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(ASX: KGN) | KOGAN.COM LTD

Apr 24, 2024

Sentiment: Sideways

Type of Trade: High Growth

Industry: Online Shop

Sector: Consumer Discretionary

As per 1HFY24 and 3QFY24 Business Update


Kogan.com is an Australian e-commerce company that specializes in providing a wide range of consumer goods and services at competitive prices. Established by Ruslan Kogan in 2006, the company initially focused on consumer electronics and has since expanded its product offerings to include a broader range of categories such as home appliances, fashion, beauty, and even travel and insurance services.

Key aspects of Kogan.com’s business model include:

  • Direct-to-Consumer Approach: Kogan.com sells directly to consumers, cutting out the middlemen to offer lower prices.
  • Online Platform: As an e-commerce platform, Kogan.com operates primarily online, providing customers with a convenient shopping experience.
  • Diverse Product Range: The company offers a wide variety of products, from electronics and appliances to clothing and travel services, catering to different consumer needs.
  • Kogan FIRST Loyalty Program: Kogan.com has a loyalty program that offers subscribers benefits such as exclusive discounts, free shipping, and early access to sales.
  • Expansion into Services: In addition to products, Kogan.com provides various services like travel bookings, insurance, and mobile phone plans, contributing to a diversified revenue stream.

Now, Let’s explore the positive and negative aspects of the update to understand why the stock price fell and whether the reaction might be disproportionate.

Kogan’s marketing proficiency appears to be robust, leveraging various channels and a diverse portfolio of brands to engage customers. The company’s growth in its loyalty program, Kogan FIRST, which offers exclusive benefits and rewards, demonstrates effective customer retention strategies. Additionally, Kogan’s expansion into various business lines like Kogan Travel, Kogan Mobile, and Kogan Marketplace shows an ability to diversify and adapt to market trends.

As per 1HFY24

✅ Positive Aspects
  • Strong Cash Balance: The company ended 1HFY24 with $83.3 million in cash, providing financial stability.
  • No External Debt: The absence of external debt reduces financial risk and interest expenses.
  • Strong Operating Cash Flows: The net cash provided by operating activities was $52.0 million, indicating strong cash generation from business operations.
  • Platform-Based Sales Growth: Platform-based sales, which include Kogan Marketplace, Kogan FIRST, and other income sources, showed improvement. The Advertising Platform and Mighty Mobile also saw accelerated growth.
  • Improving Gross Margin and Operating Leverage: Gross profit for 1HFY24 was $89.5 million, with a gross margin of 36.1%, indicating improved profitability.
  • Interim Dividend: A fully franked interim dividend of 7.5 cents per share was declared, rewarding shareholders. The Dividend Reinvestment Plan (DRP) applies with a 2.5% discount to the 5-day volume-weighted average price.
  • Reduced Interest and Tax Costs: Finance costs paid were $0.5 million, and income tax paid was $1.1 million.
  • The company invested $17.2 million into its ongoing share buy-back program during the reporting period. This suggests that the company is engaging in share repurchases, which can be a positive signal to investors, indicating management’s confidence in the business and a strategy to return value to shareholders.
  • Gross Profit up 42.2% YoY.
  • NPAT up by 136.4%
🚩 Negative Aspects
  • Decreased Revenue: The revenue for 1HFY24 was $248.2 million, down from $275.6 million in 1HFY23, representing a decrease of 9.9%, despite increase of gross sales from Kogan verticals collectively grew 25.6% on pcp.

  • Higher Cash Outflows for Investing Activities: Net cash used in investing activities was $14.0 million, due to significant expenditures like the Tranche 4 payment for the Mighty Ape acquisition ($10.9 million) and ongoing investment into the share buy-back program ($17.2 million).
  • Negative Cash Flows from Financial Activities: Net cash used in financing activities was $20.3 million, largely due to the share buy-back program.
  • Unrealized Losses: There was a small unrealized loss of $0.1 million related to shares held and open forward foreign exchange contracts.
  • Equity-Based Compensation: Equity-based compensation related to performance rights and options granted to team members resulted in an adjustment of $2.1 million.
  • Lack of Earnings Guidance: The company does not provide specific earnings guidance, which may create uncertainty for investors.

As per 3QFY24

(ASX: KGN) fell by 28% following the 3QFY24 report, it suggests that the market reaction to the report was quite negative. There could be several reasons why investors may have viewed the report unfavorably, despite some positive aspects. Here are some possible factors contributing to this reaction:

  1. Revenue and Gross Sales Declines: The report indicates that gross sales fell by 6.2% year-on-year, while revenue declined by 2.4%. These declines can signal that the company is experiencing reduced demand, impacting overall business growth. Investors often react negatively to declining sales and revenue, as it can indicate a slowdown in business operations.
  2. Reduced Cash Reserves: The company’s cash reserves decreased from $49.1 million in March 2023 to $34.1 million in March 2024. This reduction in cash could raise concerns about the company’s liquidity and its ability to fund operations or invest in growth opportunities without external borrowing.
  3. Inventory Reduction: The report mentions that the company has recalibrated its revenue quality and reduced inventories by 9.2% year-on-year. While this might be a strategic move to reduce carrying costs, it could also indicate that the company has been experiencing slower sales or excess inventory, both of which can be detrimental to profitability.
  4. Adjusted EBITDA and EBIT: Although these metrics improved year-on-year, they are calculated after excluding non-cash items like unrealized gains/losses and equity-based compensation. Investors might view these adjustments as a way to make results appear more favorable, raising concerns about the underlying health of the business.
  5. Mixed Business Performance: The report outlines varied performance across the company’s business lines. For example, Kogan Marketplace and Exclusive Brands saw declines, while Kogan FIRST and Kogan Mobile experienced growth. This mixed performance can contribute to uncertainty about the company’s future prospects.
  6. Share Buy-Back Program: The company invested $33.8 million into its share buy-back program over the past 12 months. While share buy-backs can signal confidence in the company’s future, they can also raise concerns if the cash could be used for other purposes, like expanding business operations or maintaining liquidity.

Overall, the 3QFY24 report provides both positive and negative aspects.

Based on the information provided by the report, the company experienced some challenges, like declining revenues and gross sales, but it also shows strong profitability and a robust balance sheet. While the 28% stock drop might indicate market skepticism, there’s no clear evidence that the company’s business model is fundamentally compromised, as it continues to adapt, expand, and maintain a healthy balance sheet. The recent higher than expected CPI (3QFY24) represents greater risk of higher interest rates, however, it also represents hot economy.

Outlook for H2 FY24

Kogan profitability has improved with increased gross margins, indicating a positive trend. However, the decline in gross sales and revenue in 3QFY24 suggests potential headwinds. Overall, the company’s strong cash position, with no external debt, and continued focus on profitability and customer loyalty could support a stable outlook, but challenges related to sales performance and market volatility may persist.

Technical Analysis Overview with Key Fundamentals for ASX: KGN

After Kogan’s (ASX: KGN) Q3 FY24 report, the stock experienced a significant drop, falling 28% in a single day, totaling a 41% crash for the month. Despite the company’s improved Net Profit After Tax (NPAT) for the year and for the quarter, the market seemed to focus on a decline in revenue, which likely contributed to the stock’s sharp decline.

However, looking at the broader picture, if you had invested in Kogan stock one year ago, you would still have made a 36% return despite the recent crash, indicating that KGN has been a reasonably good investment so far.

Key Technical and Fundamental Points

  • Technical Discount: The stock is currently trading at a technically discounted price, presenting a compelling entry opportunity for both short-term and long-term investors. This indicates that the recent crash could be an overreaction by the market.
  • Improved NPAT: The business has shown resilience, with NPAT continuing to improve despite the revenue decline, suggesting that the company is successfully adapting to current macroeconomic conditions.
  • Potential Overreaction: The recent market response might have been overly negative, given the company’s ongoing profitability and focus on maintaining a healthy balance sheet.
  • 🚩 Red Heiken Ashi Candle: The technical chart shows a red candle on the Heiken Ashi, indicating a potential downward trend. However, this might also signal a buying opportunity for those seeking to capitalize on the stock’s discounted price.
  • 🚩 Strong Volume to the Downside: in the recent crash, the trading volume has been strong, indicating continued interest and also panic sell off, which could lead to a recovery as the market corrects itself upon this overreaction.

Considering these factors, Kogan’s business model appears to remain solid, with a strong customer base and an expanding portfolio of services. The recent drop could be a temporary market reaction, presenting an attractive entry point for investors seeking long-term growth.

ENTRY DETAILS (AVAILABLE FOR VIP MEMBERS ONLY, login required)

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  • Targets BGS20 and BG Trading, Stop loss.
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