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Why the Kogan.com Ltd (ASX:KGN) share price crashed 24.5% lower today

Source: Kogan presentation

It certainly has been a disappointing start to the week for the Kogan.com Ltd (ASX: KGN) share price.

In morning trade the ecommerce company’s shares have fallen 24.5% to $3.50.

Disappointingly, this decline means its shares are within sight of their 52-week low and have now given back all the gains they made over the last 12 months.

Why are Kogan.com’s shares crashing lower?

This morning Kogan.com released a business update for the first quarter of FY 2019. As you may have guessed from the share price reaction, it wasn’t overly positive.

During the quarter the company saw revenue grow 33% in the month of July, but things deteriorated from there. Kogan posted a 15.7% increase in Exclusive Brands revenue and a 73% lift in Partner Brands revenue.

However, offsetting this growth was a surprising 27.4% decline in Global Brands revenue. Management has blamed changes in the GST law effective from 1 July 2018 and “the now apparent avoidance of GST by a number of foreign websites selling into Australia.”

The company has warned that it is unable to determine whether the recent widespread avoidance of GST will be temporary.

Unfortunately, this has impacted its gross margin. Management has advised that the increased competition from foreign websites selling into Australia without GST, the decline of the Australian dollar, and other factors are behind the narrowing of its gross margin. No further gross margin details were provided by the company.

Another disappointment for investors will no doubt be the increase in its costs. The release explains that expenditure on marketing grew by more than 30% year-on-year during the quarter. Management made the move to address the decline in sales of its Global Brands and to bolster the growth in other Product Divisions.

In addition to this, the expenditure on variable costs grew by more than 40% year-on-year due to the strategic expansion of its warehousing footprint into additional distribution centres around Australia and the increasing of inventory levels in the lead up to the peak Christmas quarter.

One of the few positives during the quarter was its 41.6% increase in active customers to 1,450,000.

What now?

I’ve been considering a purchase of Kogan.com’s shares for some time but suggested numerous times that investors wait for a trading update before making a move.

I’m relieved that I did. I thought this update was very disappointing and I can’t say I’m surprised by the selloff today.

Especially given the fact that management hasn’t provided any margin or earnings guidance. I feel this is vitally important for Kogan.com because it trades with such slender margins, making any weakness in its gross margin very noticeable on the bottom line.

I intend to avoid Kogan.com’s shares until its annual general meeting on November 16. Hopefully at that point management will add a bit more colour to this update and provide guidance for the full year.

Until then I think tech shares such as Aristocrat Leisure Limited (ASX: ALL) and Appen Ltd (ASX: APX) could be worth a look.

Alternatively, these tech shares could be a great alternative to Kogan.com.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Kogan.com ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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