Breaking Down Kogan The Business, Not Just a Ticker Symbol

The rise and fall of Kogan’s share price has been eye watering and heartbreaking. But that’s the price of the stock. What we want to look at is Kogan the business.

It is no secret that Kogan was the stock to buy during the pandemic. With lock-downs happening nationwide, stay at home shopping was on a rocket ship to the moon. And Kogan had a ticket on that space ship.

Understandably, many investors got ahead of themselves bidding the stock price up to over $20 per share. Management themselves thought sales volumes would continue to flourish and stocked up inventory as a precaution.

Like Warren Buffett has mentioned, “the rear view mirror is always clearer than the windshield”, and hindsight is 20-20. Unfortunatelly, lock-downs did not drag on for longer than most people thought they would.

Soon after people were back to shopping their favourite retail products in brick and mortal stores. Leaving Kogan with a mountain load of inventory they could not sell, driving up warehousing costs as a result.

Despite the roller-coaster ride with Kogan share price, what does Kogan the business actually tell us?

What Went Wrong With Kogan?

Price and value are two sides of the same coin. But there are often times when there is a disconnect between price and value. It is within this dichotomy that the potential for achieving remarkable gains, modest gains, or even losses lies.

What drew my attention to Kogan was likely the same allure that captivated numerous individuals during the pandemic -the remarkable surge in its share price. I can only assume that a substantial wave of optimism was ingrained within its valuation.

However, it was when the share price plummeted that my interest was genuinely piqued. The revelation by Kogan to the market was the catalyst of panic selling. By acknowledging an excessive stockpile of inventory, it made it clear that the expected growth baked into the current valuations was not sustainable.

This was a case of investors, or dare I say “speculators” getting too ahead of themselves. If I can recall, Kogan was also on the list of the most shorted stocks on the ASX during this time. It has since lost that title but has roughly 2% of its float still shorted.

The first problem with Kogan’s excess inventory was that it significantly raised their warehousing costs. Warehouse expense more than doubled from $13.5 million in 2020 to $34.7 million in 2021. This severely impacted their bottom line margins.

To curb this problem, Kogan went on a massive discount sale of their inventory, which only means one thing for investors- reduction in gross margins. When a business falls out of favor, its share price is subjected to punishment.

Where To Now For Kogan?

In my opinion, a bright future awaits Kogan. The business possesses a competitive advantage in its capability to provide consumer discretionary products at lower-cost to its competitors.

One notable aspect worth highlighting is Kogan’s management who admittedly owned up to their mistakes. Moreover, they were clear about their strategy to rectify those mistakes and return to profitability.

Not only have they right-sized their inventory they have also managed to return to EBITDA positive in their most recent quarterly update. These are positive signs for Kogan moving in the right direction.

Many people also fail to realise that Kogan is also not only an online retail business. They have private label products that they sell and also white label products selling energy, insurance, mobile, loans etc. The growth in these categories will help improve gross margins if they are able to scale accordingly.

Additionally, their introduction of Kogan marketplace in 2019 allows the Kogan brand to offer a larger range of products without the costs of holding inventory.

Kogan First subscribers have also shown growth year on year with a 24.3% increase as at 31 March 2023 to over 407,000 members.

Improvement in inventory sizing and growth in total users are great signs that Kogan can create more value in the future.

However, there is still a looming uncertainty in the short term regarding the macro-economic impacts rising inflation will have. If you think Kogan has a bright future ahead, short term impacts should not worry you too much.

My 2 cent On Kogan

Despite being commonly perceived as an online retailer, Kogan can be appropriately regarded as a data-driven company.

Ruslan Kogan has said that Kogan uses a lot of data to learn about what their consumers want. More importantly their user dashboard is curated or personalised to show them products they are most likely to buy.

Additionally, Kogan the business has a potential to attract more market share than it already has. According to the International Trade Administration, Australia holds the eleventh position as one of the largest ecommerce markets globally.

The anticipated revenue is projected to reach USD 25.7 billion in 2020, with a further surge to USD 32.3 billion by 2024. This remarkable trajectory reflects a year-on-year growth rate of 15.5 percent.

In contrast, the traditional bricks-and-mortar retail market experienced a modest increase of 3.4 percent during the same period, resulting in a total value of USD 200 billion.

Kogans FY22 revenue stood at just over $700 million, which is significantly smaller number than the anticipated growth in the online market.

With these figures, you can deduce that Kogan has roughly 0.3% of the online market share in Australia. With such a small percentage of market share, Kogan has a potential to increase this.

Furthermore, e-commerce sales as a percentage of total retail sales worldwide was 19.7% in 2022, according to Statista. This figure is expected to continue to increase further as years pass by.

Especially with the world digitizing it would not be unthinkable that in the next 10-20 years, total online sales could reach to 50% or more.

If Kogan manages to capture a small portion of this growth, there is no doubt it can have a lucrative future.

Key Takeaways

• A bright future awaits Kogan, supported by its competitive advantage in offering lower-cost consumer discretionary products.
• Despite its common perception as an online retailer, can be rightfully seen as a data-driven company.
• The anticipated growth in the e-commerce market presents an opportunity for Kogan to expand its market share and potentially thrive in a digitally advancing world.

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