Company Reports

No-moat Kogan is grappling with muted consumer demand. Gross sales growth in the March quarter of 2024 missed our expectations. Operating margins, or adjusted EBITDA per gross sales, strengthened on the December 2023 quarter and on the previous corresponding period. However, without the expected return to top-line growth, operating costs weighed on margins. We materially downgrade our earnings outlook for fiscal 2024 and 2025 by 19% and 15%, respectively.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

No-moat Kogan’s first-half 2024 underlying earnings per share of AUD 0.10 met our expectations, with underlying EBITDA of AUD 21.5 million already reported in January 2024. Nevertheless, we increase our fiscal 2024 underlying EPS estimate by 8% to AUD 0.16 due to a significant hike in subscription fees from April 2024. While we expect higher Kogan First earnings to boost the bottom line in the near term, we anticipate the elevated fee structure to hamper longer-term membership growth.

Kogan’s business strategy is broadly based on low-price leadership. However, as the competitive outlook intensifies from both Amazon and omnichannel retailers, Kogan is adjusting by launching a new online marketplace and building its product offerings in bulkier goods. Compared with new entrants and most traditional retailers, while replicable we believe Kogan is far ahead on its supply chain, operational automation, IT, and sourcing capabilities. It outsources delivery and uses third-party logistics providers for warehousing, but has built a proprietary least-cost routing system that automatically calculates the best carrier depending on the article ordered.

We maintain our fair value estimate on no-moat Kogan at AUD 10.70 per share. Shares screen as significantly undervalued. Despite encouraging improvements in operating earnings, and a meaningful lift in the share price today, the market still appears cautious over Kogan’s long-term sales growth potential. But we think it will be underpinned by a structural shift to e-commerce.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We maintain our fair value estimate on no-moat Kogan at AUD 10.70 per share. Shares screen as significantly undervalued. Despite encouraging improvements, the market appears cautious over Kogan’s ability to expand profit margins and its long-term sales growth potential, which we expect to be underpinned by a structural shift to e-commerce.

We maintain our fair value estimate on no-moat Kogan at AUD 10.70 per share. Kogan’s first-quarter adjusted EBITDA of AUD 8 million broadly tracks our unchanged AUD 40 million fiscal 2024 adjusted EBITDA forecast. This implies a seasonally strong December quarter and trading in the second half in line with the September quarter. However, our investment thesis hinges on sales growth to accelerate beyond fiscal 2024. From fiscal 2025 we forecast Kogan’s Australian gross sales to increase at an average rate of 7% over the next decade.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We were astonished by the severe selloff in no-moat Kogan shares following a mostly known fiscal 2023 result. We ascribe the market’s reaction to a muted short-term outlook. Shoppers are still reining in their discretionary spending, and management cited gross sales growth is more likely to strengthen in the second half of fiscal 2024. We taper our fiscal 2024 earnings estimate, adopting a more cautious outlook on fiscal 2024 gross sales growth of 2%, down from 7% before. We also expect more muted operating leverage and reduce our near-term underlying EBITDA margins to 5% from 7% previously. However, our longer-term earnings estimates from fiscal 2025 are largely unchanged. The valuation impact of the weaker near-term outlook is immaterial after offsetting it by the time value of money effect. Shares screen as significantly undervalued compared with our unchanged AUD 10.70 fair value estimate. The market appears more cautious than us on Kogan’s ability to expand profit margins, or its long-term growth potential, which we expect to be underpinned by a structural shift to e-commerce.

We maintain our AUD 10.70 fair value estimate for no-moat Kogan. 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.

We maintain our earnings forecasts and AUD 10.70 fair value estimate for no-moat Kogan. First-half fiscal 2023 results were released on Jan. 24, 2023, including a 33% decline in gross sales to AUD 471 million and an adjusted loss before interest, tax, and depreciation to AUD 4 million. See our note published the same day: “Clearing Excess Inventory Costs Kogan Dearly, but Allows Margin Recovery in Second Half.”

We maintain our AUD 11.70 per share fair value estimate for no-moat Kogan. Kogan's underlying loss per share of AUD 0.03 for fiscal 2022 missed our estimate of a loss of AUD 0.01 per share, mainly due to lesser than expected income tax benefit. Gross sales of AUD 1.2 billion, gross profit of close to AUD 184 million, and underlying EBITDA of AUD 19 million were released in July 2022.

Kogan’s business strategy is broadly based on low-price leadership. However, as the competitive outlook intensifies from both Amazon and omnichannel retailers, Kogan is adjusting by launching a new online marketplace and building its product offering in bulkier goods. Compared with new entrants and most traditional retailers, while replicable we believe Kogan is far ahead on its supply chain, operational automation, IT, and sourcing capabilities. It outsources delivery and uses third-party logistics providers for warehousing, but has built a proprietary least-cost routing system that automatically calculates the best carrier depending on the article ordered.

Kogan’s business strategy is broadly based on low-price leadership. However, as the competitive outlook intensifies from both Amazon and omnichannel retailers, Kogan is adjusting by launching a new online marketplace and building its product offering in bulkier goods. Compared with new entrants and most traditional retailers, while replicable we believe Kogan is far ahead on its supply chain, operational automation, IT, and sourcing capabilities. It outsources delivery and uses third-party logistics providers for warehousing, but has built a proprietary least-cost routing system that automatically calculates the best carrier depending on the article ordered.