Kogan: Profit Margins Continue To Expand Despite Weaker-Than-Expected Sales

We maintain our AUD 10.70 fair value estimate for no-moat Kogan KGN. Share prices have doubled in the last 12 months, but nevertheless we still think they screen as significantly undervalued. Current share prices could imply the market is more cautious than us on Kogan’s growth potential, which we expect to be underpinned by a structural shift to e-commerce.

While we downgrade our near-term earnings, our positive outlook for Kogan remains. Fourth-quarter trading was much weaker than we had anticipated. However, we continue to expect top-line growth to reignite in fiscal 2024, albeit at a lower level than during COVID-19 restrictions. Corresponding with the return to high-single-digit growth in gross sales, or gross merchandise value, we anticipate significant operating leverage to boost profits.

The 28% drop in in Kogan’s fiscal-2023 gross sales versus the previous corresponding period was greater than our expectation of a 21% decline. We had previously expected Kogan’s sales to start increasing again in June-quarter 2023, but instead, gross sales slid by 8%. However, Kogan’s sales momentum has been steadily improving during fiscal 2023, and management expects top line performance to return to growth over fiscal 2024. We forecast 7% gross sales growth in fiscal 2024, but off a materially lower sales base, some 30% below peak levels of around AUD 1.2 billion in fiscal years 2021 and 2022.

Despite soft trading, Kogan’s underlying business improved markedly in June-quarter 2023. Reduced inventory lowered warehousing costs, but more importantly removed the need for deep discounting to clear stock. We calculate gross profit margins—as a percentage of gross sales—increased by over 300 basis points compared with March-quarter 2023, and by over 500 basis points versus June-quarter 2022.