@Bushmanpat nothing is perfect, there was a good post on here a few weeks ago about pessimism being easier than optimism. Munger has a good quote "i want to know the bear case better than the bears" everything has a bear case, just got to try to know it and understand how comfortable you are with it. I'm also very slow to sell, keep those hands warm.

G'day @Bushmanpat, 

I love the honesty, being equally honest, I'm soo not qualified to comment on your question, I'm not great at putting together a thesis to sell my own positions and until a few hours ago I had no idea who TPW were or their place in the Australia market, but, having gone for a short wander down this rabbit hole, I thought I'd comment anyway. 

A quick glance through previous SM posts I see our resident riddle solver @Solvetheriddlesuggests TPW are the best online furniture retailer in Aus. That's cool, you're a part owner of an awesome business, well done!! I also see @wtsimis has also had opinions on TPW for a long time.. So hopefully one of them can provide you with a more thoughtful answer.. 

My first port of call is SimplyWallStreet to take a quick look at the financials.. Zero debt on the balance sheet (my favourite number) excellent and a valuation of........ you know something is wrong when SWS gives you it's first valuation as a ratio of sales, in this case 5.5 times sales.. For a furniture retailer.. Eeek!! Turns out it's selling for Four hundred and sixty-five times earnings. Wow my eyes are watering!! SWS's valuation section.... is always wrong.... precise but wrong.... which is a whole other story, but it's the easiest to eyeball and a great starting point.. But as I expected, according to SWS's DCF this bad boy is waaaay overvalued.. 

BUT we are not here to buy past earnings.. We are buying the future.. Afterall I'm sitting on DRO shares at 59x Sales, So how much money can you really make from selling homewares? In your post you mention future EBITDA margins of 15%... Really that seems like a long way from where they are today.. 

Digging deeper into the SWS valuation it allows you to see their DCF model breakdown (pictured below because I can't seem to attach a spreadsheet here, but I'm happy to email it to you).. Can TPW make FCF of $120m by 2035? Because that is the bedrock of the Terminal value which in turn drives ~70% of the intrinsic value? You wouldn't think so with an EBITDA margin of ~3%.. But with margins in mid-teens, 10 years from now, might be a different story.. However even if they did achieve $120m in 20350FCF, they would still be 59.9% overvalued Vs today's price. I note SWS's Valuation uses a really aggressive discount rate of 7.46%, which I have a problem with, and which I have communicated to SWS previously.

In short, should you sell? The current valuation is eye watering on any comparable multiple of sales, profit or book value.. It's too good for me, I'd be inclined to sell, but that just gives you the problem of where to then park the money next..

If you do hold on, you need a thesis which can justify how TPW can grow margins aggressively in an extremely competitive industry.. Uncle Gerry is going to ensure HVN puts up a fight!! Scale and Operating leverage will do some of the heavy, HEAVY lifting required but Management is going to need to be tough and disciplined. The latest YoY analysis available (Dec 24 Vs Dec 23) shows NPAT dropped from 1.9% to 1.2% because operating costs went from $117mil to $153m... That is not the discipline you need.

Can TPW replicate (say) William-Sonoma, WSM in the US? I don't know.. A few hours ago, I didn't even know they existed.. 

Not sure that helps your thoughts do another lap.. Goodluck, let us know what you do.

Cheers

JM

ah yes, it's always a conundrum @Bushmanpat, and @Lewis lays out the considerations well.

I do think you've approached it in the right way -- what needs to happen with revenue, margins and multiples to justify the current price?

With online retailers, one of my observations is that you need to be careful with how important marketing spends are for sales growth. There are examples of companies that have enjoyed good top-line growth, but really only as a consequence of significant marketing efforts (in which I include SEO, referral, discounting, influencers etc etc). For example, you can engineer good revenue growth if you dont care what it costs to generate a sales -- but if it costs you $2 to sell $1 of stuff, well that's clearly unsustainable. At the same time, in the early days, you need to prime the pump and grow awareness, so it is sometimes necessary and sensible to have this approach. But you do need to have the view that eventually the business becomes a known destination with lots of repeat and loyal customers, where average customer acquisition costs are less than average lifetime spend, and for which you can leverage your scale advantages to keep rivals at bay. It can be a tough thing to make happen.

Let me hasten to add -- i'm NOT saying this is the case with TPW. In fact, while marketing is chewing up about 16% of sales, and brand spend is set to climb in the second half, they are doing this from a position of profitability and strong cash flow, with repeat customers making up most orders and a growing share of exclusive products to protect margins. It's a good sign.

@JohnnyM reference the margin expansion potential. Last week we were looking for a cheapish TV unit to fill a space for a few years. My previous experience with TPW was a potential customer was that they were "upmarket" offering better quality and designer style furniture. However, I feel this has changed. There were many cheap TV units available at the lower price point where I would assume margins will always be tighter. While designs were generally quite nice, quality looked lower than I had seen before. I wonder if this has more to do with the "cost of living crisis" and that TPW had moved down the cost curve as a result. So maybe there could be room for margin expansion if they can move back up the cost curve in the future. Can't comment on experience as I ended up getting the TV unit from "Mocka" (Adairs furniture arm) and Gerry barely had any on display when I went into his store!

I had a similar experience on T&W earlier this year and can agree with your commentary regarding quality.

whilst we hadn’t used T&W in the past, the quality of the bedside table and drawers we ordered was pretty average for the price point they were charging. On top of that the colour of the drawers didn’t match and assembly was not straight forward at all.

Personally I won’t be using them again and will be going to an adairs or ikea in the future for these big purchases.

There could still be a place for T&W in the Aussie market as a low cost provider, however im probably still too jaded from my experience to jump in at those multiples. Will watch from the sidelines for now.

i feel like a lot of the big retail companies (Bunnings, big w, Harvey Norman) are moving to a marketplace kind of model where they don’t have to hold as much inventory or appeal to different markets while still clipping the ticket on the way through. Will be interesting to see how the quality control under these models goes over time and their impact on brand reputation for the parent company.