fell year over year by 12% to $235.4 million. Temple & Webster explained that the comparative period (the first half of FY22) was significantly helped by strong e-commerce demand because of COVID-19 lockdowns.

It also said that sales from 1 January 2023 to 5 February 2023, the first five weeks of the second half, were down 7%.

The earnings before interest, tax, depreciation and amortisation (EBITDA) margin was only 3.5%, which the company said was in line with its guidance of 3% to 5%. However, the EBITDA margin was 4.7% excluding the company’s investment in The Build, its online home improvement start-up. It reduced its investment into The Build as it takes a “longer view” on the opportunity.

Temple & Webster also revealed that it reduced its marketing as a percentage of revenue. It was 11.8% of revenue, down from 13.6% for the prior corresponding period. It will return to ‘brand building’ from FY24 onwards.

As well, there were 840,000 active customers recorded in the FY23 half-year result, down from 940,000 at June 2022.

Here are some positives

While the company didn’t produce overall growth, there were some promising signs.

Since the fourth quarter of FY22, the ASX share has been focusing on accelerating cost base initiatives and profit margin improvements. In the second quarter of FY23, the gross profit margin of 46.5% improved 180 basis points (1.80%) compared to the prior corresponding period. It also noted shipping recovery improvements.

The month of December 2022, which wasn’t impacted by lockdowns or Omicron, saw revenue growth. The second quarter of FY23 saw EBITDA of $5.2 million, up 13% compared to the FY22 second quarter. I think that’s a positive for the Temple & Webster share price.

Temple & Webster is still targeting much higher profit margins in the longer-term, which could be very helpful for the bottom line.

The ASX share also revealed that the revenue per active customer increased 7%, thanks to an increase in the average order value and an increase in repeat orders. It said that 57% of orders are now from repeat orders.

Private label sales continue to grow as a percentage of total sales. In the first half of FY23, private label sales were 28% of the total, up from 27% in FY22 and 26% in FY21. This range offers “better price positions relative to offline” and it generates higher profit margins.

Home improvement revenue increased by 12%, representing 6% of the group. Trade and commercial saw 17% revenue growth, with a focus on margin growth.

My thoughts on the Temple & Webster share price

I thought the sell-off was overdone. I don’t believe the business is worth a quarter less than it was.

The company is still exposed to the same e-commerce tailwinds, it’s still planning to grow margins, it’s still talking about being profitable and getting back to growth this year. I think this is just a short(er)-term blip.

The situation over the next 12 months could be tricky, but investing is about more than just the next year. I think Temple & Webster shares could deliver substantial outperformance over the next three years as pessimism about the retail sector subsides and it invests for more growth.

The post Are Temple & Webster shares a bargain buy following Tuesday’s 27% fall? 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. has positions in and has recommended Temple & Webster Group. The Motley Fool Australia has recommended Temple & Webster Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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