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Why I think the Kogan.com share price is cheap

After months of lacklustre performance, shares of online retailer Kogan.com Ltd (ASX:KGN) surged over 40% higher to $4.57 last week after the company announced that it had generated record sales over the Christmas trading period.

In the announcement, Kogan reported that active customer numbers had increased by 32% year-on-year to a little over 1.5 million as at 31 December 2018, while total first half FY19 revenues were up 9.7% versus first half FY18.

This was an especially strong result given that revenues for Kogan’s Global Brands division decreased by almost 50% compared to the prior comparative period.

Kogan has blamed this reduction on changes to the GST law which came into effect on 1 July and which seem to have allowed overseas e-commerce websites to avoid having to pay GST when selling to Australian customers, making it far more difficult for Kogan to compete.

Additionally, sales of Apple products decreased significantly versus the prior corresponding period – to such an extent that, excluding Apple products, first half revenues from Global Brands was actually marginally up on 1H18.

However, sales in the Exclusive Brands and Partner Brands divisions were so strong that the company was able to absorb its Global Brands losses and still grow its overall revenues. Partner Brands performed especially well, with revenue growth of almost 93% against the prior comparative period.

The incredible surge in the company’s share price was also partly due to the fact that Kogan’s announcement caught the market off guard.

According to ABC News, Morgan Stanley analysts had predicted subdued performance across non-food retailers over the Christmas festive period. The rise in popularity for Black Friday sales meant that national retail sales for November were higher than anticipated, but many analysts predicted that this signalled a shift in the retail calendar and that consumers would run out of puff (and cash) by the time the traditional Boxing Day sales came around.

This prediction seemed to have come true for Kathmandu Holdings Limited (ASX:KMD) after it released a first half FY19 profit downgrade based on disappointing sales results over the Christmas and Boxing Day period. Kathmandu’s announcement spooked the market and caused a broad sell-off of retail stocks, with Myer Holdings Limited (ASX:MYR), JB Hi-Fi Limited (ASX:JBH), Super Retail Group Limited (ASX:SUL) and Premier Investments Limited (ASX:PMV) all losing ground in January.

Should you invest?

I’m not overly bullish on retail shares at the moment. Retreating national house prices and the possibility of rising interest rates generally tend to make consumers spend less. When house prices fall, people feel that the amount of wealth they possess is decreasing so they are less likely to splurge on retail items. Rising interest rates reduce rates of borrowing (including on credit cards), and encourage saving rather than consumption.

However, Kogan has already proven that it can buck the trend by growing its revenues while other retailers are contracting. At the same time, it has managed to fend off threats from global e-commerce giant Amazon.

Part of this may be due to the fact that its Kogan-branded products provide decent quality discount alternatives to luxury brand items, allowing it to still increase its sales even when the broader retail sector is suffering. Plus, Kogan is a well-diversified business, selling travel deals, health and pet insurance and mobile phone plans in addition to electronics and other household goods.

All this is to say that, while the overall retail sector may contract over the shorter-term, Kogan has demonstrated that it has the ability to outperform its peers. The company may not be the market darling it once was, and at current prices its shares are still well shy of the 52-week high of $10 they reached in March of last year – but if you’re looking for some retail exposure for your portfolio, Kogan has proven that it is still an investment well worth considering.

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Motley Fool contributor Rhys Brock owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. 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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