MENU Ltd (ASX:KGN) shares drop lower on disappointing trading update

The Ltd (ASX: KGN) share price has dropped lower in early afternoon trade following the release of its annual general meeting presentation.

At the time of writing the ecommerce company’s shares are down 2%.

What was in the presentation?

The presentation included the results of its shareholder vote, a breakdown on its performance in FY 2018, and a trading update for the current financial year.

One thing that immediately jumped out at me was the result of the vote for chairman David Shafer’s re-election.

Shareholders don’t appear to have been pleased with the way Mr Shafer has been selling a considerable number of shares this year. A sizeable 17.3% of shareholders voted against his re-election.

What about FY 2019? has had a mixed start to FY 2019 due to challenging market conditions in its Global Brands Product Division which contributed 18.3% of its Gross Profit in FY 2018.

In the first quarter the segment saw its revenue slide 27.4% on the prior corresponding period. Since then, things have deteriorated further. Segment revenue fell a massive 48.4% in October compared to the October 2017.

No mention was made in relation to improvements in November, so I suspect conditions remain tough.

One big positive, though, has been the performance of its Partner Brands Product Division which was responsible for 20.5% of its Gross Profit in FY 2018.

Revenue was up 73% in the first quarter and accelerated to 84.1% year on year growth in October.

The company’s key Exclusive Brands Product Division, which represented 44.2% of its gross profit in FY 2018, has also been performing well in October. After a reasonably slow start to the year, year on year revenue growth accelerated to 38% during last month.

What does this mean for its margins?

Management advised that that its gross margin declined year on year during the September quarter, but rebounded in October to levels above the last financial year.

While this is a positive, it is worth noting that the company has seen its costs grow significantly, potentially offsetting this improvement.

Overheads, marketing, and employee costs have grown ahead of revenue, whereas variable costs have also “increased significantly year on year”.

Should you invest?

Based on everything that management has said, unless there is a major improvement over the Christmas period, I wouldn’t be surprised to see post flat earnings in the first half of FY 2019.

In light of this, I intend to continue avoiding until it either provides clear guidance or releases its half year results.

In the meantime, I would suggest investors looking for exposure to the retail industry consider Bapcor Ltd (ASX: BAP) or Super Retail Group Ltd (ASX: SUL).

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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 and has recommended Bapcor. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended 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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