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Temple & Webster or Kogan shares?

A number of the ASX’s greatest stars in 2020 had been e-commerce companies, which skilled unprecedented demand as COVID pulled ahead on-line penetration charges.

This noticed Temple & Webster Group Ltd (ASX: TPW) and Kogan.com Ltd (ASX: KGN) shares soar to lofty heights, solely to slink again down as ASX on-line retailers misplaced their shine.

Let’s check out which of those two standard ASX e-commerce shares could possibly be a greater purchase.

Evaluate the pair

Earlier than I current a bull case for every firm, right here’s a fast abstract of how these two ASX e-commerce shares stack up throughout some headline metrics.

As you’ll be able to see, regardless that Kogan generates considerably extra income, Temple & Webster’s superior gross margins imply that extra {dollars} filter by to gross revenue.

Kogan Temple & Webster
Market capitalisation $380 million $670 million
FY22 income $719 million $426 million
FY22 income development -8% 31%
FY22 gross revenue $184 million $193 million
FY22 gross margin 26% 45%
FY22 adjusted EBITDA $19 million $16 million
FY22 internet revenue after tax -$35 million $12 million

The case so as to add Kogan shares to your cart

The only bull case for Kogan is that shares have been oversold. The Kogan share worth has been slashed by 59% this 12 months. It’s at present sitting at $3.55, a painful 86% decrease than the all-time excessive of $25.10 it reached in October 2020.

In hindsight, it’s simple to see the market lapped up the COVID hype and bought properly and really carried away.

However Kogan shares have fallen so removed from grace that they’re now down greater than 50% in comparison with pre-COVID ranges.

That is regardless of the retailer bringing in $280 million extra income and having 2.4 million extra clients in comparison with FY19. However crucially, what hasn’t grown is the corporate’s backside line.

Nonetheless, Kogan’s development story has lengthy been underpinned by taking an even bigger slice of the pie out of a fast-growing market.

The e-commerce tailwind will probably propel the trade for years to come back, all of the whereas Kogan’s market share has loads of room left to run.

NAB estimates that within the 12 months to June 2022, Aussies spent $55.72 billion on on-line retail, representing 14.5% of complete retail gross sales.

In the meantime, Kogan’s market share sat at simply 2.7% in FY21, up from 2.4% in 2020 and a pair of.1% in FY19.

Short-term blip

Administration took a wager that COVID-accelerated demand could be the brand new regular. Kogan has since candidly admitted it bought it unsuitable, which led to extensively reported stock woes. 

Bulls will argue this was merely a blip and that the long-term development story stays firmly intact. If not stronger than ever, supported by a rising, loyal buyer base and varied development levers on the firm’s disposal.

Importantly, the ASX retailer has confirmed its enterprise mannequin could be worthwhile and it’s proven potential for working leverage to kick in.

The corporate has set an formidable goal of reaching $3 billion of product sales in FY26, which interprets to an annual development fee of 26%. 

It’s additionally aiming for a million Kogan First subscribers, which might bolster buyer loyalty and repeat purchases whereas offering a significant recurring income stream.

If the founder-led administration workforce can ship on these medium-term targets, with out consuming into margins, the enterprise could possibly be value multiples of what it’s in the present day.

The case to furnish your portfolio with Temple & Webster shares

Equally to Kogan, Temple & Webster is benefitting from the shift to on-line. However the tailwinds blowing at Temple & Webster’s again are arguably stiffer. 

COVID accelerated plenty of development and noticed individuals searching for furnishings on-line for the primary time. Anecdotally, it’s simple to see Temple & Webster’s rise in prominence as household and buddies flip to the corporate as a vacation spot web site for ease and comfort.

However the trade continues to be within the early phases of on-line penetration.

The Australian furnishings and homewares market lags the net penetration seen in different western nations. In 2021, on-line penetration was within the vary of 15-17% in Australia. However within the UK and US, penetration charges had been above 25%.

As we play catch up and extra of the market strikes on-line, Temple & Webster, as the most important on-line participant in Australia, is in a first-rate place to pounce.

In FY22, its market share of the full furnishings and homewares market in Australia sat at simply 2.3%. That leaves an extended runway for development, particularly as the corporate goals to extend its model consciousness from 61% to 80%.

What else is there to love?

Operationally, Temple & Webster additionally has a myriad of things working in its favour.

Importantly, it’s gained over shoppers, boasting swarms of optimistic critiques on web sites like Trustpilot with scores greater than its rivals.

The corporate is thought for its expansive vary, providing greater than 240,000 merchandise from 500 suppliers throughout 210 classes.

That is made potential by a various and dependable provide chain and distribution community. 

In contrast to Kogan, Temple & Webster utilises a drop-shipping mannequin for third-party merchandise so it’s largely shielded from stock danger.

Because of this as a substitute of shopping for all the merchandise upfront, paying cash to retailer them in warehouses, and dispatching them when a buyer makes an order, that is all dealt with by third events. Plus, it implies that Temple & Webster doesn’t carry the danger of merchandise not being offered.

In FY22, 73% of the corporate’s gross sales went by the drop-shipping community. The remaining 27% had been higher-margin non-public label merchandise, the place Temple & Webster takes on the stock danger and fulfils distribution duties.

Working within the furnishings house additionally comes with benefits over different retail classes. Furnishings is the next margin class in comparison with, say, shopper electronics and home equipment. 

And many of the class is offered underneath the retailer’s model relatively than the provider’s. This permits for extra catalogue differentiation and means there’s extra alternative for higher-margin initiatives, corresponding to non-public label merchandise. 

Trying forward, the corporate has been ploughing a reimbursement into the enterprise to spend money on its digital capabilities and broaden into new verticals, corresponding to residence enchancment and commerce and business.

Prudently, the corporate not too long ago heightened its deal with profitability, upgrading its FY23 EBITDA margins to 3-5%.

Higher ASX e-commerce purchase

Each Kogan and Temple & Webster are benefitting from the structural shift to e-commerce.

However for me, it’s onerous to go previous the primary participant in a extra focused trade rising at a sooner clip. And that participant is Temple & Webster.

The present atmosphere will probably proceed to be risky as we battle hovering inflation, rising rates of interest, and a precarious housing market.

However taking a long-term view, I’m assured {that a} sizeable portion of the furnishings and homewares market can be on-line. 

And I consider Temple & Webster is in a robust place to capitalise on its first-mover benefit and gobble up extra share of what’s already a really large addressable market.

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