Does Kogan Have An Inventory Problem?

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Does Kogan have an inventory problem? Rising costs and tougher comparables are expected to create a headache for the online retailer heading into FY22

-Escalating costs for all online operators post-pandemic
-Excess inventory likely being cleared at lower margins
-Exclusive brands now more than 65% of revenue
 

By Eva Brocklehurst

As a result of investing in the business during the pandemic, Kogan.com ((KGN)) has experienced a cost blowout. Costs rose faster than revenue in the March quarter, leaving the market somewhat perplexed about the outlook with a resultant slump in the share price.

Jarden points out the company's update follows similar indications from listed online retail peers, which have experienced escalating costs as they have had to reinvest post the pandemic amid heightened competitive pressure.

While Kogan's gross sales and profit grew more than 47% and 54%, respectively, operating earnings fell more than -24% in the March quarter. The company has made a substantial investment in private label product and this has coincided with a large increase in warehousing/logistics expenses.

Excess inventory, Canaccord Genuity suspects, is also likely being cleared at lower margins. The broker calculates cost pressure will produce a -$15-20m drag on second half operating earnings. Moreover, similar to other e-commerce operators, the company will be cycling hard comparables going forward.

Jarden reduces revenue forecasts by -5% in FY21/22 and re-bases operating earnings forecasts downwards by -28-34% for the same period. This stems from increased discounting, higher warehousing, storage & marketing costs.

The broker suspects Kogan has an inventory problem, which will now be exacerbated by tougher comparables and, with a more aggressive strategy, this presents continue downside earnings risk. As well, Jarden observes a sharp increase in competitive intensity across Australia's online retail segment as marketplace businesses, in particular, face headwinds.

While Kogan is a strong player and there is a track record of positioning the business at the forefront of trends, the broker requires a more favourable risk/reward balance before adopting a more positive approach and downgrades to Neutral from Overweight, reducing the target to $12.27 from $19.30.

Structural?

Yet Canaccord does not believe the problem is structural but largely the delayed impact of strategic investments that were made during the depths of the pandemic. The broker expects the cost base to normalise in FY22, albeit with reduced margins. FY22 will begin with around 4m active customers, around $150m in inventory and a broader product range.

The company is also expected to invest in its own fulfillment network that will reduce the requirement for third-party providers and ultimately increase its competitive advantage. Private label contributes to around 50% of gross profit and it is a primary source of competitive advantage for Kogan and Canaccord retains a Buy rating and lowers the target to $18 from $25.

Still, Credit Suisse points out sales momentum appears to have slowed at a faster rate than the company expected, while some inventory arrived after the peak trading period in November/December because of shipping delays that were not unique to Kogan.

The broker agrees the issues are temporary and, therefore, remains positive about the growth opportunities over the medium term. The number of active customers continues to expand and exclusive brands are now more than 65% of revenue.

Credit Suisse believes the Kogan First program is an important means of creating and maintaining customer loyalty and a strong private-label offerings and significant customer base mean sales should grow at least in line with the online retail market.

While there is some uncertainty regarding the persistence of short-term costs associated with increased promotional activity, the broker is not concerned and retains an Outperform rating and a $17.93 target.

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