Thank you for standing by, and welcome to the Temple & Webster Group Limited 2022 half-year results investor conference call. All participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. If you wish to ask a question, you'll need to press the star followed by the number one on your telephone keypad. I would like to now hand the conference over to Mr. Mark Coulter, Chief Executive Officer. Please go ahead.
Thank you, Ben, and good morning, everyone. It gives Mark Tayler and myself great pleasure to be presenting the results for the first half of FY 2022. We'll be running through the investor deck uploaded to the ASX this morning. Before we begin, I would like to acknowledge that I'm currently speaking to you from Gadigal land, and pay our respects to elders, past, present, and emerging, and celebrate the diversity of First Nations peoples and their ongoing connection to the land. The key messages for you to take away today are. The first half was a record result with revenue up 46% to AUD 235 million, which is a 218% increase on a two-year basis. This means the business has more than tripled in two years.
Importantly, we're a high-growth business pre-COVID, and we've grown throughout the period, even as states opened up from lockdown. While COVID has accelerated the underlying trends of online adoption in the furniture and homewares category, we are still significantly under-penetrated compared to markets such as the U.S. and U.K. Our second and third growth horizons are beginning to bear fruit. These new growth horizons are large and complementary addressable markets with scope for significant growth. Our B2B division grew 49% year-on-year, despite significant disruption to businesses around the country, and our investments in the home improvement category saw that area of the business grow 95%. Our operating leverage continues to allow us to increase our investment in the business across core capabilities such as sourcing, logistics, technology, and data.
Our strong debt-free balance sheet, combined with our asset-light business model with broad and diversified supply lines, have set us up to be the online market leader in our category for years to come. For anyone new to the Temple & Webster story, page four are the reasons why we exist and succeed. This page never changes. One of the reasons I believe we continue to outgrow many of our peers is that we focus on making our customers' homes and workspaces more beautiful. Practically, this means we curate our catalog and supply mix to ensure our customers trust our range. We prioritize investment in the creation of exclusive inspirational content and have a team of photographers, designers, stylists, 3D artists, editors, and videographers.
We invest in technology to help our customers choose the right items for their personal styles and home, including our AI, artificial intelligence-based interior design tool. We are not tempted to venture into other categories such as fashion, beauty, or God forbid, CE for a short-term revenue sugar rush. Instead, our vision has led us to the decision of going deeper in the home category by expanding our home improvement offer. Making the world beautiful one room at a time is more than just a statement. Every Temple lives and breathes this vision. It is this focus on our customers' homes that has led to an impressive 34% increase in active customers to more than 900,000. When we survey our customers, we consistently rank highly for brand attributes such as beautiful products and inspirational content.
While providing great value is integral to our offering, we believe being famous for our range and inspirational content is one of the significant moats around the Temple & Webster business. We remain asset-light, and three-quarters of what we sell is still drop-shipped and therefore carries no inventory risk. Having said that, expanding our private label division remains a key strategic priority. Private label represented 26% of the group's sales for half. We continue to invest in people and capabilities in this area, including expanding our buying and our planning teams, and our data science capabilities around forecasting and inventory management. We've also expanded our private label assortment into new categories such as baby and kids' furniture and homewares and cookware. Now, no doubt all of you have been reading and hearing about the significant supply chain issues that COVID has thrown at the world.
We have been impacted with production layer delays at source, shipping delays into country and warehouse and transport issues domestically. This has led to temporary dips in our customer satisfaction. The good news is that the inherent flexibility in our supply chain has allowed us to navigate and mitigate these headwinds better than most. We source from over 100 factories for our private label and have more than 500 drop-ship suppliers, which in turn are sourcing from thousands of factories around the world. For particular markets or factories that hit with delays, we've been able to substitute products within our range. Our asset-light strategy has also allowed us to quickly adapt to fulfillment strategies and stay ahead of logistical bottlenecks. Lastly, we have developed a transport control tower, which is analogous to an airport control tower.
Through technology and data integrations, we monitor the performance of every order in real time and anticipate and resolve delivery issues before they impact the customer experience. One of the highlights of the half was posting the sixth straight quarter of revenue per active customer growth, up 10% on the same period a year ago. This is a function of both increases in average order value and the repeat rate. Cohorts that we've acquired during COVID are still performing better than their historical counterparts, and our conversion rate trend continues to improve. To me, this speaks to the trust that customers are placing in Temple & Webster, especially when it comes to ordering larger and more expensive items for the home. The increase in conversion rate is also due to the significant increases in technology investment we made over the half.
We have increased the number of software engineers in the team by almost 50% and continue to staff up our data and analytics function. On top of this, we increased our investment into our Israeli technology partner, which has built an artificial intelligence interior design service. This AI tool powers our product recommendation mood boards, and we are working on extending the service into areas such as AI-generated display suite packages for our developer clients. We also have live trials of our 3D augmented reality service and have made good progress in building a library of 3D assets.
Our app installs are climbing, and our rating remains 4.8 stars across both iOS and Android. As we've previously talked about, we will be investing in our brand win to capture the almost 40% of the country who has never heard of us, and also to ensure we remain top of mind for our existing customers. While we have maintained our existing level of TV spend over the half, most of our efforts have gone into getting ready for a bigger push this calendar year. We've commissioned customer market research and engaged branding agencies to ensure the message and creative we launch with is on point. We do not believe this work should be rushed as a brand is so key to what we do. Finally, as I mentioned in my opening, we continue to make good progress on our next growth horizon.
Our B2B division grew 49% over the half despite tough trading conditions, driven mostly by a significant increase in repeat business. This side of the business represents around 7% of the total group, and we believe has much more room to grow. This half, we also increased our investment in our home improvement offering, adding both range and capabilities to this area. Revenue from these categories grew 95% versus PCP, and they now represent around 4% of the group. Again, our efforts in this space have only just started, and given the size of the market opportunity, we will be increasing our investment, adding category managers, merchant planners, and dedicated technology and logistics support. I'll now hand over to Mark Tayler to take you through the results in more detail.
Thank you, Mark, and good morning, everyone. It's great to share another set of results that demonstrate both our continued growth but also our strong executional capabilities. I'm gonna start on page 14. Now, this is not a new page, but it is important to reiterate our commitment to above-market growth and reinvesting for the future to be the number one player in our home market. What does this actually mean? Well, it means that we'll be running the business to the highest possible revenue growth rate while staying profitable and staying within a 2%-4% EBITDA range over the short to medium term.
We will continue to reinvest in areas such as pricing, promotional activity, and brand-building marketing, and also more fixed cost-type investment as well, primarily people and technology in areas such as mobile, augmented reality, artificial intelligence, 3D, our delivery experience, the size of our catalog and the private label range, and data and personalization. We're also allocating focus and capital to our second and third growth horizons in Trade & Commercial B2B and home improvement, where we think there is substantial opportunities, as outlined by Mark earlier. We expect these new businesses to have similar economics to furniture and home goods.
Longer term, we will take advantage of our market leadership position by leveraging our scale, strategic moats via improved trading terms, lowering marketing spend as a percentage of revenue as a result of much larger brand awareness, and lowering our fixed cost as a percentage of revenue as natural operating leverage comes through. Page 15 highlights the profit and loss results for the first half of FY 2022 in comparison to the first half of FY 2021. Revenue for the half was up 46% year-on-year to AUD 235.4 million and up 218% on a two-year basis, reiterating our position as one of the nation's fastest-growing retailers.
Although we have seen some inflationary pressures on product and freight, our diversified supply chain has allowed us to mitigate many of these challenges faced by other retailers with our delivered margin coming in at 30.5%, which was in line with what we had previously communicated to the market. You will see marketing as a percentage of revenue increased to 13.6% from 12.8% in the first half of FY 2021, which was a result of a step up in both performance and brand marketing in our pursuit of becoming a household brand name in our category. Pleasingly, brand awareness is heading in the right direction, with aided brand awareness now over 60%, as Mark mentioned. Contribution margin came in at 13.8% of revenue, which is within our stated target range of 12%-15%.
Fixed costs as a percentage of revenue reflect our investment in people and tech, while also investing in new growth horizons in B2B and home improvement. As we've seen in previous years, the full cost of the investments made in the first half will naturally materialize in the second half. As a result, EBITDA came in at 5.1%, slightly ahead of the full-year target range of 2%-4%. However, this 2%-4% full-year target range remains. Page 16 highlights the strength of our debt-free balance sheet position with cash at the end of the half of AUD 105.5 million off the back of a strong trading period and also the benefits of the Group's negative working capital model.
Private label stock levels at the end of the half were similar to those levels at the end of June 30. However, we've had a good amount of stock land in January and, you know, we're happy with the levels that we have and also the levels that are also sitting within our dropship network heading into the second half. All owned inventory metrics remain either within or better than our internal targets, which ensures our stock remains not only low risk, but also high turn. We increased our investment in our Israeli AI interior design startup to accelerate not only their growth and speed of product development, but also deployment. The initial investment was $650K USD, and we have increased our investment by up to a further $1.5 mil USD.
You will see this investment in the other column in the cash bridge. Pleasingly, our balance sheet provides us the flexibility to deploy capital to not only strengthen our core business-
Also the ability to invest into our new growth horizons as mentioned, which could be done via organic means or potentially via inorganic opportunities as well. Thank you all. I'll hand you back to Mark.
Thanks, Mark. Before taking you through the strategy, I think it's always worth reiterating the investment thesis of Temple & Webster. Many of you have heard this before, but it's always worth reiterating. On page 18, you can see that the 2020 market numbers from Euromonitor. Firstly, our core furniture and homewares market is large, and in 2020 was valued at AUD 16 billion. Secondly, you can see that Australia still significantly lags behind the U.S. and U.K. in terms of online adoption in that category. We know there's a lot of market growth ahead of us. In addition to this core market, we are now pushing into the complementary home improvement market. The next page gives you an indication of the size of this opportunity.
While some of the market is out of scope, and we grant you that, it's your building material, we have identified in-scope opportunity of another AUD 16 billion, which more than doubles our TAM or total addressable market. This market is even further behind furniture and homewares in terms of online penetration, and we estimate only a few percent of this market has moved online. We believe similar dynamics will play out in the home improvement category as they are in furniture and homewares. Millennials who have grown up buying everything online are now buying homes and furnishing them. Soon, they will also be renovating them. The convenience of our channel will cause a structural shift we've seen in other retail categories. Our flywheel is set out on the following page.
Essentially with scale comes benefits such as being able to forge closer relationships with suppliers, which enables us to obtain greater stock security, negotiate better terms, secure exclusive product ranges. We can make bigger investments in things like technology and data, as we are doing today, increase our brand awareness, and go deeper in private label. We can produce more content by having more creative resources. In effect, the bigger we get, the better and stronger our customer proposition becomes. Our strategy is simple. We will improve our range to ensure it remains the biggest, best, and most desirable to our customers. That includes expanding our private label range. We will drive our digital advantage, including making better use of our immense amount of data through initiatives such as personalization.
We continue our push towards national brand status to ensure we are the first place Australians turn to when shopping for their homes. In this half, we'll be kicking off our national brand campaign. Now, as big as we get, we will remain true to our vision of making the world more beautiful, and this includes inspiring our customers to take the leap in decorating their homes. We will add to our creative team and further invest in inspirational tools and content. We are constantly improving our customer care and delivery experience through our relentless focus on operational excellence, investing in our team, technology, and data capabilities. Of course, we will be continuing to invest in our future growth horizons, being Trade & Commercial and home improvements.
While TPW will primarily be an organic growth story, we will consider disciplined inorganic investments to accelerate our growth where it makes financial, strategic, and operational sense. Our trading update is on page 22. The second half of FY 2022 has started strongly with year-on-year revenue growth of 26% for the period first of January to 6th of February. Note that we are comping some very big growth rates, still from the period last year. On a two-year basis, it was actually up 161% versus 2020. While year-on-year growth numbers will remain volatile given the timing of lockdowns, we want to reiterate that we are a long-term growth story. We are only at the start of the significant structural transformation of retail. Finally, a big shout out to the Temple team.
Tripling the business while working from home and dealing with all the issues that COVID has thrown at us has not been easy. Thank you for your passion and hard work. We'll now take any questions you may have. Thanks, Ben.
Your first question comes from Tim Piper from UBS. Please go ahead. Pardon me. Your first question comes from Tim Lawson from Macquarie. Please go ahead.
Thanks for taking my questions. Just a couple. In terms of the private label, with the supply chain, any sort of impact on the momentum in the sort of penetration in that part of the business?
Definitely, I mean, there were some delays out of source and shipping, like most retailers have been talking about. As we said, you know, the good news is we have, you know, hundreds and hundreds of drop shippers, and we're sourcing from lots and lots of locations. So, yes, it probably would have grown a bit faster and represent a bigger business without the impacts of COVID, but it still did pretty well considering.
Yeah. Just a general comment on product availability, I guess, related to that sort of question, but across the broader business.
Now it's pretty good. Containers have been arriving, our drop shippers have stocked up. We're feeling pretty confident about our stock positions.
Yeah. You talked about sort of repeat customer performance, but can you sort of give us a feel for how much that increase in revenue per active customer is around those repeat customers? Should we expect as repeat customers become a, you know, larger part of the mix over time that revenue per customer should naturally increase with that mix benefit?
I mean, I would hope so. Of the 10% increase in revenue per active customer, the majority is from increase in repeat rate versus an increase in AOV. I mean, what, I think if you look at other retailers around the world that are a bit ahead of us, they've been able to grow active customers and revenue per active customer. Yeah, you're right. It's a function of cohorts getting better. I think it's also a function of people getting more comfortable with the channel and coming back more often naturally. You know, the early adopters tend to be a bit more fickle.
As we get into the kind of more mainstream shopper, they're a bit more loyal, and once you've got their loyalty, they stick with you for a while. I mean, my personal hope is that you'd see the revenue per active customer increase even as we grow our active customer base.
Yep. Last question for me, just the chart on slide 11 around the first-time and repeat customers within the B2B business. Just to, I mean, eyeballing that looks like the repeat rate, you know, is very strong. Is that the right assumption there? Effectively first-time orders are repeating, you know, very at a high conversion rate or consistency rate?
Yeah, that's right. The lion's share of the business is coming from repeat orders. I think the nature of the last half has been. It's probably been an aberration for lots and lots of reasons. We're still dealing with all the issues in the world, and there's been significant impact on businesses due to COVID. Lockdowns. A large part of our business is clients like in the hospitality industry, and obviously they've been affected disproportionately to other businesses. There has been issues and why the customer acquisition probably lags a bit.
The good part, the good thing about this business is once we get a customer, we do a good job for them, they usually have repeat orders because, you know, they may have multiple hotels or the developers of multiple sites, and so, they're very sticky, high lifetime value. That's why we really like this part of the business.
Okay. Thanks for taking my questions.
Your next question comes from Tim Piper from UBS. Please go ahead.
Morning, team. Apologies, I got cut out there for a moment, so if you answered this, sorry. Just a question on the revenue per active customer. It looks like your repeat rate's about flat half on half. Is a lot of that coming from the AOV increase? And is that a product mix factor or is that more, you're actually seeing customers adding more products to basket each time they transact?
Tim, you did get cut off at the very wrong time because the question was answered. Actually, most of the revenue per active customer came from increase in repeat rate as opposed to AOV. Repeat rate is increasing.
Okay. Got it. In terms of your marketing spend, it just looks like a bit more of the share is going towards repeat and existing customers now. Is that a targeted strategy around customer engagement, or is that more of an impact from some of the brand marketing that you're now undertaking?
Yeah, it's a really good question. I think it's obviously a bit of both. As we invest more in brand and more expensive channels, then the mix shifts and the percentage of the ad cost percentage changes. But there's more leakage with those channels as well because, you know, we can't run an ad just targeting new customers. TV doesn't know how you do that. Definitely as we move beyond, we, I mean, we have the sophistication now, so we have different levels of bidding in Google versus whether a new customer or a first-time customer. We'll actually upload the tag pools of customers onto Google so we know how much to bid on a repeat versus new. We obviously will bid far more on a new customer than a repeat.
TV can't do that. We will see more of our ad go to repeat. Is that a bad thing? I don't think so, because obviously we wanna make sure we're top of mind. You know, a customer may come in and out into our category over the year or years. If we're top of mind and we've seen an ad recently, then I think that'll help them come back to us versus looking elsewhere.
Got it. Now, I want to squeeze one other one on marketing in there. I mean, there's been a lot of talk and we've seen from some other companies, you know, obviously increase in cost per click and cost inflation within digital marketing more broadly. Maybe a comment on the balance of investment versus cost inflation within your CAC at the moment. Do you have any real insight on, you know, whether there's a structural kind of change or if you think this kind of eases, you know, as things normalize?
Yeah. Again, that's just a really interesting question. I think. Look, there's definitely been some inflation in our cost per click, far less than our increase in orders and revenue. And our customer acquisition costs, if you blend everything to a CAC or times everything to CAC, have gone up by a bit, as you can see. But what's helping us is increases in conversion rate and the increases of how much people are spending when they get to the site. We're in a fortunate position. We've got a relatively high average order value compared to many people in our category. You know, our site converts very well. We've got good brand. We've got, you know, hundreds and hundreds of thousands of ratings and reviews across the site.
We've got, we're in a fortunate position that we can drive our conversion initiatives to offset some of the inflation in CPC. We have in our cost per customer, there is a bit of digital inflation, but there's also the brand, the shift in mix of the brand. I think in sort of respect of your question around is it a short-term, long-term? I think what's happened, my take on digital marketing and what's happening with the retail environment is, you know, COVID happens, lockdowns happen. There's a flood of traffic online. Online retailers that were set up to grow ahead of COVID, as you know, I've always said we were fortunate enough to be match fit coming into COVID.
We were still growing 40%+ pre-COVID. We'd done a lot of work on our margin economics, done a lot of work on our digital marketing, done a lot of work on our supply chain capabilities and fulfillment capabilities. We were in a pretty good shape to capture the wave of customers coming in, and hence we grew faster than pretty much everyone in the category. Of course, what happened to the offline retailers were like, "Okay, stores are closed or my offline retail is down, I'm gonna turn to online," and marketing budgets and were redeployed online.
Now that's washing itself out, and as traffic kind of goes back to more normalized historical kind of growth rates, and customers start kind of going back into normal growth, there is probably an overhang in digital marketing budgets from particularly the online channel retailers, which may be temporarily driving up CPM. But look, unless you have economics like ours with high AOV, you know, good margins, good conversion rates, good repeat rates, it's not sustainable for some of those competitors to be, you know, bidding to such an extent. So I think it'll wash out and return to more normal levels. And look, if you look on a year trend, it's probably high. It is higher inflation than a two-year trend. So there's definitely a COVID impact in the numbers at the moment.
Yeah. Point taken. Thanks for taking the questions.
Thank you. Your next question comes from Aryan Norozi from Barrenjoey. Please go ahead.
Hi, guys. Just a high-level one from me. I mean, your business, as you said, you were growing sort of 40%, 50% pre-COVID. You're obviously a much bigger business now, so there's law of large numbers. Do you think I mean, there's a lot of volatility in the numbers, but is the way to look at your revenue growth moving forward a year-on-year basis, and you think you can still grow sort of 20%, 30%, 40% on those levels? Or should we be looking at your numbers pre-COVID and looking at the compound annual growth versus pre-COVID? How do we think about your business? Is the base where you are now, and you think the investment of 2%-4% EBITDA margins can make you grow to that 30%+?
How do we think about that, please? Any guidance would be helpful.
Yeah, that suspiciously sounds like guidance. I think, look, I mean, we think of the business as in long term, right? Quarter-on-quarter or month-on-month is less relevant. We think in structural terms. What's our total TAM? Where do we think online penetration will get to? And the 64,000-dollar question is in what timeframe? Even if we catch up to some of our U.S. and U.K. peers in the next couple of years, that's still significant growth. They're still growing. Don't forget, they haven't slowed. It's more a function of how big the total market will be. Then, of course, what's our market share?
We think we should be the biggest player in the online market given our capabilities and given everything we're investing in. You play that out, and you'll get to a sort of a CAGR over that period. That's how we think about it.
Yep. Perfect. Just a small one. The consulting costs, I think probably tripled, from AUD 0.8 million to AUD 2.5 million. What's that consulting for?
Yeah, I'll take this one, MC. There's another line, right? That other line actually incorporates quite a few things. Consultancy is one element of what goes into that other line. In fact, part of it is actually investments in technology that are enabling a variety of different areas in the business. There's some consultancy costs in there which are essentially longer term plays that bolster our and improve the scalability of some of the key areas in our business, i.e., logistics and customer care. It's actually a combination of quite a few things.
I would say that would stretch over the course of the next sort of few years. I don't expect to see that sort of growth coming through that line. There was a few investments made, you know, in the first half of FY 2022 that are really there to bolster, you know, some of these departments from a longer-term perspective.
Yeah.
Perfect.
just line-
Yeah.
Oh, sorry. Just yeah, I was gonna say it's definitely not management consultants, if that's what you're worried about. It is, as Mark says, the things like our data consultants. We've got a data agency which is doing data strategy with us. We've got a consultant to help us around our app and new platforms. We have security tech consultants. A lot of it is technology consultants.
Perfect. Last one, just around the balance sheet. You've got a pretty large net cash balance, and you're cash generative, so you're not gonna be sucking working capital as you grow. How do we think about uses of that capital, and in the context of M&A, please?
Yeah, it's a really good question. It's an interesting one. As we were heading into the COVID period, we were looking at M&A quite closely, actually. I think COVID hit, which meant that we did have to refocus our energy into managing a business that essentially tripled in two years as Mark mentioned. Look, but as you say, look, we've got, you know, we're in an enviable position, right? We've got over AUD 100 million in cash, no debt. The model itself is a negative working capital model. We're profitable. Mathematically, if we continue to grow, then, you know, we should be bolstering that balance sheet and those cash reserves.
We have been deploying some of our capital to organic means. We have increased our private label range and SKUs, which you would have seen over the last sort of couple of years. We have been building things like the largest 3D asset library in Australia in our category, and you know, we'll continue to do that. There are ways in which we are deploying some of this capital from an organic perspective, but it certainly gives us a bit of ammunition going into the second half, going into FY 2023, to also look at some inorganic opportunities as well.
I think we've actually, now we're in the mindset that we can actually start to look at this properly, and wrap some resources around this and some thinking around this, because we just haven't had the capability or the capacity really over the last sort of couple of years. It enables us to execute quickly. We always talk about if we were gonna do any sort of M&A, we would be around bolstering the strategic pillars in our business. Whether that's product range, our digital capabilities, brand awareness, some of the inspirational services that we've outlined, even things like customer service and our delivery experience.
You've also got some of the second and third growth horizons that we've spoken about today as well, where there could be some inorganic opportunities in those areas. I think now, you know, heading into this calendar year, you know, we've got a bit more head space now to be thinking about this in, you know, with a more mature mindset.
Perfect. Thanks, guys.
Thank you. Your next question comes from Wassim Kisirwani from Jarden. Please go ahead.
Yeah. Good morning, Mark and Mark. Can I just not belabor the point on marketing and customer acquisition, but just one question there with regard to first-time orders or showing some decline. Obviously, you know, we're digesting a period of remarkable growth. But just how do you think about that marginal return on that investment dollar with regards to first-time customers? Is it fair to expect that trend in first-time orders, you know, will continue to trend lower?
I think... Look, I think how we're thinking about it and what we told the market before is that, you know, with an ROI of, you know, 2.6 incremental margin versus our CAC, it's really high. In fact, a lot of our investors and shareholder base think too high. Why are we, you know, having such a high ROI on our marketing spend when we could spend more and as you say, push the incremental cost of a new first-time customer? Look, I think the drop in first-time customers you know, if you look on a year-on-year basis, it still looks pretty good. There was there was obviously lockdown effects and other things in those charts.
I think it probably, if you look at a normalized basis, first-time customers are growing. I think there's a lot of growth left in first-time customers, and you just look at that as the penetration chart for our category. How far we push it? I mean, we can definitely push it more. Even the incremental dollars we're spending and going harder in digital and going harder in TV, it's still delivering a 2x return. Now obviously we look at it channel by channel. You know, there's particular channels that we can push harder. We will go harder.
I have talked previously about, you know, we used to have the discipline of making sure every customer is profitable in their first order. We are experimenting with releasing that constraint to make it potentially first year revenue, the first year lifetime. We'll continue to push where it makes sense. You know, I don't think there's any. In our category there's no prizes, I don't think, for having the lowest CAC. I think it's actually having, you know, the marketing mix which optimizes growth and margin and what I believe we're trying to pull in in that period.
Great. Just a final question just on the investment, you know, timeline and horizon. You know, you've made the comment that, you know, the second half should sort of see an uplift there. With regards to that margin target, it's gonna, obviously, if the rates are growing, it'll prove difficult to hold that margin within that range unless there's a significant step up. Is it the case that you're just not needing to invest in things like price and promotions to the extent that you thought or are there sort of more elaborate ex-investment plans coming over sort of the second half and into next year?
Yeah, I'll take this one, MC. Look, there's a few things in that question, but essentially what the 2%-4% range does, it gives us a bit of, I suppose, some control within the business to work back from that number, if you know what I mean. For us, it's a metric whereby we're still profitable, but it still allows us to, you know, reinvest back into the business a significant portion. If you look at it in terms of first half and the second half, the natural sort of cadence of the business is pretty similar each year, whereby the first half is generally a stronger performing half in terms of profitability.
The investments are generally made within the first half because we do like to kind of see how the year's progressing to give us a bit of a sense of how, you know, the full year is gonna sort of play out. Some of those investments that we're making in the first half typically then, you know, materialize fully in the second half. That kind of gets you back into that 2%-4% range. But as a function of where we sit in terms of the market maturity, right? As Mark mentioned, you know, the online penetration is still super low in the category, and a lot of the peers that we're coming up against are deploying this sort of reinvestment strategy.
So for us, it gives us a model whereby we're still profitable, we're still cash flow positive, but it allows us to be reinvesting into those areas that not only build those, I suppose, strategic moats around the business and make us a lot more defensible going into the future. It also allows us the financial flexibility to be investing into some of these second and third growth horizons. Look, this is a short to mid-term strategy. As you say, over time, we will get to a point where you literally cannot be spending all of that operating leverage efficiently to get you back to that sort of level.
That's why on page 14, we talk about why there's a short to mid-term strategy, but also, you know, what the longer-term strategy looks like as well, which would be, you know, leveraging our size and our scale. That would then naturally be yielding, you know, a, you know, bottom line outcome, which would, you know, be more in line with the sort of outcomes that you'd be seeing for furniture and home goods retailers, both locally and globally.
Very good. Thanks, guys.
Thank you. Your next question comes from Scott Hudson from MST. Please go ahead.
Yeah, morning, guys. Just a quick question on, I guess, price inflation. Was there any benefit to the first half sales growth from, I guess, price increases coming through the channel?
Hey, Scott. I would say very, very minimal amount there.
In terms of, I guess, the outlook into the second half of 2022, what's your expectations in terms of, I guess, price increases on the back of, I guess, the supply chain constraints and raw material price increases that we've seen over the past six months?
Yeah, look, I think, you know, we go back to the strategy, right? Our strategy is we wanna be the fastest-growing retailer in our category. Materially increasing pricing points is probably not part of that strategy. I think what we would look to do, and you can see it in the first half results, there's been a bit of an impact there in inflation, and you can see it coming through the delivered margin line at 30.5% versus where we were in the first half last year. I think for us, you know, one of our strengths, I would say, now, is essentially the flexibility in our investment profile. What this short to mid-term structure allows us to do is flex our short-
Mm-hmm.
Short-term investment and our longer term investment as well. If we're seeing increase in sustained inflation coming through the cost of sales line, then it's more than likely that we would be holding prices. There may be some increases, but I don't think we'd be seeing material pricing points, increases coming through. I think for us, we'd much prefer to keep the pricing points relatively similar, let our competition increase their pricing points, and maybe we'll potentially scale back some of the longer term investments in the short term to enable us to, you know, to take that hit in terms of the margin. The bottom line is still remains the same.
Got it. Thanks. I guess just if you could remind me on, is there any sort of seasonality early in the second half of the year? I mean, I guess historically, you obviously delivered some pretty significant growth, and I know it's hard to sort of look at your growth numbers and unpick seasonality. Your understanding of the channel is generally the start of the third quarter a seasonally weaker period than some of the other quarters?
It is. Q1 and Q3 are essentially our lowest quarters in terms of revenue, dollar terms. Q2, naturally, is our highest revenue quarter.
Yep.
Closely followed by June. Obviously you've got Christmas and everyone getting their houses ready for Christmas. If you look at Q4, you've got a lot of end of year sales, and you've also got a lot of Trade & Commercial sales that come through for end of financial year as well. Certainly Q3, which is where we are at the moment. January is generally a pretty strong trading month. Typically what we see is when customers are in their homes, then they're usually pretty good months in terms of revenue. February, everyone goes back to work, credit card bills come through, kids are back in school. February is typically a lower month. March is usually pretty low as well.
Things start to ramp back up April, May, June.
Okay, thanks.
January is always a strong month.
Okay. Just in terms of, I guess, the home improvement space, I mean, in terms of online, obviously online penetration is pretty small. What's the, I guess, online capabilities of the existing peer group in that space?
Well, obviously, you've got the gorillas of the industry, and they've definitely been investing in their online capabilities. I think we would take a different customer proposition than them, and do more of. You know, our proposition, Temple & Webster Group's proposition is more around making your home beautiful inspiration, you know, more curated range, curated supplies, place to come to make your own beautiful. Now, that vision extends to home improvement directly. I mean, the same thing, whether it's, you know, loose furniture or, you know, fixtures in your wall, it's still the same concept that you're trying to make your home a more livable and enjoyable space for yourself and your family. I think, do we have confidence in our digital capabilities against, you know, the bigger players? I think we do.
I think we've got market-leading digital capabilities. I think the other thing about the home improvement sector is it's even more long tail than furniture and homewares. I mean, in furniture and homewares, we all can think of the national chains. Home improvement space, you get the big ones, and then it kind of gets smaller. Big ones maybe in each category, but then it gets quite long tail. That long tail obviously can't afford to have incredible sophisticated digital capabilities. We think the market structurally could actually even be better than furniture and homewares from a competition point of view. Margins are quite good, actually.
A lot of categories in home improvement, they're even better than furniture and homewares. Some are lower, some are higher. If you look at the home improvement retailers around the world, both offline and the emerging ones online, like in U.S. and U.K., you can see their ad profitability roughly the same or better than their peers in furniture and homewares. Yeah, we think we're quite excited about this opportunity even with the gorillas in the industry.
That's great. Thanks, guys.
Thank you. Your next question comes from Wei-Weng Chen from RBC Capital Markets. Please go ahead.
Hi, guys. Thanks so much for taking the question. Just the first one was on supply chain. I appreciate it's still a challenging environment and I guess who knows what might happen around the corner. In general, are you seeing supply chain issues subsiding?
I don't know if, Anthony, you wanna add anything, but definitely from a stock position, we're feeling more comfortable when things are arriving. From a domestic warehousing and transport point of view, those issues are much better. Now, you know, depots and particular areas are still being impacted by COVID and workers, and there are some delays still, but it is better than it was. Global shipping is still, I'd say, washing itself out and will take a little bit longer to get back to normal.
Yeah.
Yeah. Look, the only thing I would say there is, well, two things. One, I'm glad our products don't have semiconductors, so we don't have those sorts of issues and concerns. But I think I agree with Mark. I think we are seeing some improvements in both global supply chain, but also localized logistics as well. A lot of it's COVID impacted, particularly the localized logistics, whether it's warehouses, drivers and trucks. There was a big hit in sort of December, January, and also in Q1 and Q2 during the lockdown period as well. Definitely in the localized logistics, things have improved a lot.
We're seeing that not only from an external point of view in terms of talking to all of our providers, and we've diversified our group of localized logistics partners a lot throughout the period. We can see it in our own numbers as well. We can see it in our MPS numbers as well, that things are improving. In terms of supply, like I mentioned before, you know, we're going into this period in a pretty strong position. Private label levels are getting closer now to where we would want them to be heading into the second half.
We've got direct visibility into all of our drop ship networks, so we can see what inventory levels our drop shippers are sitting on and, you know, where they've all stocked up. You know, we're heading into this period feeling pretty confident.
Yeah. No, thanks for that. I think you just next question, I think you kind of touched on it just before, but I was just gonna ask about the margin of the growth areas, so Trade and home improvements. Is it broadly expected to be similar to furnishing?
Yeah. I mean, I think there's margin opportunities, but I think in terms of where I'm thinking about it, that if we Trade & Commercial and home improvement, you know, if they're match or be similar to the current furnishing home goods margins then we're okay with. That allows to grow those areas quite quickly. Yeah.
Yeah. Certainly at the moment, but things will be different at scale obviously, but at a larger scale. Certainly at the moment, B2B is pretty close to furniture and homewares, and so is our home improvement as well, DIY. They're both, you know, very similar to furniture and homewares at the moment.
We're. Yeah.
Okay.
We're running the business to that. Yeah.
Okay.
As Mark said, there are options on both areas to grow that margin.
Yeah. No, thanks for that. Then just the last one from me on the 2%-4% margins just for this year. Obviously we're seven months into this year. Can you maybe give some color on how to think about that range? What were the considerations in not refining that margin target today? If it's easier, maybe can you speak to, you know, what needs to happen to get to 2% and what needs to happen to get to 4% and kind of what will drive that?
Yeah. Well, it's all mathematics, right? Trading will be part of it. Look, to be fair, trading was part of the reason why we ran a bit ahead of the 2%-4% range in the first half is because we, you know, we had a lockdown situation thrown in the first half, which wasn't expected. You typically set your cost base for, you know, an expected outcome in the first half. Part of that reason why the 5.1% was higher than the 2%-4% was sort of driven by trading. Look, there's no perfect number, right?
Whether it's 2%-4%, whether it's 1%-3%, whether it's 3%-5%, you know, we're trying to strike a balance, I suppose, between ensuring that we stay profitable, but we've got enough leverage there to be reinvested back in the business in the short to medium term. Like I said before, there'll be some investments that were made in the first half, which it's primarily people. When we talk about those investments, it's primarily people into some of those key investment areas that we spoke about before. But when you're investing in people in the first half, obviously you're gonna see the full impact of that in the second half. Look, we at the moment, we still expect that to be within that full range.
I think the key thing for us is whether it's 3%, whether it's 2%, whether it's 4%, at the end of the day, it's relevant, but it's almost irrelevant as well. The key for us is making sure that we're growing as fast as we possibly can. We're taking it aggressively, taking as much market share as possible, so we can get to our goal of becoming the largest retailer in this category as fast as we can while staying profitable and cash flow positive.
Okay. Yeah, that's all from me. Thanks so much.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Annabelle Diamond from Credit Suisse. Please go ahead.
Good morning. Thanks for taking my question. First one is, you mentioned that customer satisfaction has been impacted by logistics. Obviously consumers are well aware of the disruptions that there's been. Have you had to make any permanent changes to logistics and fulfillment, as a result? I think as well, at your last result, there was some discussion around having more control over this part of the business. You know, can you share any progress that you've made there?
I think, look, I think there's most of the issues in the customer satisfaction, and it has been a bit variable. There have been periods which have been back of target and periods under. It really correlates quite strongly to periods where COVID is knocking out domestic transport leg. When customers are having to wait longer because, you know, a particular depot shuts down or Australia Post shuts down their depot or sends an email to the customer saying, "We're not picking up today." Now, some retailers have responded around the world to going heavier on logistics and owning more of the chain, you know, using their balance sheet and asset.
I still think our strategy of asset light acting as a middleware, if you like, between our customers and suppliers and logistics industry is the right strategy. It does allow us the flexibility to scale up and adapt and deploy resources very quickly. We haven't made any changes which are, you know, irreversible or going heavier into the asset side of logistics, but we've definitely gone heavier in terms of the capabilities, processes, technology. We have scaled up our logistics and operations teams. We have implemented technology, and I talked about, you know, the transport control tower where we're actually in real time now monitoring orders. We've got data feeds from our carriers. We intervene early.
We are meeting our carriers daily, to understand, you know, to make sure that our orders are prioritized. There's a lot more we're doing in that side. Likewise on the warehousing side, we're working with our 3PLs much closer, much more closely to ensure our orders are picked and packed and sent out, you know, within our goal. Do I think we can go tighter and exert more control? Yes, I do think so. However, we are kind of have to almost wait a little bit for some of the current issues around, particularly around COVID and workers maybe not get COVID to sort themselves out, so we can increase our integration even further.
Mm-hmm. Okay. That's great. I just wanted to follow up with respect to sourcing. You know, have you completed in your view your diversification of your supplier base, not just by numbers, but also by geography? Or is there sort of still a desire to continue diversifying that base of suppliers further?
I think the team is working on diversifying further. I think COVID has taught the world not to be reliant on particular markets or particular parts of the supply chain. We continue to make progress. We are diversifying, you know, throughout Asia. We have picked up factories also outside of Asia. Is the diversification finished? No. I mean, inventory is a slow-moving beast because you don't want to dramatically change your supply chain overnight. You wanna do it incrementally with products which you test. You don't necessarily wanna change if that sells and such. It is an evolution rather than a revolution.
Mm-hmm. Just to follow up on that, to finish up, in terms of ethical sourcing, how are you actually managing that, given you've got, you know, a growing supplier base?
Yeah. It's a really great question. We do a lot of work with our suppliers. The easiest part of supply chain to control is our private label. We have audited all of our factories both from a materials perspective from a modern day slavery perspective you know from a factory worker condition et cetera. We audit our own factories and we. If there's any red flags we either put them into almost a probation period until they improve or we will delist. That's the easiest bit to ensure. We're increasingly sourcing you know sustainably sourced material sustainably sourced parts of our range and you'll see that getting bigger and bigger over time. Drop shippers is a bit.
We are one step removed because they are the importer. However, we work with all the drop-shippers to also get them to order their factories. The focus actually this year and next year is to put the same rigor that we do our own factories to do that with our drop-shippers. Look, it's tricky because there are so many suppliers. However, I think we've also got more market power on our side because they're a bigger and bigger part of our suppliers' business. They are taking our requests more seriously. You know, and it's part of our job to ensure, you know, the industry and the supply chain, you know, does evolve and does move to more, you know, ethical and sustainable sourcing.
Okay. Great. Thanks very much for that and congratulations on the results.
Thank you.
Thank you. Your next question comes from Sophie Carran from Goldman Sachs. Please go ahead.
Yeah. Hi, Mark and Mark. Thanks for taking my questions. Maybe just one on the range expansion. I mean, the home improvement looks like it's done pretty well. If you could just talk about the impact you think this has had on the repeat purchasing behavior and areas that you're thinking about for further range expansion.
I think it's too early to say directly that home improvement has led to an increase in repeat rate. It's still small and it's still early days. If you think about the home improvement, it is a different time where you're renovating versus furnishing. My actual hypothesis is the home improvement may lead to an increase in the furnishing or home goods business. Because if we get the customer when they're renovating, then we'll probably get them, you know, months later when they, you know, or years, depending on your renovation later when you're furnishing your home. I think it's a bit early to say. I have to say.
In terms of the range expansion, I mean, we are constantly looking to expand our offering. Like, I don't think our current range. There are range gaps, style gaps, product, price gaps throughout the catalog. We're working with our wholesalers and our drop shippers to fill those. We are using our own private label to fill them. It's a constant expansion.
Great. Maybe just thinking about that investment that you're making into areas such as 3D or augmented reality and AI. Can you just talk on some of the metrics that you're using to measure the success of that investment?
Yeah. Everything pretty much, I mean, I think I'd say it's pretty much everything. Not everything, but 95%+ of any initiative that we roll out on site, we A/B test. We have our A/B testing tool that we split traffic into different lanes, and those lanes either see or don't see the initiative we've launched. That includes things like the AI interior design tool. It includes things like whether customers see our 3-D models inside. It includes things like do they see the link to the augmented reality tool to see the product in their homes using their phones. From that A/B test, we can look at what does it do to conversion rate? What does it do to average order values?
What does it do to overall revenue or page impressions or engagement, et cetera? We track everything. Clearly what we're trying to do is optimize revenue or conversion rates. They're the key metrics that we'll look at. We look at everything else as well. If an initiative may not directly increase conversion rate, but has a great impact on engagement, for example, and that's part of one of the things we wanna do, which is engage our customers and make sure they keep coming back to us for inspiration. That's a success as well. The success of the individual experiment is defined upside.
Excellent. Thanks, Mark.
There are no further questions at this time. I'll now hand back to Mr. Coulter for closing remarks.
Thanks, Ben, and thank you everyone for your time today. As you heard, another strong result for Temple & Webster. I think it's really important to remember that we were a high-growth business before COVID. Yes, COVID has accelerated underlying trends, but look, we've got a long way to go. We're at start of a structural revolution in retail, and we feel we're really well positioned to capture the growth that will be coming into our market for future years. Thank you very much everyone for your time.
That does conclude our conference for today. Thank you for participating. You may now disconnect.