Temple & Webster Group Ltd (TPW) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Temple & Webster Group Limited 2022 Half Year Results Investor Conference Call. [Operator Instructions] 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 '22. 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 my respect to elders past, present and emerging and celebrate the diversity of First Nations people and the 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 $235 million, which is a 218% increase on a 2-year basis. This means the business has more than tripled in 2 years. Importantly, we are a high-growth business pre-COVID, and we've grown throughout the period, even if 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 underpenetrated 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 growing 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. And our strong debt-free balance sheet, combined with our asset-light business model with broad and diversified supply loans has 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 4 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 supplier 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 style and home, including our AI, artificial intelligence space interior design tool. And we are not tempted to venture into other categories such as fashion, beauty or God forbid PPE for a short-term revenue sugar rush. Instead, our vision has led us to the decision of going deep 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 chance to live and breathe this vision. It is a focus in 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 3/4 of what we sell is still drop ship and therefore, carries no inventory risk. Having said that, expanding our private label division remains a key strategic priority. Private label represent a 26% of the group sales for the 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 delays or shipping delays in the 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. In particular market for factories that hit with delays, we've been able to substitute products within a range. Our asset-light strategy has also allowed us to quickly adapt to fulfillment strategies and stay ahead of logistical bottleneck. Lastly, we have developed 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 the historical counterparts, and our conversion rate trend continues to improve. To me, that speaks to the trust that customers are placing in Temple & Webster, especially when it comes to ordering larger and more expensive volumes to 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 and 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 a 3D augment reality service and have made good progress in building the library of 3D assets. Our app in stores are climbing and our rating remains 4.8 stars across both iOS and Android. As we have 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 existing customers. While we have maintained our existing level of TV spend over the half, most of our efforts are guiding to getting ready for a bigger push this calendar year. We've commissioned customer market research and engaged branding agencies to ensure the message we created we launched with is on point. We do not believe this work should be rushed as our brand is our key to what we do. Finally, as I mentioned in my opening, we continue to make good progress on our next growth item. Our B2B division grew 49% over the half despite tough trading conditions, driven mostly by a significant increase in the 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 in 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, merch 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 going to 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 #1 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 whilst staying profitable and staying within a 2% to 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 traded commercial B2B and home improvement. But we think there is substantial opportunities, as outlined by Mark earlier. And we expect these new businesses to have similar economics to furniture and homewares. Longer term, we will take advantage of our market leadership position by leveraging our scale, strategic moats by 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 '22 in comparison to the first half of FY '21. Revenue for the half was up 46% year-on-year to $235.4 million and up 218% on a 2-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 to what we have previously communicated to the market. You will see marketing as a percentage of revenue increase to 13.6% from 12.8% in the first half of FY '21, 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% to 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% to 4%. However, this 2% to 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 $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 we're happy with the levels that we have and also the levels that are also sitting within our drop ship 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 lower risk but also high term. We increased our investment in our Israeli AI interior design start-up to accelerate not only the growth and speed of product development, but also deployment. The initial investment was USD 650,000, and we have increased our investment by up to a further USD 1.5 million. 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 but 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. So before taking you through the strategy, I think it's always worth reiterating the investment pieces 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 $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. So 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 the opportunity. While some of the market is out of scope and [ we granted EG ] building materials, we have identified in-scope and in-scope opportunity of another $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 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 the structural shift we've seen in other retail categories. Our flywheel is set out on the following page, essentially with scale and 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. And we can produce more content by having more creative resources. In effect, the bigger we get, the better and stronger our customer proposition become. 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 for 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. 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. And of course, we will be continuing to invest in our future growth horizon, in trade and commercial and home improvement. Now 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 '22 has started strongly with year-on-year revenue growth of 26% for the period 1st of Jan to 6th of Feb. Note that we are comping some very big growth rates still from the period last year. And on a 2-year basis, it was actually up 161% versus 2020. Now 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 by working from home and dealing with all the issues [ of COVID in Australia ] has not been easy. Thank you for your passion and hard work. We'll now take any questions you may have. Thanks, Ben.

[Operator Instructions] Your first question comes from Tim Piper from UBS. Pardon me. Your first question comes from Tim Lawson from Macquarie.

Just a couple. In terms of private label, was 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 in shipping like most retailers have been talking about. As we said, the good news is we have hundreds and hundreds of drop shippers, and we're sourcing from lots of locations. So yes, it probably would have grown a bit faster and represent a bigger business without impacts of COVID, but it's still pretty well considering.

Yes. And 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. So containers have been arriving, our drop ship have stocked up. So we're feeling pretty confident about our stock conditions.

And just 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? Or should we expect as repeat customers become a larger part of the mix over time, that, that revenue per customer should naturally increase with that mix benefit?

I mean I hope so. So of the 10% increase in revenue per active customer, the majority is from increase in repeat rates versus an increase in AOV. So I mean I think if you look at other retailers around the world that are ahead of us, they've been out to grow active customers and revenue per active customer. And yes, 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. The early adopters tend to be a bit more fickle. So as we get into the kind of more mainstream shopper, they've been more loyal. And once they've got their loyalty that they stick with you for a while. So I mean my personal hope is that you'd see the revenue per customer increase even as we grow our actual customer base.

Yes. And then last question for me, just this chart on Slide 11 around the first time and repeat customers within the B2B business. Just -- I mean eyeballing that looks like the repeat rate is very strong. Is that the right assumption there? It appears to be first-time orders are repeating very -- at a high conversion rate or consistency rate.

Yes, that's right. So the lion's share of the business is coming from repeat orders. And look, I think it's the nature of -- the last half has been -- is probably the aberration -- is an aberration for a lots of reasons. We're still dealing with all the issues in the world. And there has been significant impact on businesses due to COVID lockdowns. I mean a large part of our business clients like in the hospitality industry and obviously, they've been affected disproportionately to other businesses. So there has been issues on why the customer acquisition probably lagged a bit. But the good part -- the good thing about this business is once we get a customer, we do with jobs for them, they usually have repeat orders because they're in -- they may have multiple hotels or the developers with multiple sites. So they're very sticky, high lifetime value. So that's why we really like to [indiscernible].

Your next question comes from Tim Piper from UBS.

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 rates are about flat half on half. So is a lot of that coming from the AOV increase? 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 customer came from increase in repeat rate as opposed to AOV. So repeat rate is increasing.

Okay. Got it. And then 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?

Yes, it's a really good question. I think it's obviously a bit of both. So as we invest more in brand and more expensive channels than the mix shifts and the percentage of the ad cost percentage change. But there's more leakage with those channels as well because we can't run an ad just targeting new customers, [ TV ], don't know how you do that. So definitely, as we move beyond -- I mean we have the discussion now. So we have different levels of bidding versus new customers or first-time customers. So we'll actually upload the tagged pools of customers onto Google, so we know how much to bid on the repeat versus new. Obviously, we'll bid far more new customer than repeat. But say, they can't do that. So you probably -- we will see more of our ad go to repeat. Is that a bad thing? I'm not -- I don't think so because obviously, we want to make sure we're top of mind. A customer may come in and out into our category over the year or years. If we're top of mind and seeing ad recently, then I think that will help, then come back to us [indiscernible].

Got it. I might just squeeze one other one on marketing in there. I mean there's been a lot of sourcing we're seeing from some of the companies, you obviously increased in cost per click and cost inflation within digital marketing more broadly. Maybe a comment on the balance of yourselves of investment versus cost inflation within your CAC at the moment? And do you have any real insight on whether there's a structural kind of change or if you think this kind of eases as things normalize?

Yes. Again, that's a really interesting question. So 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 [indiscernible] CAC have gone up by a beat, as you can see. But what's helping us is increases in conversion rate and increases of how much people are spending when they get to the site. So we're in a fortunate position. We've got a relatively high average order value compared to many people in our category. Our site converts very well. We've got a good brand. We've got hundreds and hundreds of thousands of ratings and reviews across the site. So we've got -- we're in a fortunate position that we can drive our conversion initiatives to offset some of the inflation in CPC. So in our cost per customer, there is a bit of digital inflation, but there's also the brand, the shifting mix to the brand. I think in respect to your question around, is it a short term, long term? Look, I think what's happened -- my take on digital marketing and what's happening with the retail environment is COVID happened, lockdowns happened, there's a slighter traffic online. The retail -- online retail that were set up to grow ahead of COVID -- and I've always said, we were fortunate enough to be match-fit coming into COVID. We were still growing 40% plus pre-COVID. We've done a lot of work in our [ margin ] economics, done a lot of work in our digital marketing, done a lot of work on our supply chain capabilities and fulfillment capabilities. So 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. So -- but of course, what happened to offline retailers all that, okay, store are closed or offline retail is down, I'm going to turn to online and marketing budgets 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 a normal growth, growth there is probably a hope overhang in digital marketing budgets from particularly the omnichannel retailers, which may be temporarily driving up CPM. But look, unless you have an economic like us with high AOV, good margins, good conversion rates, good repeat rates, it's not sustainable for some of our competitors to be bidding to such an extent. So I think it will wash out and return to more normal levels. And look, if you look on a year trend, it's probably -- it is higher inflation than a 2-year trend. So there's definitely a COVID impact in the numbers at the moment.

Your next question comes from Aryan Norozi from Barrenjoey.

Just a high-level one for me. I mean your business, as you said, you're growing sort of 40%, 50% pre-COVID. And you're obviously a much bigger business now, so there's a law of larger numbers. But do you think -- I mean there's a lot of volatility on the numbers, but is the way to look at your revenue growth moving forward on a year-on-year basis, and you think it can still grow sort of 20%, 30%, 40% on those levels? Or is it -- 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, you can -- you think the investment of 2% to 4% EBITDA margins can make you grow to that 30% plus? How do we think about that, please? Any guidance would be helpful.

Yes, that suspiciously sounds like guidance. I think -- I mean we think of the business as long term, right? So quarter-on-quarter or month-on-month is less relevant, we think in structural terms. So what's our total TAM? Where do we think online penetration will get to? And the $64,000 question is in what time frame? But even if we catch up to some of our U.S. and U.K. peers in the next couple of years, there's still significant growth. And they're still growing, so they haven't slowed. So it's more a function of how big the total market be. And then, of course, with our market share. And we think we should be the biggest player in the online market given our capabilities and given everything we're investing in. And you play that out and you'll get to sort of a CAGR over that period. That's how we think about it.

Yes, perfect. And just a small one. The consulting costs, I think, broadly [indiscernible] from 0.8 million to 2.5 million. And what's that consulting for?

Yes, I'll take this one, emcee. So there's another line, right? And that other line actually incorporates quite a few things. And 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 to bolster out and improve the scalability of some of the key areas in our business, i.e., logistics and customer care. So it's actually a combination of quite a few things. But I would say that would -- 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 in the first half of FY '22 that are really there to bolster some of these departments from a longer-term perspective.

Yes. And just lastly...

Yes, I was going to say it's definitely not managed to consultants, if that's what you're worried about. But as Mark said, this thing like data consultants or got a data agency, which is doing a data strategy with us. We do -- we've got a consultant to help us around our app and new platforms. We have security tech people, a lot of technology people.

Perfect. And last one, just on the balance sheet. You've got a pretty large net cash balance and you're cash generative, so you're not going to be stuck in working capital as you grow. So how do we think about uses of that capital and in the context of M&A, please?

Yes, it's a really good question. It's an interesting one. So 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 2 years, as Mark mentioned. Look, but as you say, look, we've got -- we're in an enviable position, right? We've got over $100 million in cash, no debt. The model itself is the negative working capital model. We're profitable. So mathematically, if we continue to grow, then we should be bolstering that balance sheet and those cash reserves. Now we have been allocating some -- we have been deploying some of that capital through organic means. So 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 we'll continue to do that. So there's 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 '23 to also look at some inorganic opportunities as well. And 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 it because we just haven't had the capability or the capacity really over the last sort of couple of years. So it enables us to execute and execute quickly. We always talk about if we were going to do any sort of M&A, it would be around bolstering the strategic pillars in our business. So 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. But then 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. So I think now heading into this calendar year, we've got a bit more head space now to be thinking about this with a more mature mindset.

Your next question comes from Wassim Kisirwani from Jarden.

Mark and Mark, can I just -- not to belabor the point on marketing and customer acquisition, but just one question there with regard to first-time orders showing some decline. Obviously, we're digesting a period of remarkable growth. But how do you think about that marginal return on that investment dollar with regards to first-time customers? Is it fair to expect that, that trend in first-time orders 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 with an ROI of 2.6 incremental margin versus our CAC, it's really high. In fact, a lot of our investors and shareholder base says it's too high, why are we having such a high ROI on 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, if you look on a year-on-year basis, it still looks pretty good. There's obviously lockdown effects and other things in those charts. But I think that probably if you look at a normalized basis, it's still -- first-time customers are still growing. I think there's a lot of growth left in first-time customers, and you just look at that as an 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 growing harder in TV, it's still delivering a 2x return. So now obviously, we look at it by channel by channel. And so there's particular channels that we can push harder, we will go harder. I have talked previously about we used to have the discipline of making sure every order is -- every customer is [ processed ] in the first order. We are experimenting with releasing that constraint to make it potentially first year revenue from the first year lifetime. So we'll continue to push where it makes sense. I don't think there's any -- it's -- in our category, it's not -- there's no surprises. I don't think we're having the lowest CAC. I think it's actually having the marketing mix, which optimizes growth and margin and what I believe we're trying to pull in that period.

Great. And then just as a final question just on the investment time line and horizon. You've made the comment that the second half should sort of see an uplift there. But would that -- with regards to that margin target, it's going to -- obviously, at the rates it's growing, it will 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 promotion to the extent you thought? Or are they sort of more labor investment plans coming over sort of the second half and into next year?

Yes, I'll take this one. And so look, there's a few things in that question. But essentially, what the 2% to 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. So for us, it's a metric whereby we're still profitable, but it still allows us to 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 and the investments are generally made within the first half because we do like to kind of see how the year is progressing to give us a bit of a sense of how the full year is going to sort of play out. So some of those investments that we're making in the first half typically then materialize fully in the second half. That kind of gets you back into that 2% to 4% range. But it's a function of where we sit in terms of the market maturity, right? So as Mark mentioned, 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 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, but it also allows us the financial flexibility to be investing into some of these second and third growth horizons. But look just to the 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 what the longer-term strategy looks like as well, which would be leveraging our size and our scale. And that would then naturally be yielding a bottom line outcome, which would then be more in line with the sort of outcomes that you'd be seeing for furniture and homewares retailers, both locally and globally.

Your next question comes from Scott Hudson from MST.

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?

Scott, I would say very minimal amount there.

And in terms of, I guess, the outlook into the second half of '22, 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 6 months?

Yes. Look, I think when you go back to the strategy, right? And our strategy is we want to be the fastest-growing retailer in our category. So materially increasing pricing points is probably not part of that strategy. But 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. But I think for us, one of our strengths, I would say, is essentially the flexibility in our investment profile. So what this short to mid-term structure allows us to do is flex our short-term investment and our longer-term investments as well. So 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 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 take back in terms of the margin but the bottom line still remains the same.

Got it. And then 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. But you're understanding that the channel is generally the start of the third quarter a seasonally weaker period than some of the other quarters?

It is. It is. So July of Q1 and Q3 are essentially our lowest quarter in terms of revenue dollar terms. Q2 naturally is our highest revenue quarter closely followed by June. So obviously, you've got Christmas and everyone getting their houses ready for Christmas. But if you look at the -- if you look at Q4, you've got a lot of end of year sales, and you've also got a lot of trade and commercial sales come through for end of financial year as well. But 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. So February is typically a lower month. March is usually pretty low as well. Then things start to ramp back up April, May, June.

January is always a strong month.

And then 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?

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 -- our proposition -- Temple & Webster Group's proposition is more around making a home beautiful, inspiration, more -- curated range, curated suppliers, to make your home beautiful. And that vision extends to home improvement directly. And the same thing, whether it's loose furniture or 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 the bigger players? I think we do. I think we've got market-leading digital capability. I think the other thing about the home improvement sector is it's even more long tail than furnishing a home. So we're still -- essentially, furnishing a home is we're going to think of as the national chain. Home improvement space, you get the big ones, and then it kind of gets smaller. Big ones may be each category, but then it gets quite long tail. So that long tail obviously can't afford to have incredible and sophisticated digital capabilities. So 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 the categories in home improvement. They're embedded in furniture and homewares, some are lower, some categories and some are higher. If you look at the home improvement retailers around the world, both offline and emerging ones online in U.S. and U.K., you can see as roughly profitability is the same or better than their peers in furniture and homewares. Yes. So we think we're quite excited about this opportunity, even with the gorillas in the industry.

Your next question comes from Wei-Weng Chen from RBC Capital Markets.

So just first one is on supply chain. So I appreciate it's still a challenging environment. And I guess who knows what might happen around the corner. But in general, are you seeing supply chain issues exciting?

I don't know if you want to add anything, but definitely from a stock position where feel more comfortable when things arriving. And from a domestic warehousing and transport point of view, those issues are much better. Now depots in particular areas are still being impacted by COVID and workers and there are some in delay still, but it is better than it was. Shipping -- global shipping is still, I say still washing itself out and will take a little bit longer to get back to normal.

Yes. Look, the only thing I would say there is -- well, 2 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 is COVID impacted, particularly the localized logistics, whether it's warehouses, whether it's drivers and trucks. So there's a big hit in sort of December, January and also in Q1 and Q2 during the lockdown period as well. So definitely in the localized logistics things have improved a lot. And 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 throughout the period. But we can see it in our own numbers as well. So we can see it in our NPS numbers as well as that things are improving. And in terms of supply, like I mentioned before, we're going into this period in a pretty strong position. Private label levels getting closer now to where we would want them to be heading into the second half. And we've got direct visibility into all of our drop ship network. So we can see what inventory levels our drop shippers are sitting on, and where they've all stocked up. So we're heading into this period and feeling pretty confident.

Yes. And I think you just -- the next question, I think you kind of touched on it just before, but I was just going to ask about the margin of the growth areas for trade and home improvements. So is it broadly expected to be similar to furnishing?

Yes. I mean that's -- I think there's margin opportunities, but I think in terms of where we're thinking about it, that is, Trade & Commercial and Home Improvement, if the natural be similar to the current furnishing and homewares margins and we're okay with that allow us to grow those areas quickly.

Yes. Yes. Certainly at the moment, but things will be different at scale, obviously but at a larger scale. But certainly, at the moment, B2B is pretty close to furniture and homewares. And so is home improvement as well as DIY. So they're both very similar to furniture and homewares at the moment.

And we're running the business to that, right? Obviously, as Mark said, there are opportunities on both areas to grow that margin.

Yes. And then just the last one for me on the 2% to 4% margin. Just for this year, obviously, we're 7 months into this year. Can you maybe give some color on how to think about that range? What were the considerations in refining that margin target today? And if it's easier, maybe you can speak to what needs to happen to get to 2% and what needs to happen to get to 4% and kind of what will drive that?

Yes. Well, it's all mathematics, right? So trading will be part of it. And look, to be fair, trading was part of the reason why we ran a bit ahead of the 2% to 4% range in the first half is because we had a lockdown situation for the first half, which wasn't expected. And you typically set your cost base for an expected outcome in the first half. So part of that part of that reason why the 5.1% was higher than the 2% to 4% was sort of driven by trading. But look, there's no perfect number, right? Whether it's 2% to 4%, whether it's 1% to 3%, whether it's 3% to 5%, we're trying to strike a balance, I suppose, between ensuring that we stay profitable, but we've got enough leverage there to be reinvesting back in the business in the short to medium term. So like I said before, there'll be some investments that were made in the first half, which is primarily people. When we talk about those investments, it's primarily people in 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 going to see the full impact of that in the second half. So look, at the moment, we still expect that to be within that full range. But 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.

[Operator Instructions] Your next question comes from Annabelle Diamond from Credit Suisse.

First one is you mentioned that customer satisfaction has been impacted by logistics and obviously, consumers are well aware of disruption 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. Can you share any progress that you've made there?

So I think I think the -- most of the issues in the customer satisfaction, and it has been a variable even 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. So when customers are having to wait longer because particularly depot shuts down or a post shuts down the depot or sends an e-mail to the customer saying, we're not picking up today. Now some retailers have responded around the world to growing heavier on in logistics and owning more of the chain using the balance sheet. And 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 the flexibility to scale up and adapt and deploy resources very quickly. I think -- so we haven't made any changes, which are irreversible or going heavier into asset side of logistics, but we've definitely gone heavier in terms of the capabilities, processes and technology. So we have scaled up our logistics and operations teams. We have implemented technology, and I talked about the transport control tower. 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 -- to make sure that our orders are prioritized. So there's a lot more we're doing in that side. And likewise, in the warehousing side, we're working with our 3PLs much more closely to ensure our orders have picked and packed and sent out within our goal. Do I think we can go tighter and hence more control? Yes, I do think so. And however, we are kind of have to almost wait a little bit for the -- some of the current issues around -- particularly around COVID and workers [ may not have ] COVID to put themselves out, so we can increase our integration any further.

Okay. That's great. And then I just wanted to follow up with respect to sourcing. Have you completed in your view, your diversification of your supply base, not just by numbers, but also by geography? Or is there still a desire to continue diversifying that base of suppliers further?

I think there is -- I think I would like -- and I think the team is working in diversifying further. I think COVID has taught the world not to be reliant on particular markets or particular parts of your supply chain. We continue to make progress. We are diversifying throughout Asia. We have picked up factories also outside of Asia. But is the diversification finished now? I mean our inventory -- inventory is a slow-moving beast because you don't want to dramatically change your supply chain overnight. You want to do it incrementally with products which you test. You don't necessarily want to change it necessarily, et cetera. So it's an evolution rather than a revolution.

And then just a follow-up on that to finish up. In terms of ethical sourcing, how are you actually managing that given you've got a growing supply base?

Yes. It's a really great question. So we do a lot of work with our suppliers. The easiest part of the supply chain to control is our private label. So we have audited all our factories, both from a materials perspective, from a modern slavery perspective, from a factory working condition, et cetera, we audit our own factories. And if we see any red flags, we even put them into almost a probation period until they improve or we would do list. That's the easiest bit to ensure. And we increasingly are sourcing sustainably sourced materials, the sourced parts of a range, and you'll see that getting bigger and bigger over time. Drop ship is a bit -- we are one to remove because they are the importer. However, we work with all the drop shippers to also get them to audit their factories. And the focus actually this year is to put the same rigor that we -- this year and next year to put the same rigor that we do our own factories to do that with our drop ship. So look, it's tricky because there are so many suppliers. However, I think we've also got more market power on [ Onfi ] because they're a bigger and bigger part of our supplies business, they are taking our requests more seriously. And it's part of our job to ensure the industry and the supply chain does evolve and does move to more ethical and sustainable sourcing.

Okay. Congratulations on the results.

Thank you.

Your next question comes from Sophie Carran from Goldman Sachs.

Mark and Mark, 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.

Yes. 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. And if you think about the home improvement, it is slightly -- it is a different time where you're renovating versus furnishing. So my actual hypothesis is the home improvement may lead to an increase in the furniture and homewares business because if we get the customer when they're renovating, then we'll probably get them a month later when they -- or years depending on your renovation, later when you're furnishing your home. So 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, I don't think -- we think our current range -- there are range gaps, style gaps, product and price gaps throughout catalog. And that's where we're working with our wholesalers and our drop ship to still those. We are using our own private label to fill them. It's a constant expansion.

Great. And then maybe just thinking about that investment that you're making in areas such as 3D, augmented reality and AI. Can you just talk on some of the metrics that you're using to measure the success of that investment?

Yes. So everything pretty much -- I mean, I think, I say, pretty much everything and not everything, but 95% plus of any initiative that we roll out on site, we A/B test. So we have AB test control that we split traffic into different lanes and those lanes, you either see or don't see the initiative at launch. And that includes things like the AI interior design tool. It includes things like where the customers see a 3D model and site, it includes things after they see the link to the augmented reality tool to see the product in the home by using a phone. And then from that A/B test, then 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 impression or engagement, et cetera. So we track everything. Clearly, what we're trying to do is optimize revenue or conversion rate. So they are the key metrics that we'll look at, but we look at everything as well. So these initiatives may not directly increase conversion rate, but has a great impact on engagement, for example, and that -- and that's part of -- one of the things we want to do, which is engage our customers and make sure they keep paying back to us for inspiration, that's a success as well. But the success of the individual experiment is defined upfront.

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 -- look, I think it's really important to remember that we were a high-growth business before COVID. Yes, COVID has accelerated underlying trend. But look, we've got a long way to go. We're at the start of a structural revolution in retail, and we feel we're really well positioned to capture the growth that will be coming to the market for future years. So thank you, everyone, for your time.

That does conclude our conference for today. Thank you for participating. You may now disconnect.