Can online retailer Kogan relive its COVID glory days?

Can online retailer Kogan relive its COVID glory days?

Several missteps and worse-than-expected trading performance have hammered Kogan shares. In early 2021, the business hinted at some growing pains, which were laid bare in May when the company said it would slice its earnings forecasts after buying too much inventory.

Kogan profit for the 2021-22 financial year plummeted 86 per cent and the company axed its dividend payout.

The company also drew shareholder ire at its annual meeting for poor performance and perceived mismanagement, with investors also protesting a generous share grant to Ruslan Kogan and David Shafer in the year prior.

Industry: Online retail.

Main products: Electronics, household goods.

Keyfigures: Chief executive Ruslan Kogan, chief financial officer David Shafer.

The bullcase: With Kogan’s share price just a few dollars above its 2016 initial public offering price, much of the bull case stems from hope it may be able to again reach the levels of performance it was reporting through the pandemic.

Barrenjoey analyst Tom Kierath told clients in a research note in June that Kogan may be able to turn a corner if consumer conditions improve at a better-than-expected rate, and overall online penetration in the market exceeds forecasts.

It is possible Kogan may also be able to improve his standing through some “strategically compelling” acquisitions, Kierath says. The company has been fairly active in the mergers and acquisitions space, most recently acquiring NZ retailer Mighty Ape.

The company’s recently launched marketplace – where third-party sellers can offer their goods on the Kogan website – could also deliver higher sales and profits, with UBS analysts giving the company a 12-month share price target of $6 under this scenario.

A downbeat economy could also see more shoppers opt for cheaper goods, which Kogan sells through its private-label range, which makes up about half its profit.

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The bear case: Many analysts remain pessimistic about the company following its half-year results in February.

Primary among their concerns are the company’s continued high levels of inventory, an issue it has been wrestling since May last year.

UBS analyst Tim Piper told clients last month the company was still carrying “significant levels” of excess inventory.

“We forecast Kogan’s gross margins to remain somewhat compressed in the near term while this is cleared, while this additional inventory should also drive an elevated warehousing expense,” Piper said. Kierath notes Kogan’s inventory levels are still about $30 million higher than they should be.

Investors are also concerned about the weak consumer environment as inflation continues to rise. Data out this week from major banks CBA and NAB shows spending on discretionary items, including Kogan’s key lines such as household products and electronics, has begun to fail.

Finally, the uptick in online spending during the pandemic has been both a blessing and a curse for Kogan, as other retailers are now pouring more resources into the channel, further increasing competition.

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A clear example is Woolworths’ recent $250 million acquisition of MyDeal, a close Kogan competitor. This, alongside Wesfarmers’ Catch, means there are now numerous well-funded competitors in the market.

“This, coupled with increased investment by omni-channel peers and continued investment by Amazon will result in a permanent step-change in customer acquisition costs and competitive intensity, reducing Kogan’s long-term earnings power,” Kierath says.

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