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Date : 07/03/2024

Why You Should Keep an Eye on Kogan (ASX: KGN) Heading Into FY25?

The performance of Kogan (ASX: KGN) has seen quite a bit of fluctuation over the recent years. Could there be a brighter horizon for the company despite current challenges? On the surface, the outlook might seem bleak with decreasing consumer interest, fierce market competition, and presently negative profits. However, a closer examination reveals that Kogan is in a stronger position now than even during its peak pandemic performance.

About Kogan

Kogan, established in 2006 by Ruslan Kogan, is primarily recognized for its online retail platform. While its flagship operation revolves around e-commerce, Kogan’s business extends beyond this. The company provides various services, including mobile plans, insurance, internet, and financial services, and sells its proprietary products alongside third-party items. Notably, its brands contribute significantly to the gross profit, surpassing 50%. Additionally, Kogan owns Mighty Ape, a New Zealand-based online retailer, and the e-commerce properties of Dick Smith. A critical component of its operations includes 31 warehouses to support the needs of its over 4.1 million active users.

Kogan also runs a loyalty program named Kogan First, echoing the benefits similar to those of Amazon Prime. This program boasts over 400,000 subscribers, offering exclusive deals, free shipping, and a special event called Kogan First Day, providing only deals to members.

The Journey of Kogan Shares

After the initial COVID-19 market downturn, Kogan’s stock value surged by almost 500% within seven months as consumers transitioned from physical stores to online shopping. However, this rapid ascent was followed by a sharp decline over the next two years, as depicted in stock performance charts. This downturn was partly due to consumers reverting to traditional shopping methods post-lockdowns, leaving Kogan with excessive inventory accumulated in anticipation of a continued online shopping trend and to mitigate supply chain issues.

Founders Reduce Stake

The significant decrease in dividends and the substantial sell-off of shares by the company’s founders have not been favourable developments. Initially, Ruslan Kogan and David Shafer held a combined 69.5% of the company’s shares in 2016, but this stake has since diminished to just 19%. Notably, Kogan offloaded shares worth $114 million when the stock price exceeded $20.

For the fiscal year ending 30 June 2022, the company reported a $35 million loss, a downturn from the previous year’s profit of approximately $3 million. This performance was influenced by unique items such as asset disposals and expenses related to equity compensation. Even after adjustments, the net profit after tax (NPAT) declined, moving from $42.9 million in profit to a $2.9 million loss, despite an increase in revenue over pre-pandemic figures, which then dropped by 8% to $718.5 million.

Signs of Improvement

At first glance, the FY23 results seemed discouraging, with the company still posting a loss and a 32% decrease in revenue over 12 months. However, several positive developments were noted:

  • Inventory levels decreased from $159.9 million to $68.2 million.
  • Operating cash flow reached $70.9 million.
  • The net cash position improved significantly, doubling from $31.2 million to $65.4 million, even after the final payment for the Mighty Ape acquisition.
  • The company’s customer base nearly reached 3 million.
  • The Kogan First loyalty program exceeded 401,000 subscribers, generating $26.3 million in revenue, a 70% increase year-over-year.

Impressive First Half in FY24

The first half of FY24 brought encouraging news, as evidenced by a 20% increase in the share price following the announcement. Despite a decrease in gross sales and revenue by 6% and 10%, respectively, to $446.6 million and $248.2 million due to inventory clearance and a strategic shift towards subscription-based revenue, the gross profit saw a significant increase of 42% to $89.5 million. Moreover, the company reported a positive NPAT of $10.2 million on an adjusted basis and $8.7 million on a statutory basis, with the cash balance growing to $83.3 million.

Competing in a Unique Market Space

Kogan’s ability to stand against global behemoth Amazon is noteworthy, given its focus on different product categories. While Amazon focuses on perishables and low-cost clothing items, Kogan specializes in consumer electronics and home furnishings. The company has streamlined its supply chain by sourcing directly from manufacturers.

Promising Outlook for the Next Three Years

Following Kogan, analysts are forecasting a slight decrease in revenue to $465.7 million (down 5%) but a significant rise in EBITDA to $41.3 million (up 506%) and a profit of $15.2 million, recovering from a $7 million loss. For FY25 and FY26, revenue, EBITDA, and NPAT are all expected to grow, indicating a positive trajectory for the company. Despite high P/E ratios, the PEG multiples for the coming years suggest that the stock might be undervalued, leading to a $9.37 per share, a 24% premium over its current price.

Kogan: A Stock to Watch

While Kogan appears to be moving in the right direction, potential investors are advised to exercise caution and consider timing their investments around the release of FY24 figures due to possible short-term market fluctuations. Given its performance recovery post-pandemic and promising future prospects, Kogan remains a company worth closely monitoring for its potential stable growth and improved business operations.

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