Temple & Webster emptied my bank account!
A Financial tear-down of the millennial's homeware retailer.
My suspicions arose on the third consecutive day he visited the house.
The overly friendly man. Pearly white teeth, charming smile.
He comes bearing gifts. Gifts for my wife.
She awaits this mysterious man every day, constantly checking her phone and emails for updates.
She leaps with excitement as he pulls his van into the driveway.
Greeting him at the door, she engages in some small talk. With a smirky grin he offers to haul these gifts into the house.
She always accepts.
Piles of nondescript, cardboard boxes fill the floor of our unfinished dining room. The boxes are unopened — left to be ceremoniously revealed on the weekend.
“Delayed gratification” my wife says, “something to look forward to”.
To break up the monotonous routine of COVID-19 lockdown I gather…
Because apparently I don’t have anything better to do than spend my weekends sitting on the floor, attempting to assemble the 25 piece Southampton Bedside Table , purchased to match the Dana Kinter Wattle Quilted Dark Green quilt cover from Adairs, or the Jacob Faux Leather Wingback Armchair to match the Shaggy Cow Framed Canvas Wall Art , which is weirdly positioned to stare at our marital bed…
I soon learn the name of this mysterious man.
This secret admirer that comes bearing gifts on the daily.
He’s also responsible for blowing out our monthly savings budget.
A homewrecker and a thief…
His name is Temple & Webster.
Ok, hate is a strong word. But I’m sure you can relate to this in some way.
There’s a high change that you or your significant-other spent a lot more time online shopping during lockdown.
It makes sense, right?
We’re stuck at home. We’re bored. Anxious. Frustrated. Lonely.
In times of stress we resort to retail therapy to fill our emotional void.
The problem is Wanderlust is cancelled in 2020, so we can’t book holidays. We can’t leave the house, so buying new clothes to show off to friends is somewhat redundant.
Instead, we channel our spending to things that will improve our immediate surroundings.
Furniture, BBQs, outdoor settings, carpets, beds, quilt covers.
Furnishings to make our space more ‘liveable’.
Objects to fill the empty spaces…
eCommerce is crushing it
eCommerce is the sector that has seen explosive growth as a result of COVID-19.
According to a 2020 eCommerce report by Australia Post, “online sales rose by 80 per cent year-on-year in the eight weeks that followed the World Health Organisation’s declaration of a pandemic.”
Data from consulting firm shows in the US market, eCommerce as a percent of total retail sales has grown from around 15 percent to more than 30 percent.
“If you’re feeling whiplash, it might be the 10 years forward we just jumped in 90 days’ time,” McKinsey said.
As the aphorism goes: ‘A rising tide lifts all boats’. COVID-19 has been the tide to accelerate the growth of eCommerce.
This is particularly true if you are in the business of selling homewares online as people improve their surrounding environment.
Within Australia, Temple & Webster is the brand perfectly placed to capitalise on this confluence of events.
So, how much so?
In this financial teardown, we’ll be looking at how COVID-19 has helped Temple & Webster’s bottom line.
We’ll be looking at:
- Revenue growth in the last quarter
- Unit Economics, to see if it was good growth or vanity growth.
How COVID-19 has helped sales
Temple & Webster has had a record year of revenue growth and profitability, with most of the gains happening in the 2nd half of FY20. In the 6-month period to up to 30 June-20, revenue grew almost doubled (96%) compared to the first 6 months.
This growth in revenue has been primarily attributed to growth in active customers and orders.
Active customers grew exponentially in the June-20 quarter, corresponding directly with repeat and first time orders. This is no doubt correlated to when Australia went into lockdown in March-20.
So was this all vanity metrics?
The marketing ROI and Revenue per Active Customer indicates that’s not the case.
Marketing ROI, calculated as Gross Profit (after delivery costs) / Customer Acquisition Costs ( CAC) was ~2.6x at 30 June 2020.
Average CAC per customer was $46. With an average revenue per customer, of ~$375, it cost the company ~12% of marketing to acquire customers — which is around the ballpark of what an eCommerce business should budget.
Overall, this means profitable growth.
Let’s break this margin down a little further by looking at the entire P&L.
Unit economics tear-down
Before we start, I will say it is refreshing to see Contribution Margin reflected in the accounts of Temple & Webster’s financials, which was 15% at 30 June 2020
In other words, management have defined the difference between Fixed and Variable Costs.
This means that, at an average Revenue per customer of $375, Temple & Webster generates $56 of profit before covering fixed costs like wages and administration costs (15% X $375).
Why is Contribution Margin important? Because it’s a key ingredient into understanding the operational leverage that Temple & Webster, and more broadly product business models have.
Let’s look at the operating profit of Temple & Webster to demonstrate my point.
Although sales grew 74% (from $101.6M to $176.3M) compared to the previous year, Operating profit (EBITDA) grew over 4.5x, from $1.5M to $8.5M.
This is because the fixed costs have not grown as the company has scaled. Temple & Webster hit it’s operating leverage inflexion point.
Another way to think about this is that any new growth in contribution margin dollars will directly translate directly to bottom line profit.
We can analyse this further by observing how fixed costs as a percent of revenue change as a company grows.
As you can see in this diagram, Temple & Websters fixed costs are reducing as revenue grows, with the difference translating directly to profitability. This is what you want to see in a scalable, eCommerce business.
As revenue grows, fixed costs shouldn’t grow at the same pace.
It’s not unreasonable to assume that a large percentage of incremental contribution margin growth from here on in will trickle down to profit.
Key takeaways on Temple & Webster
- Revenue growth has been primarily attributed to COVID-19 (call it a silver lining)
- Contribution margins have remained consistent, so growth is profitable
- Operating leverage has been driven by management of fixed costs, meaning that incremental growth in contribution margin has trickled down to operating profit.
💡 More on Operating Leverage
Operating Leverage is a key metric that analysts assess to understand the operational scalability of a business. It comes down to the mix of Fixed and Variable costs a business has.
The main question you’re trying to answer when it comes to operating leverage is: as sales grow, how much of that revenue trickles down into operating income?
If the operating leverage is high, more incremental revenue growth will trickle down to operating profit. Conversely, low operating leverage means less incremental revenue growth will trickle down to operating profit.
Importantly, there is no “good or bad’ when it comes to operating leverage. Every business model is different.
It’s about risk and return. Investors typically look at companies with high operating leverage potential because the chances of achieving outsized returns are greater.
It’s why Venture Capital firms are attracted to software business models — they have high operating leverage.
Operating leverage is also an indicator of operational scalability.
Read more on operational scalability in our blog “ Why your services business is hard to scale “
The big question: is this Pandemic Boom here to stay?
The eCommerce sector is on a tear and Temple & Webster has no doubt benefited from the pandemic.
The question is how much of the “new normal” is here to stay?
Based on a consumer trends report by Shopify, buying habits as a result of COVID-19, like everything else, have changed-maybe forever. According to the report
“53% of North American buys said that the pandemic has changed the way they will shop going forward”
Based on this data, it’s likely the mysterious man will be making more frequent visits to see my wife.
At least I know his name now.
Originally published at https://sbo.financial on September 24, 2020.
