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

Thank you for standing by, and welcome to the Temple & Webster Group Limited First Half Fiscal Year '26 Results Call. I would now like to hand the conference over to Mark Coulter. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining us. I'd like to begin by acknowledging the traditional owners and custodians of country throughout Australia. On the call with me today is our CFO, Cam Barnsley, and we'll be taking you through Temple & Webster's results for the first half of FY '26, which were released to the ASX earlier today. So starting with Slide 4. You can see that we delivered a strong result in the first half of FY '26 as we continue to execute on our strategy to reach $1 billion in revenue by FY '28. Revenue growth accelerated since our last trading update, ending the half up 20% year-on-year to $376 million. That acceleration was partly due to the natural volatility inherent in our business and partly due to our planned promotional calendar for the remainder of the year. This growth has expanded our market share to an all-time high of 2.9%. Our growth plays are also performing well with revenue growth accelerating to 47% and 24% in Home Improvement and Trade and Commercial, respectively. And our New Zealand business is off to a great start, generating $1 million in sales in just 4 months since launch. EBITDA for the half was within our guidance range of 3% to 5%, with EBITDA, excluding New Zealand investments coming in at $14.9 million, representing a 4% margin, demonstrating our ability to balance growth with tactical earnings growth. Our balance sheet also further strengthened. We generated nearly $23 million in free cash flow during the first half, ending the period with a cash position of $161 million and no debt. This capital strength provides us with the flexibility to invest in our long-term growth. Turning to Page 5. You can see that beyond our headline financial results, our key operating metrics are also trending positively, providing strong momentum as we enter the second half. Active customers reached a record high of 1.35 million, up 14% year-on-year. Conversion rates also trended higher to 3.2%, and our Net Promoter Score remains up there with the best-in-class at 63%. We're particularly pleased to see the continued improvement in our customer cohort behavior, resulting in growth in repeat orders. These orders now comprise 62% of our total orders, up from 58% in the pcp. Scaling our repeat customer base is a key lever to achieving our longer-term marketing and EBITDA targets. Finally, it's worth noting that our marketing ROI has stabilized at 1.4 following 2 years of brand investment and the growth of our first-time customer acquisition costs has slowed. These positive inflection points sets us up well for the next phase of our brand strategy. You can see on Slide 6 that the momentum in our core business today gives us a strong foundation to pursue a significantly larger growth opportunity. With expansion into Home Improvement and New Zealand, our total addressable market has more than doubled in size to over $40 billion. At the same time, the segments that make up this TAM remain underpenetrated relative to global peers. This creates a powerful multiyear structural tailwind for Temple & Webster. In furniture and homewares, online penetration in Australia and New Zealand lagged global benchmarks by 5 to 7 years, while Home Improvement offers even greater upside with online penetration estimated at between 5% and 10%. We believe our category will follow similar trends as other more established online categories with digital native millennials entering their peak spending years for furniture and homewares. I won't go into the details of Slide 7. However, you can see our strategic position to capture more share within our $40 billion market. To date, our growth has consistently outpaced the broader market, resulting in us expanding our market share to 2.9% in the first half. So you can see there is plenty of growth ahead of us. On Slide 8, you can see our strategic priorities. Our ambition is to become Australia's leading furniture and homewares retailer. To achieve this, we are executing against 5 strategic priorities to strengthen our competitive advantage, accelerate top line growth and expand margins. I'm pleased to report that we continue to make strong progress across each of these priorities. Starting with our goal to become the top-of-mind brand in our category, our brand investment over the last 2 years has delivered measurable uplifts in KPIs, including unprompted brand awareness and branded search share. Coupled with stabilized marketing ROI and a deceleration in customer acquisition cost, it's clear our brand investments are having a positive impact. In terms of our exclusive product offering, they continue to grow as a percentage of our total revenue. In the first half, private label and exclusive drop ship products reached 49% of revenue, up from 45% last year. Furthermore, our dedicated sourcing office in Shanghai is already helping to deepen our manufacturing relationships. As we expand our presence there over time, we will improve speed to market and inventory management and further strengthen our private label offering. We also continue to trial and deploy proprietary AI-powered tools company-wide. For example, our AI-powered shipping engine is now fully deployed and driving over 10% improvement in shipping cost accuracy. Additionally, we are trialing personalization tools to improve the efficiency of our marketing spend and product recommendations. And to capitalize on the rise of Agentic commerce, we are also updating our GEO strategy and optimizing data feeds and site content to enhance LLM discoverability. As we scale, our commitment to cost discipline is driving ongoing operating leverage. Fixed costs improved to 9.4% of revenue in the first half, a 110 basis point reduction from the prior year. This fixed cost leverage is allowing us to reinvest in our growth drivers of price and marketing whilst maintaining our customer value proposition. Turning to our adjacent growth pillars. Home Improvement saw an acceleration in growth to 47%, underpinned by a significant lift in private label penetration to 25%. This category offers a vast underpenetrated market with no dominant online-only incumbent, dynamics that mirror the early days of our furniture and homewares business. We're still in the early stages of this growth opportunity and see a substantial runway ahead. Our Trade and Commercial division has also seen an acceleration in growth with revenue reaching $31 million in the first half, up 24% year-on-year. Now on Slide 7 (sic) [ Slide 9 ], you can see an update on New Zealand, which represents a compelling opportunity for Temple & Webster. It's a $3 billion market, but it does expand our TAM by nearly 10% and serves as a proof of concept for future international growth. We entered New Zealand with a clear set of objectives to test our customer value proposition, to set up our website and technology infrastructure, to establish an in-market supply chain and to commence operations in a capital-efficient manner. I'm pleased to share that we are making good progress against all these objectives with revenue surpassing $1 million within 4 months since launch and our KPIs trending broadly in line with Australian benchmarks. It's clear that our value proposition is resonating across borders and that our platform and infrastructure is scalable internationally. For the remainder of this calendar year, our focus is on enhancing the end-to-end customer [indiscernible] customers in New Zealand so they can have an experience comparable to our Australian customers. Key initiatives include accelerating shipping times and launching a dedicated New Zealand domain with localized pricing. I'll now hand over to Cam to take you through our first half financial results in more detail.

Great. Thanks, Mark, and good morning, everyone. Thanks for joining. I'll start on Slide 11. As Mark mentioned, revenue grew 20% in the first half to $376 million. This was driven by increases in both new and repeat customers as well as a slightly higher average order value. This is particularly pleasing against the backdrop of weak consumer sentiment and inflationary pressures and reflects our strong execution with the Black Friday and Cyber Monday period and into December. During the half, we achieved material fixed cost leverage with fixed costs growing at just 7% versus revenue at 20%. This resulted in our ratio of fixed cost to revenue declining from 10.5% in H1 FY '25 to 9.4% in H1 FY '26. This outstanding result has allowed us to invest more into price and promotion for our customers, which is reflected in our delivered margin at 30.5%. This remains within our target operating range of 30% to 32%. This investment was also balanced with more disciplined approach to marketing across the stack. Pleasingly, our marketing cost as a percentage of revenue improved by approximately 40 basis points when compared to FY '25, down from 16.3% to 15.9%. Included in the marketing line for H1 was continued spend on brand marketing, which is now helping to improve overall blended ROI. Our EBITDA margin for H1 was 4%, excluding our $1.4 million investment into New Zealand. The majority of our New Zealand revenue to date has fell into the second half of the year. While net profit before tax was down year-on-year, when excluding our investment into New Zealand, movements in unrealized foreign exchange gains and one-off costs relating to our new warehouse in Melbourne, our net profit before tax increased compared to the prior period. In H2, we will be comping a much lower net profit before tax result. So we are confident that our growth in net profit will be more in line with growth in EBITDA for the full year. Turning to the balance sheet on Slide 12. We ended the half with $161 million of cash on hand, an increase of $16 million through the half. Our free cash flow was materially higher at $23 million, which excludes buyback activity that was undertaken. You can see a breakdown of our free cash flow calculation on Page 18. On the asset side, the key change to discuss relates to our right-of-use asset and property, plant and equipment. These changes reflect our new warehouse lease signed in Melbourne during the half, which required some upfront capital investment prior to becoming operational. This new facility provides us with significant flexibility as we grow and an economically more attractive outcome when compared to a fully outsourced arrangement. On the right-hand side of the slide, we have once again outlined our capital management priorities, which remain unchanged. Maximizing returns at the core of our long-term strategy and is the lens through which we assess capital allocation. Most importantly, we remain debt-free and fully funded to pursue organic and inorganic growth opportunities as well as other capital management strategies, including our on-market share buyback. Now turning to Slide 13, which sets out our FY '26 and longer-term financial profile. For the full year, we expect to maintain a delivered margin within our 30% to 32% range, while driving further marketing efficiencies. As always, we retain the flexibility to adjust these in response to market conditions. We reiterate our FY '26 EBITDA margin guidance of 3% to 5%. As we shared in November, we expect a total New Zealand start-up investment of between $2 million and $3 million for the full year, with $1.4 million deployed in the first half. Given the positive results so far, we continue to view this investment as having a strong ROI. Over the longer term, our focus remains on scaling towards an EBITDA margin exceeding 15%. We have several key levers to achieve this, continued fixed cost leverage as the business grows, supplier scale benefits and increasing mix of private label and exclusive product, logistics optimization, the compounding effect of marketing investment and higher repeat rates and the ongoing integration of AI to lock efficiencies across our entire P&L. Now in terms of housekeeping, our expectation on D&A remains unchanged at between $12 million and $14 million for the full year FY '26. Intangible CapEx in H2 is expected to be comparable to H1. And whilst we did see an increase in PP&E CapEx in H1 above BAU, as already mentioned, this reflected the investment into our new warehouse in Melbourne. So PP&E CapEx is expected to revert back to BAU levels during H2. Thanks all for your time, and I'll now hand you back to Mark.

Thanks, Cam. So we are pleased to report that the trading momentum from the first half has continued into the second half. Revenue from the 1st of Jan to 9th of Feb, this calendar year is up 20% year-on-year, driven by an acceleration in new customer growth, which is really great to see and a continued growth of our repeat customers. Looking ahead for the rest of FY '26, our focus remains unchanged: to grow revenue, take market share as fast as we can while delivering on our stated margin objectives. Our on-market share buyback program remains in place and ready to be deployed. Note, we have over $160 million in cash on the balance sheet, and we have the ability to buy back over 11 million shares under the current program. And lastly, I want to say a massive thanks to the Temple & Webster team. I'm proud of what we've accomplished, but even more excited about what's to come as we continue our journey towards becoming the #1 retailer for furniture and homewares in Australia. With that, we'll now open the line for questions.

[Operator Instructions] Our first question comes from Owen Humphries at Canaccord.

I guess the question for today is just all around the operating leverage within the business. I guess people are looking at the incremental contribution margin that was delivered today. I guess there was a big investment around promotion or promotional spend that aided the growth towards the back end of last year. If you look at the trend, it's kind of 34% last year, 32% in the second half, 30.5% in the first half. You've given guidance of that 30% to 32%. Can we just kind of talk about or could you give more guidance around how that will trend going forward into the second half and then into FY '27?

Yes. Thanks, Owen. It's Cam here. Thanks for the question. Look, first, I would say we guide on EBITDA, but our 30%, 30% is our target range from DM perspective. And I think what you've seen this half is we had an excellent outcome on fixed cost leverage, so 110 basis points of leverage there. And we've also had quite material leverage on the marketing line. If you compare H2 FY '25 to the current half from a marketing perspective, our cost of sale has come down from 16.7% to 15.9%. So we've had leverage across both fixed cost and marketing, which has been quite pleasing. And that's enabled us then to invest more in DM and offer a strong compelling offer to customers. When I look at H2, I think if you break down the margin profile across the entire P&L, we will see more leverage coming through from marketing side. We've seen great leverage in the first half. That will continue into the second half, and we'll continue to see fixed cost discipline. So even if we're operating at the same DM in second half, we should see an expansion in EBITDA margins coming through in H2. Now from a DM perspective, there are some tailwinds that potentially could see that increase, including things like foreign exchange, roughly 30%, 40% of our cost of goods sold is in U.S. dollars. So as that starts to filter through, that will start to come into being. And there's also continued global uncertainty and tariff situation and potential supply benefits we could be getting there. So there are some positives that could come behind that DM. But even if we operate at the same level through the half coming up, we should see improvement from a margin perspective in H2 versus H1 at the EBITDA level.

I think it's -- I'm going to jump in for a second. I think it's worth restating for everyone, we are not managing the business for profitability at this point in the cycle. And I think that's really, really important to understand. We have put out an EBITDA margin guidance range. We will land the business in that range. But everything else, we will fund into growth because our stated ambition is to get to be the biggest scale player as quickly as possible. And that's our midterm goal is to get to $1 billion in revenue by FY '28. No one else will be there. We're already the largest online retailer. That is only going to accelerate our scale benefits. And once we're at that scale point where we are the -- in this undisputed market leader, that unlocks a whole bunch of things, then better supplier terms, better fixed cost leverage, better marketing as a percent will come down because things like repeat to grow, brand awareness is more fixed in nature. So it unlocks a lot of operating leverage down the track, but we're not managing the business profitability. We said we want to show you that we can kind of get our fixed cost as a percentage down, but the rest we're going to put in growth, and that's what we're doing.

And on New Zealand then the -- well done in getting that launched, $4 million of revenue quickly. I guess you're using it as a test bed for international expansion. It sounds like you're getting more confident on that given the expansion into New Zealand. Just talk -- just remind us the time frames given the balance sheet capacity.

Look, I don't think we're in a rush to go outside of ANZ yet. We've just launched it. It's very early days. And yes, it's going well. But there's still a lot to work out. We don't even have a dedicated New Zealand site yet. So we're still -- that $1 million we generated in 4 months is from a fairly terrible customer proposition, even if I do admit myself. You're a New Zealand customer, you find us primarily during the -- in performance channels such as Google. You click on an ad, you land on a dotcom.au site, it's priced in AUD, you go through cart, you get a 3-week ship delivery date because it's being shipped there. Shipping is more expensive, you pay [indiscernible], then it gets converted to New Zealand dollars and you check out. And with that customer experience, we've still done $1 million in the first 4 months. And it's a small market, so $1 million is actually a really great start. So I think what we want to go to in the future this year is, well, what happens if we have a much more appropriate customer experience. We have a [ dogcart ] on NZ site. It's the range is -- it's the range that you can shop if you're in New Zealand. It's priced in New Zealand dollars. There's promotions which are relevant to New Zealand. They're not excluded from things like free shipping promos. We have stock in market that we can deliver to you quickly and then let's see where we can get that to. So I think that this year is really about proving that out, what does a localized e-commerce experience look like and what's involved in that. We'll take the learnings from that, we assess. And then if everything is still looking great, then we'll look at other markets, but it's not going to be this calendar year.

The next question comes from John Campbell with Jefferies.

Just firstly on marketing. I mean marketing spend has been going up circa sort of $10 million per annum half-on-half. And obviously, the intention is for marketing spend as a share of sales to come down, and it did come down this half. Do you expect in terms of the dollar spend in the second half to be roughly equivalent to the dollar spend in the first half? Or just give us a little bit of sort of hard guidance on that.

Thanks, John. I won't guide on dollar spend on marketing, but we do think about it as a variable cost, right, because the majority of our spend is performance-based. And as you all know, we can dial up and dial down our marketing spend depending on the conditions that we're seeing. So we do think about that as a percentage. But what I said previously still holds that we should see that percentage come down in H2.

1 percentage.

That percentage should come down in H2. I won't give a specific guidance on it. Have a look at our long-term margin targets as well or our short-term margin target page, where we're saying between 15% to 16% for the full year.

Yes. Okay. And just on the growth avenues, so Trade and Commercial and Home Improvement, both look pretty good. Can you just sort of touch on -- in Trade and Commercial in particular, like it's obviously a big market and sort of somewhat outside of your sort of core competencies, if I could put it that way. It's probably not the way you put it. But can you just talk to us about the initiatives that you are -- particularly within Trade and Commercial, but also Home Improvements is driving that sales performance?

Yes, sure. I mean they're very different areas. I mean the easiest probably start with Home Improvement, which is essentially just another category on Temple & Webster. So it's run through Temple & Webster. It's marketed similarly. We do a bit more mid-market marketing around Home Improvement, so before and after rooms on Instagram and Pinterest and things like that. Really, the main driver of Home Improvement right now is getting a really great range. At the moment, the Home Improvement category is quite expensive. It's quite difficult to shop. There's not that many options, especially online. And so what we're finding -- and the supply chain is trickier than furniture and homeware. So what we're finding is by using our private label division by importing things like vanities and ceiling fans, et cetera, we're really propelling the customer take-up because they're great quality products at significantly better prices. So it's the classic retail, great products prices. So Home Improvement, it just is a much earlier stage than furniture and homewares because you think about life stage, it's not really until a bit older as you renovate. So those customers that are renovating in their 40s and 50s, et cetera, they're the ones that the early 40s have really grown up with the Internet. And so that's when we call that -- when we say digitally native millennials, it's the younger 40s and below. So that's Home Improvement. So it's really a range strategy. But to do that, to ship the range, we have to develop shipping solutions, fulfillment solutions. We had to restructure our data to make sure the site is searchable for the right product. So there's a whole bunch of things that's gone into it. But I'd say the key driver of our growth has been getting a better range. Trade and Commercial is a bit different. Yes, it is different to our core capabilities, but it does leverage a lot of the same. So actually, a large part of that growth or the predominant part of the growth of Trade and Commercial is self-serve. So that is businesses that we've set up that have ABN that we've set up with their own access as a special part of the site. Consumers don't access it. That has further discounts. On top of that, the bigger clients get account managers. And then our goal is to really get our customers. And the best type of customers for us are customers that are buying all the time. They can go on to a portal, we maybe pre-agreed a range that they can shop from and they shop from -- they just shop as needs come up. And that looks very much like e-commerce. It's a -- let's take a child center operator. It's the manager of the particular center needs a new rug. So they go on to the portal, they buy the rug. It's prenegotiated discount, the rug comes and it looks very much like e-commerce. So it's leveraging a lot of what we've already built. It's just that the buyer is a business. It's not a consumer. So it's not going to a home, it's going into a business. So we don't -- we're not doing major office fit-outs for the big corporates yet. That's not because we don't really do office installs. But where our sweet spot is retirement homes, child care, hotels, hospitality, things that actually our range is appropriate for.

The next question comes from James Wilson at Macquarie.

Just one for me. Are you able to maybe give us a little bit more color on the cadence of your revenue growth and how it's evolved? So -- conscious that you accelerated into the end of the first half relative to your AGM update before slightly pulling back to that 20% run rate over the trading update that you've just given us. Is there an impact of maybe macro sentiment shifting there? Or is it a function of promotion? Can you just talk us through how that's evolved, please?

Yes. Sure. So I mean the half -- and I think I've said this before, we have seen for the last little while, a few years that customers are definitely promotionally sensitive. So as interest rates have gone up, cost of living crisis, inflation, et cetera, customers naturally gravitated towards more value. Every retail in the country and their promotional calendar. We're no different to anybody else. We have the ability that suppliers do help us out with that promotional calendar, which means somewhat bearing all of the cost ourselves. But there is natural volatility as a result of that move to promotional calendar -- to a more promotional intensity. Periods like Black Friday or Black November really are becoming more and more important. So what we're finding is that we are growing -- the fastest growth periods are when we've kind of got our strongest offer and then customers are waiting a bit more in between. So we are -- we plan for that. So we have a calendar where we know when we're going to pull back a little bit marketing, when we're going to push when we can have a stronger offer on competitors and where our goal is to stay one step ahead of the pack, which I think we've been quite successful in doing. We're a very nimble operation. We have no stores. We can change our pricing and promotional calendar very quickly, much, much faster than offline. So we can respond to what we're seeing in market very, very quickly. And we do. We run very -- in an agile fashion. So I think the half -- yes, there were peaks and troughs in the half. The AGM update was unfortunate because it fell into more of a trough leading up to a peak. And I kind of tried to tell everyone just we do have a very strong finish to the year coming up, but believe me, didn't get me so far. But we have planned for it, and we are delivering this growth. In terms of macro, definitely, obviously, interest rate rises, we don't necessarily want to be in an environment of -- it's great when people have more money and are spending. But we do have the ability to outgrow macro headwinds, and we have done for the last 14 years. That trend from offline to online is a structural shift. It's happened in every category in every country. It's not really macro dependent. If anything, maybe a downturn accelerates that trend because people seek more value. And then obviously, we're the gorilla in the space. So we have a bigger team, bigger marketing budgets. We're a bigger part of our supply businesses. We're a bigger part of our courier businesses, carrier businesses. We can accelerate our market share by putting our foot down. And you can -- our suppliers are saying that we are doing the best in the category for them. So I think it's a bit of both is what we do in post macro, but I'm really confident, as you've seen, that we can navigate the storms given the flexibility and agility of our business model.

Understood. And just on that sort of flexibility, you've spoken to us about your expectations into the second half around delivered margins. Are you able to maybe give us a sense of the sort of base case assumption that you guys are using when it comes to interest rates and the environment into the second half when making those comments? Is that assuming rates remain at the same level that they are today? Or have you factored in some buffer for potential increases in interest rates and the macro getting a bit tougher in the second half?

We don't really -- look, we don't -- it's not like we're a bank where we kind of -- the interest rate has a direct impact on our margins or bottom line. It's more indirect. It's about consumer sentiment, housing supply, housing turnover, the wealth effect. It's an indirect effect. I think what we are assuming is that we will still need to be -- have a great offer and be price competitive and make sure that we're -- our promotional calendar is on point. We've already -- we think we can -- the DM that we're running now is really -- a lot of that is us funded, but we actually definitely see opportunity for our suppliers to help us out. So that actually the DM should improve as a result of that. But as I said, we're looking at the whole P&L and going, well, actually, we're doing really better in fixed costs. We can actually fund a bit and why not do that to kind of ride the growth curve. So it's not -- we're not forecasting the environment to become easier, but we do think we can navigate through it better than anyone else.

The next question is from Chami Ratnapala from Bell Potter.

Yes, hopefully, you can hear me.

Yes. Yes.

Perfect. Yes. I think the first question, probably just want to -- quite a few questions on sort of near term, but more looking at the current delivered margin. First part, I mean, is the delivered margin in the promo side? Is it more outside supply funded? Or could you just talk to sort of what happened here? And then with where that's tracking, does the long-term EBITDA margin outlook of getting towards that 15%, does that become longer dated in this challenging environment and where delivered margins are tracking? So 2 parts to that, if I may.

Thanks, Chami. I might take the second question first, the longer-term question. And nothing has changed. Nothing has changed around confidence on the 15%. Nothing has changed in terms of our 3% to 5% range for this year. I think it's important that when you're looking at the EBITDA result for this half, you do think about the full year and you also think about the period that we are comping in first half '25 because there was some unusual noise in the first half '25, including FX. So we had an almost $2 million benefit from an FX perspective and unrealized FX perspective in the first half of '25, which if you adjust for that, the EBITDA for the first half of '25 goes from $13.2 million to $11.3 million, and that's something that's completely nonoperational. And then we also called out some costs relating to our Melbourne warehouse move in Melbourne, about $0.8 million as well. So when you consider these things, actually the half-on-half EBITDA has increased quite materially and the margin has increased. That's a very short-term view. But that means that our view on 3% to 5% for this year remains unchanged. Our confidence in second half being a better margin outcome than first half is there as well. And longer term, nothing has changed in terms of our view on scalability and the components of that across the P&L.

And then just on delivered margin specifically, I mean, the promo that was noted, was that outside the usual supply funding. Could you just elaborate a bit here?

The majority of our promotion is still supply funded, as we have said before. But one part of our model is we do have the ability to change that up depending on what we're seeing in the market. So our promotional plan is set a long time in advance. But we do have the ability to move things up and down if needed throughout the year, and that's what we do. But the message that we've always given still remains, which is the majority of our promotions are supply funded, and our job is to continue to seek that funding when we need to.

The next question is from Garth Francis at MST Marquee.

I just wanted to get a little bit more color on the cash flow result. Payables were up quite significantly versus the revenue growth. Was there a change in terms there just to deliver that outcome? Can you just give us a little bit more color on that, please?

It's Cameron here. Look, nothing unusual. It's just timing of payments. November is a particularly big period for us, as you know. So we do get a lot of invoices through the month of December, which can fall into January by the time they're due. So there's nothing abnormal in that increase in payables.

I might just ask on the competitive landscape. You've touched on the move from online -- the growth in online. Are you seeing peers who are an omnichannel operators doing better in online as well? Just given that the market has grown quite substantially over the last 6 months relatively to the rest of the market, we might have expected an increased acceleration if you were holding growth rates from previously and just sort of pointing to your new customer growth down customer growth acquisitions having slowed on the first half of last year?

Yes. Look, I think I mean every -- I mean look, it's still a mixed bag. There are some big retailers which are still -- haven't really embraced omnichannel to the fullest extent in Australia in furniture, I'm talking specifically in furniture. But others are doing a good job, and it varies by retailer. What I'm not seeing is the omnichannel retailers talk about growth of online and percentage of online business and et cetera, blah, blah, blah. What I'm not seeing is that impacts their overall revenue numbers to a great extent. So I think a large part is a substitution. The issue, of course, is they've still got the fixed cost of their store network. And retailer IKEA is probably the best omnichannel retailer in the world. It's invested a lot in e-commerce. It has a it's structured data and content well. It's invested on things like green fleets and return of used IKEA goods. And it's really making the shopping journey easier. But actually, if you look at its global sales and Australia sales, its top line is going backwards and it has been for the last couple of years. And it's now at a point where it's closing stores in places like Japan and China. So I think online is a great -- is a must-have for an omnichannel retailer. I still think my thesis is still that the winner in a space will be an online-only retailer that doesn't have the legacy network of stores. But the others will -- the big ones should do okay. They should still maintain the revenue, hopefully, or stem the losses at least, but it's not the silver bullet that is going to save them.

The next question comes from James Leigh at Goldman Sachs.

My question is a quick one just on mix and how we should think about that impacting the first half delivered margin result. Was there anything to call out from a mix perspective?

Product mix, you're talking about, category mix?

Yes.

I mean the thing that still -- yes, no, the trend that we're still seeing is within Temple & Webster is that people are still buying the bigger things. So sofas are outperforming, outdoor furniture outperforming, Home Improvement is obviously outperforming and things like vanities. So people are still coming to us for the bigger items. That's why you're seeing the AOVs hold and the revenue per customers hold in the face of a very -- an increased promotional calendar. So you'd expect our AOVs to decline because of the discounts that we're offering customers. But the fact it's holding, you can see that mix. So it's not necessarily driven by a mix thing. Having said that, our entry-level prices -- price points are -- do tend to outperform within a category, and they can be lower margin. So there's a bit of a headwind to margin with people shopping for value. But no, I think the biggest impact at the end is that we read the tea leaves, we could see interest rate -- people talking about interest rate rises. It was becoming a more competitive environment. And so we're like, okay, we've got the flexibility. Let's actually increase the promotional intensity, and we can self-fund that while we work with suppliers on a more intense promotional calendar they fund. Let's take advantage of the fact that we can do it, pull the lever off we go, growth delivered at 20%. And then what we've shown to our suppliers also is that we have the ability to grow 20% during this period, which none of your other clients do, customers do, now work with us. So as I said, I don't expect us to be running or self-funding those promotions, that additional promotional calendar going forward. But there was a moment in time where we're like, okay, well, the macro is turning against us again with the interest rate rises, time to adjust our strategy.

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

So I guess, given to drive sales, you can either pull on price or marketing. So maybe contribution margins, maybe the more important metric to look at right now. So contribution margins went from 14.6% to 13% year-on-year, that is. You need to get to 20% to get to your kind of long-term target. So I guess, can you speak specifically to contribution margins and why you think you can get that up to sort of 20%?

Yes. Thanks, Wei-Weng. Look, I think firstly, on the half-on-half change, I'll just call out what I spoke about before, which was we did have a 60 basis point tailwind from FX in the first half. So the drop is not quite as large as what you say, if you take that out. Secondly, as we've always said, there is obviously 2 levers that we pull in the business, price promotion and marketing to determine how we best grow. And nothing has really changed from that perspective. But what I would call out is, as I said earlier in the call, the marketing leverage that we're able to achieve through in the first half, that should continue into second half. And I think if you look at our longer-term targets of getting marketing cost of sale down to 11%, we still think that's very achievable. And price and promotion obviously does vary throughout the year and in periods where you see a more buoyant consumer and confidence is a bit higher, then that can be higher. And obviously, there's things that we do as well to try and make sure that we optimize our cost of goods sold and gross margin. So I think nothing has changed from a long-term perspective and our confidence in getting the contribution margin and deliver the margin up the ad cost towards those longer-term trajectories.

Directionally, it's kind of going the wrong way at the moment. Like is it -- when should we expect this to kind of start moving up?

I did make a comment earlier around second half that we expect to see an improved margin outcome in H2 versus H1. But once again, it is a longer-term journey and both leverage in marketing and DM getting to 33% is a gradual move. And we should see continued operating leverage over time. It's not a step change. It's a gradual move as we scale.

I mean let's put it in context, right? The main driver of that improvement in contribution margin is actually a reduction in marketing costs. The DM is actually to call it 33%, 30.5%, it doesn't take much for us to get to 33%, a little bit better terms on factory prices with scale, FX would help some of that, getting our local suppliers to find more promotional calendar. That's not a big gap between 30.5% and 33%. We're talking about a really particularly aggressive point in the cycle with interest rates going up again and competitors having to step up their promotional calendar, we've matched ahead of the curve or we've gone there ahead of the curve. And so DM has taken a short-term hit. So I'm not worried about the DM. Now the biggest driver is the marketing. And we can see that we are in a very -- the period of the business we're at now is that we are spending a lot of marketing. Our goal is growth. We're going -- driving our performance channels hard, investing in marketing, in brand marketing, that CAC has gone up. If we -- as we grow and repeats will grow to a bigger part of the business, we know our dollars we spend in order, that marketing cost will come down. As the business goes from 60% repeats to 70% repeats to 80% repeats is which Wayfair is at the moment to 85% and at that time, the marketing costs will average down. As our brand scales and as it becomes a smaller percentage of the business, marketing costs will come down. And you see a business like Wayfair in the U.S., which has switched into more margin optimization, it's running sub-11% ad costs and the growth is circa 9% for the U.S. and EBITDA margins are not bad. And the 30% of DM on a pure drop-ship model. We have 30% private label and growing. And so that is a tailwind for our margin. So I look at a business like Wayfair, which is probably 4 to 5 years ahead of us in the cycle, and it's already proving out the marketing is sub-11% and the DM for the drop ship is 30%. Now if we ran our drop ship is at 30%, added the private label and exclusive, we would already be above 33%. So that's why I'm not really worried about the longer term. I just think right now, I think we all need to kind of focus on the bigger picture, which is this is a growth story. This is a once-in-a-generation change of shopping habits. And do we want to be the retailer, which is the go-to brand for the next generation of shopper, which will then last for decades. It is not a 1-year growth strategy. This is a structural shift. So I think we will continue to focus on the top line and grow and deliver that $1 billion short-term target. And over time, you'll see the economics improve. [Audio Gap]

Your next question comes from Sam Teeger at Citi.

Can we dig into the delivered margin a bit further given judging by the share price, the market is obviously spooked by it. Can you help us understand what categories are seeing the highest rates of discounting? And do you want the strategy to be Temple & Webster being a price leader or price follower? And then kind of following on from that, I appreciate everything you've said about looking at the longer term and the target is $1 billion. But right now, on a scale of 1 to 10, how happy are you with the balance between discounting and marketing investment?

Well, I think the price follower/leader really applies to commodity goods where you're selling the same thing and you may be differentiating on service or distribution or something else. I think our whole strategy is we're not selling the same thing. So then it's about pricing to optimize the demand curve or whether that be for profit or revenue, that's a decision for the business. Definitely, our strategy is we don't need to be the cheapest even if we have selling the same thing because there is a premium that people pay for Temple & Webster service and the safety that goes with that, security that goes with that, which we see. I think in terms of how happy are we, I think -- well, the market is the market, and the market to be honest, we don't manage the business for the market. The market -- sometimes they want growth, sometimes they want profit, and it's hard to work out what the market wants. What we want is we want to be the biggest retailer of furniture and homewares in the country, and we want to reach that $1 billion by FY '28. And then actually, the goal is to become the largest retailer, which is to overtake IKEA and Harvey Norman, which other businesses around the world have proven online-only businesses should be the category leader in the market. So that is the goal. And as I said, when we do that, we have then set the business up for success for decades. Short-term thinking around what the market wants, whether it wants margin this half or wants growth, to be honest, is a distract -- the thing that we should be doing as a management team is focusing on what is the right strategy for the business. And I can hand on heart say the right strategy of the business is to get to market leadership as quickly as possible. Now shareholders or the market or analysts or journalists may not agree with me. And that's okay. I can sleep at night. What I firmly do believe is that this is a once-in-a-generation opportunity to establish Temple & Webster as a leader in a huge category and have structural tailwinds behind it for decades.

Got it. And just right now, so what categories have seen the highest rates of discounting?

Well, we run site-wise usually. So it's kind of free shipping across the site or 10% off the site. So it's not -- we don't necessarily -- we have a whole series of secondary promotions that we call it, which is the supplier funded 15% of coffee tables this week or 10% of [ lamp ] this week, et cetera. But the big drivers are site-wise, so the discount supply across the board.

And just to make sure I got it wrong, can you please confirm whether the FY '26 margin guidance of 3% to 5% includes the New Zealand start-up costs? Or is that separate?

Includes.

Includes. Includes.

Your next question comes from Evan Karatzas at UBS.

I'll just ask one in the interest of time. We've sort of floated around, but I'm just going to ask directly. Can you just talk to the competitive environment you're seeing out there in that core online B2C furniture/homewares category? And if any changes in that have required you to be a bit more, I guess, aggressive on the price and promotions as well?

I think -- look, I think the competition is responding to some of the macro trends, right? So -- and you can see furniture, for example, in the U.S., I mean, it's a tariff issue, but it's also -- as customers are feeling the pinch, they can put off the bigger purchases, but then competitors do respond to that. So it's a circle of macro followed by competitive activity. Yes, definitely in our B2C furniture and homewares, you can see retailers up their promotion intensity. Some of them are trying to get an IPO away. The timing of that is interesting. But in general, our core is still growing. So the 20%, the core B2C furniture and homewares is still high teens in terms of growth of the 20s. So it's not like it's just Home Improvement, Trade and Commercial. The core is growing. The core is much, much bigger also, like it's $0.5 billion business growing at high teens. No one in the country is doing that in furniture. So it's still a -- probably the highest growth furniture and homewares business in Australia. But we've always planned for the fact you do start fighting law of big numbers. So layering on Home Improvement, Trade and Commercial, international, that's -- like all businesses, you need multiple growth horizons. But I think this is a particular -- this is a moment where you'll probably -- what's happened in the U.S. and other markets is that the omnichannel retailers strike back, but it hurts their bottom line. They only have so much capacity to fight and then they start going out of business. And so you see -- if you look at -- if you just Google furniture store closures in the U.S., you'll see millions of square feet have been taken out of the market, in the furniture market over the last year or 2 because they've reached a point of the cycle where the omnichannel retailers can't fight anymore. So there is a moment of cycle where the competition will get the strongest. And then unfortunately, those fixed costs aren't going anywhere, and it becomes untenable. So I think, yes, we are in a bit of a cycle on a tipping point. But as I said, we -- I have complete confidence that we have the ability to that maneuver.

Your next question comes from James Bales at Morgan Stanley.

Firstly, on second half sales growth expectations. When you look at how choppy the comps have been, how you've been able to reaccelerate to 20% in the end of the first half and into the first 6 weeks on comp stacks look very different. Is comps the right way to think about it? Or is this about just the economics of promotions and payback at depending on how the sort of consumer looks in the next 6 months?

Look, it's always a bit of both, right? So obviously, if we have really strong periods, of growth in previous periods. That's a harder number to comp, just that's normal math. But then what we can do to make sure that we're comping those periods is to change our promotional calendar or intensity or we know when those periods are, so we can plan for them. So it's a bit of both. But as I said, we are feeling -- to your question, are we feeling better about the second half? I think the second half should be a good half.

Okay. So that sales, what about operating leverage? I guess my takeaway from what you've said today is that you're happy to reinvest in DM. You're happy to reinvest in marketing to acquire and acquire customers and grow the base. And so if you get operating leverage over the next couple of years to plan, should I assume that most of that comes on the fixed cost line?

No. James, I think if you're looking longer term, obviously, it does depend on the environment and how we're operating. But you can see the fixed cost leverage year-on-year. So if you go back to '24 to '25 to first half '26, we've seen 70 to 100 basis points operating leverage year-on-year. So that should continue. And then the question is how do we reinvest that across the other lines of the P&L whilst also balancing -- showing some margin expansion over time? So nothing has really changed from that perspective. It does very much depend on what the market is throwing at us and then how we reinvest that into marketing and DM. But we do want to -- we do commit to showing some operating leverage, but that has to balance with the overall objective of reaching $1 billion and becoming Australia's largest retail in the category as well.

Your next question comes from Aryan Norozi from Jarden.

Just 2 quick ones. One, new customer order growth was only 4% in the first half of '26 and previously, it's been 10%, 20%, 30%. So what's going on there? Is it less economical to drive customers at current CAC and so you're pulling back and that's what's driving the marketing leverage? Or is it something else, please?

Yes. Actually, if you look at a revenue basis, it's higher than on an order basis. So a bit of what's happening is the channels that we're going into and spending on and our mix shifts within the Google and former channels are delivering better customers who are spending more. So that's -- if you're on TV or the out-of-home channels, they tend to be a better customer than a straight performance channel -- performance customer. So a bit of it is the type of new customer getting and the product range that they're buying. And a bit of it is Google will flow money to the customer that's most likely to buy. Repeats are doing really well. Cohorts are smashing it. The growth on the repeat side is amazing to see. And so Google has been chasing a customer which is more likely to buy. I think what we're really happy to see is that actually that this first trading update that we did this half, we've put a line in it to say that, that 20% is partly because of new customer acceleration. So we've -- that trend of new customers, smaller growth, but buying bigger things, we've actually seen a significant uptick in new customers this second half. Whether it could be something we're doing from a promotion point of view? We are -- we've upped our paid social strategy, so it could be something to do with marketing as well or it could be doing -- or it could be macro interest rate rise has kicked in, people are back into the value mindset and hence, kind of seeking out the more value retail. I'm not sure what it is, but it's good to see the new customers in high growth mode.

And then just second one, is it fair to say your delivered margins should be higher in the second half than the first as you get more and more of supply funding? So you've obviously seen a change late in the year or calendar year. You've gone to -- your buys have gone out to your suppliers and negotiated terms. And so by the time you end up in June 2026, you should have a higher mix of those extra promotions funded by suppliers because there's now one as big as Temple & Webster drop shipping to partner with them, so they're more likely inclined to do it. And if so, is that what gives you the confidence the second half EBITDA margins are going to be higher than the first half? Or is that comment just purely based on operating leverage and marketing and then the extra kicker is potentially [indiscernible] margins getting better?

Yes. Look, I think there's 2 things, right? There's DM and then there's everything else. And even if we operate at the same DM level as what we did in first half, in second half, we're confident that we should see a step-up in margin in H2 versus H1 because of what we spoke about before on marketing and fixed costs. Now there are some tailwinds around DM in terms of FX and negotiations as well. But once again, it is an interplay between marketing and DM over time. So yes, I'd love to see an improvement in DM in second half, and there's some tailwinds there that give us confidence on that. But we also have to balance that with marketing and growth at the same time. So it's an equation of balance, but there are some positive signs in terms of FX and potential savings on COGS.

Thank you. That does conclude our question-and-answer session for today. I'd like to now hand back for closing remarks. Thank you.

So thank you, everyone, for your time today. As you can see, we've delivered a strong revenue growth in frankly, turbulent macro times. Importantly, we were able to deliver that growth and still deliver our EBITDA margin guidance. So that shows the flexibility and agility of the model. I do want to conclude by reminding everyone that our midterm target is to reach that $1 billion in sales. That is our #1 priority. At that point, we firmly believe that we'll unlock scale benefits, establishing Temple & Webster as the go-to brand for next-generation shopper is going to reap rewards and dividends for many, many, many years to come. So thank you for your time.

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