Should investors be bullish on this former COVID darling ASX 300 share?

This could be one of the most promising long-term growth shares around.

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Key points

  • ASX 300 share Temple & Webster has returned to revenue growth
  • Increasing scale can improve its profit margins over time
  • Further online adoption and AI tools could be a strong boost for the business in the coming years

S&P/ASX 300 Index (ASX: XJO) share Temple & Webster Group Ltd (ASX: TPW) was one of the strong performers during the COVID-19 period as e-commerce sales boomed.

It's down over 60% since the peak in 2021, but could this be a smart time to pounce on the ASX 300 share amid concerns about a slowdown in online shopping and pain from inflation and higher interest rates.

Before we get to whether now is a good time to invest, let's have a look at the latest update from the company.

May update from the ASX 300 share

On 17 May 2023, the online retailer of furniture, homewares, and home improvement business revealed it had returned to year-over-year growth as it completed cycling against COVID-19-impacted periods. Revenue in the period of 18 April 2023 to 15 May 2023 was up 10%.

That compares to revenue being down 5% for the period of 1 January 2023 to 15 May 2023.

It said it's still expecting the earnings before interest, tax, depreciation and amortisation (EBITDA) margin to be between 3% to 5%.

The company's cash level was around $100 million with no debt. Indeed, I think the market is highly undervaluing this large cash pile the company has.

Temple & Webster's boss Mark Coulter said the business had adjusted its range, promotional activity, pricing, and merchandising to reflect the inflationary environment and changing customer needs.

Share buyback

I like that the company is utilising its large cash reserve to carry out a share buyback, which creates long-term value for existing shareholders. In effect, it means the company's ownership is spread across fewer shares. This increases each investor's ownership of the company and hopefully boosts the Temple & Webster share price.

As of the latest update, the ASX 300 share had bought back just over 2.58 million for a total cost of more than $11.6 million.

Certainly, I think this is a very effective use of the company's capital at this lower Temple & Webster share price.

Is the Temple & Webster share price a buy?

In the short term, I think there's a possibility there could still be some pain. We've already heard from a few different retailers such as Adairs Ltd (ASX: ADH), Best & Less Group Holdings Ltd (ASX: BST), Universal Store Holdings Ltd (ASX: UNI), and Baby Bunting Group Ltd (ASX: BBN).

It was interesting how long it took for interest rates to affect the retailers' numbers. It was also notable how harshly the market treated the decline with seemingly little thought that a slowdown was a possibility up until the update. However, I  believe all of these retailers will be able to bounce back and beat the market strongly over the next two or three years.

Further, I think if Temple & Webster were to be sold off, it would make its shares even more of a buy than it already is, in my opinion.

The last five years have shown long-term growth of online adoption by shoppers and I believe more people will shop online in the future. This bodes well for the ASX 300 share considering its market share strength in the online space.

As well, Temple & Webster benefits from increasing scale. It has already built its website and many of its products are shipped straight from suppliers to customers. This means its margins can improve substantially over the next few years on incremental order volumes.

Artificial intelligence (AI) can definitely help improve its margins as well. The company recently invested more in Renovai, an Israeli start-up that 'digitises' the interior design process and powers product recommendations. This tool has shown "a significant increase in conversion rate" for customers who interact with it.

It is also using ChatGPT to power all pre-sale product enquiry live chats (which are 25% of customer enquiries). This has led to an increase in "live chat customer satisfaction, an increase in customers adding products to their carts, and an increase in conversion rates from this channel."

The business has also used AI to generate "enhanced product descriptions across all 200,000+ products". This would be a challenging task to do at scale efficiently with a human team. The company says this has also added to the conversion rate, add to carts, and revenue-per-visit metrics.

With a growing market share, increasing profit margins, AI developments, and expansion into areas like home improvement products, I think this is one of the most promising ASX growth shares.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs, Baby Bunting Group, and Temple & Webster Group. The Motley Fool Australia has positions in and has recommended Adairs. The Motley Fool Australia has recommended Temple & Webster Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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