Kogan’s Trading Update Shows Signs of Improving Profit Margins

We maintain our earnings forecasts and AUD 10.70 fair value estimate for no-moat Kogan KGN. First-half fiscal 2023 results were released on Jan. 24, including a 33% decline in gross sales to AUD 471 million and an adjusted loss before interest, tax, and depreciation to AUD 4 million.

First signs of improving underlying operating performance are emerging. January 2023 was the first month in which Kogan generated a profit at the adjusted EBITDA level since July 2022. Deep discounting to rightsize inventory levels had heavily affected profits in the first half of fiscal 2023. Illustrating the extent of discounts, its third-party brands segment reported a net loss at the gross profit line, that is, on average, third-party products were sold below their costs. However, management expects improving third-party and exclusive brands contributions to group earnings, now that the bulk of the group’s excess inventory has been cleared. In January 2023, the group’s gross margins have already improved by 8 percentage points to 33% year on year. Adjusted EBITDA for the month was AUD 1.5 million.

We estimate Kogan’s adjusted EBITDA at AUD 20 million in the second half of fiscal 2023, as marketing and warehouse expenses decline as a percentage of gross. We also forecast top-line growth to reignite, albeit at a lower level than enjoyed during COVID-19 restrictions. In January 2023, gross sales declined by 33% on the prior corresponding period. But Kogan will be lapping relatively weaker sales for the remainder of fiscal 2023.

Our forecast implies second-half gross sales to be 18% above second-half fiscal 2020 levels, unadjusted for the acquisition. In January 2023, gross sales were up 8% versus January 2020, without adjusting for the Mighty Ape acquisition in December 2020.