Too many investors underestimate the power and duration of megatrends. They give up too early on trends or lack the patience to realise long-term gains.
The best megatrends often take decades to play out. One of those trends, the migration of advertising from print to channels, was featured in this column last week. Look at the continued success of REA Group and Car Group.
Online retailing is another megatrend with years or decades of growth ahead. For all the hype about e-commerce, online’s share of total spending here was only 16.8% in 2023, according to Australia Post research.
That share has largely flatlined since 2022. During the COVID-19 pandemic in 2020 and 2021, online’s share of total retail sales leapt from 10% to as high as 25% as we were forced to buy more goods and services online during lockdowns.
The thought was that more consumers, having tried online shopping for the first time during the pandemic, would stick with it when lockdowns ended. Yet online sales growth has been surprisingly sluggish in the past few years. For many, online purchases during COVID-19 were a one-off or a novelty.
That is starting to change, judging by results from this earnings season. To my thinking, the highlight in the retail sector in the current earnings season was not the performance of JB Hi-Fi or, to a lesser extent, Super Retail Group. It was growth in pure-play online retailers, particularly in the fourth quarter.
Longer term, population growth, traffic congestion and greater familiarity with online shopping all point to higher penetration rates for e-commerce. Simply put, more of us will buy more goods and services online to save time and money.
Still, expect steady rather than spectacular growth in online’s share of total retail sales, but higher growth than we have seen in the past few years.
As the market becomes more comfortable that faster annual growth in online sales is resuming, retailers best exposed to that trend could be re-rated.
All retailers these days have a mix of online and physical sales channels. As with online advertising, it’s the pure-play online retailers that appeal most, at least for investors willing to invest in small-cap stocks.
Yes, there are many challenges for online retailers. After a slower-than-expected start, Amazon Australia’s customer base is growing strongly, with almost 8 million people here estimated to shop at the online giant and formidable competitor.
Growth in Black Friday sales in November each year is another challenge and opportunity for pure-play online retailers. Interest in Black Friday is a chance for mostly bricks-and-mortar retailers to build their online sales.
Still, I like the long-term prospects for a few online retailers at the current valuation. I mentioned two of them – Kogan.com and Temple & Webster Group – in this column in July 2024 and was wary of a third online retailer: Cettire.
Kogan.com has rallied from $4.25 in that column to $4.69. Temple & Webster is up from about $9.10 in July 2024 to $11.20. Cettire is down from $1.38 to $1.31.
So far, so good with the online retail ideas. Although Kogan.com and Temple & Webster have rallied in the past month, their latest earnings results suggest further gains can be sustained, albeit at a slower pace from here.
Here is an update on both stocks:
- Kogan.com (ASX: KGN)
The popular online site reported better-than-expected June-quarter earnings. After posting negative quarterly revenue growth year-on-year for the first three quarters in FY24, fourth-quarter revenue rose 3.8%. That was a strong turnaround.
Kogan.com’s fourth-quarter margins were also better than expected. After higher inventory and other costs hurt the stock during COVID-19, Kogan.com appears to be getting its costs under control and improving its profit margins.
Kogan.com said it expected its revenue growth “to accelerate into FY25”. If that happens, Kogan.com should benefit from higher top-line growth and better margins – a combination that could deliver faster earnings growth than the market expects, as investors focus too much on the current weak retail environment and not enough on future conditions.
A highlight in the FY24 result was Kogan.com’s repeat customers. Almost 70% of its 2.6 million active customers purchased more than once from Kogan.com or Mighty Ape, a leading NZ online retailer it owns.
Kogan.com is doing a good job in attracting more customers and encouraging more of them to make additional purchases.
Morningstar’s valuation for Kogan.com at $10.70 a share suggests the stock is materially undervalued at the current $4.69.
I’m not as bullish, but Kogan.com looks undervalued for long-term investors who understand the features, benefits and risks of investing in small-cap stocks. The company looks like it has found its groove again after COVID-19, judging by its fourth-quarter results.
In the next year, interest-rate cuts should help consumer sentiment and retail sales generally, for physical and online stores.
For Kogan.com, the main driver will be continued migration in retail sales from physical to online, stronger online sales growth and improved margins. Its growth won’t be in a straight line, but there’s more to like about Kogan.com following its FY24 result.
Chart 1: Kogan.com
Source: Google Finance
- Temple & Webster Group (ASX: TWP)
The online homewares and furniture retailer reported revenue of $498 million in FY24, up 26% year-on-year – a standout result in a depressed retail sector.
EBITDA growth of 2.6% was at the high end of the company’s 1-3% range. Across most of its financial targets, Temple & Webster was at the mid or high point of its guidance range. On costs, it was at the low end of its stated range.
In fact, Temple & Webster had to explain to the ASX why its FY24 result differed from market expectation, given its growth.
For me, the highlight was Temple & Webster’s market-share growth, up 31% year-on-year. Care is needed with percentage changes off a small base: the company’s overall share of Australia’s total furniture and homewares market is only 2.3%.
But that reinforces the scale of the opportunity and why Temple & Webster potentially has a long runway of growth if it continues to implement well.
Clever marketing and growth in online homewares and furniture sales, particularly among younger consumers, should continue to lift Temple & Webster’s market share. With greater share comes greater sales and better margins.
Temple & Webster has a mid-term revenue goal of more than $1 billion. With cash of $116 million and no debt, it’s well placed to lift its earnings, return on equity and valuation. The company has a strong brand, business model and product.
Still, a share-price consolation or pullback in the next few weeks would not surprise given the strength of Temple & Webster’s rally since October last year.
But the stock is only back to levels it achieved in late 2020, despite having built a larger customer base and grown its market share since the pandemic.
Chart 2: Temple & Webster
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 28 August 2024.
