Description

Westwing (WEW) is a content-led, European DTC home furnishings retailer.   The company is mispriced because local investors are overly focused on challenging COVID comps and the reopening trade and misunderstand the length of WEW’s growth runway.  WEW enjoys a large, underpenetrated TAM and lucrative customer economics which should allow for a long-period of attractive growth.  As we cycle past COVID comp concerns, I believe investors will refocus on WEW’s ability to grow to multiples of its current size with proven high profitability and believe the WEW can compound for a long-time.  Based on its midterm guidance, I believe WEW could be worth >e80 in 2024 with downside protected in the mid-20s which seems like an attractive risk-reward.

Business Description

WEW sells home furnishings in 11 countries in Europe to over 1.7mln active customers.  The company’s customer base is ~90% female and focused on the 25% of the population that drives over 66% of the home and furnishing purchase decisions.  Furniture represents 35% of the mix with the bulk of the assortment being more home decor.

WEW sells its products through its highly curated Daily Themes which is a useful avenue for acquiring and maintaining customers and provides the company with real-time sales data on customer preferences.  This business is supplemented by WestwingNow, which is its permanent assortment and is useful for cross and upsell of the company’s bestselling products at high margins.

The company works with a fragmented supplier base (>5,000 brand partners) which means that its brand as a retailer resonates more than the individual supplier brands (unlike in fashion or beauty).

Unique Content Asset

WEW considers itself a “shoppable magazine” and uses a storytelling-based retail approach to inspire its customers.  The company has over 230 employees in organic marketing who create content in its own internally owned studios and deliver that content to its customer base throughout Europe.  This organic marketing model is very unique as it relies purely on the content creation of WEW’s talented employees.  It is also a scaleable asset as the fixed costs of the organic marketing team can be spread over the increase customer base.   I believe this content asset is a more defensible form of marketing than classic online DTC marketing which is reliant on external channels (FB/GOOG) and the supply/demand dynamics of keywords.

As a result of this unique content asset, 94% of WEW’s traffic is organic as opposed to paid.  The company also enjoys tremendous engagement metrics with >85% of WEW customers visiting their website or app over 100x per year.  Finally, this content led approach means that many brands view them as a marketing channel in addition to a distribution channel and pay them marketing payments for inclusion into Daily Themes.

WEW also has very strong social media engagement metrics as its customer base is highly engaged across multiple platforms.  For example, in Germany, WEW had the 2nd most social media interactions behind only Mercedes and ahead of Netflix, Audi and Disney.

Cohorts

WEW’s cohort data is very strong with the company consistently delivering ~90% retention and ~80% of the orders coming from repeat customers. Furthermore, retention nears 100% in later years of the cohort, showing the long-term stickiness of the WEW customer base. 

This strong retention means that the company has also consistently returned an attractive LTV/CAC with a payback period of 12 months and high long-term ROIs as customer GMV continues to build over time (e 1,300 over 7 years and continuing to grow).

Large TAM

The European Home and Living Market is ~e120bln so WEW currently has 0.4% share and online in total has 13% market share.  The European home and furnishings market is increasingly moving online but still has a long way to go to reach other categories so WEW and other online players should have a long runway to increase sales.

Profitability

One interesting element of WEW is that the company has shown the ability to be highly profitable.  The company has guided to 10-12% mid-term and 15% long-term EBITDA margins.  During FY 2020, the company generated ~16.9% EBITDA margins in its core DACH region (central costs are less than 10bps as a % of sales).  The DACH region is generally a couple of years ahead of the International region in terms of business progress (more penetrated with permanent assortment and private label) and generally shows the future direction of the business.

I believe this proven profitability is a key differentiator between WEW and other DTC players whose long-term economic models are dependent on achieving aspirational improvements to their existing economic models.

Furthermore, these high profits are achieved in a capital light way with WEW sporting consistently negative working capital and normal capex/revs of 2-3%

One of the key drivers of long-term profitability is increased private label penetration.  The company is in the process of growing its private label share from 28% in FY 20 to 50% 

Private label has adjusted EBITDA margin that is 12-15% higher than the company’s 3rd party suppliers so this continued mix-shift should help significantly increase long-term profitability.

Capitalization and Valuation

WEW has 22.0mln diluted shares for a 671mln market cap at e30.50.  The company has 122mn of cash and 14.8mln of cash settled options and a 2.9mln non controlling interest for a total EV of 566mln.  At the midpoint of guidance, FY 12/21 revenue is expected to be e530mln (1.07x), EBITDA is expected to be 48.5mln (11.7x).

Management

WEW was founded by Delia Lachance (maiden name Fischer), a former editor for ELLE and ELLE Decoration magazines.   She remains as the Chief Creative Officer and was named one of the 75 most influential women of the German economy by business magazine Manager Magazin. 

Stefan Smalla helped cofound the business and currently serves as CEO.  Before Westing he was a consultant at Bain & Co. and was CTO at dooyoo and founded a social network.  Stefan’s former boss at Bain was an angel investor in Westwing.

Upside

WEW has put out mid-term targets of e1bln in revenue and 10-12% EBITDA margins in FY 2024/25.  At the midpoint, that suggests ~110mln of EBITDA and almost 80mln of FCF. 

Importantly, the company will still only have 0.8% market share at this mid-term revenue level and will still be well below its long-term profitability target of 15% EBITDA margins which suggests that it still has a long runway for cash flow growth post 2024/5.

Based on 110mln of 2024 EBITDA and ~80mln of FCF, WEW would be worth ~e81-84 at 16x EBITDA and a 4% FCF yield.  Given that EBITDA will be growing at a ~30% CAGR at that point with a high ROIC and a long-runway for future growth, I think these multiples are conservative.  Further upside exists if investors gain confidence in WEW’s long-term targets. 

Downside

WEW has guided for ~510mln of 2021 revenue and ~48mln of EBITDA at the low-end of guidance (510-550mln of revenues and 8-10% EBITDA margins).  These metrics would suggest a share price of ~e23-26 at 10x low-end EBITDA and a 5% FCF yield.  The company has a strong balance sheet with e122mln of cash and a very sticky customer base which I believe should be valuable over the long-term. 

Risks

1.       WEW really only appeals to a small niche of consumers so true TAM is a miniscule part of total e120bln.

2.       Tough COVID comps hurt near-term revenue growth and disappointment vs. consensus forecasts

3.       Logistics issues- WEW screwed up a warehouse move in 2019 and could do so again.  Supply chain problems likely have near term negative impact on growth and/or profitability.

4.       Somehow WEW screws up the content asset

Sources:

Most data from WEW capital markets day and other presentations

https://ir.westwing.com/websites/westwing/English/3200/presentations-_amp_-webcasts.html

Catalyst

Passing of COVID comp concerns; Long-term earnings growth