The Motley Fool

Should you invest in Kogan.com shares?

Shares in Australian online retailer Kogan.com Ltd (ASX: KGN) have performed strongly so far in 2019, surging more than 90% higher to $6.43 at the time of writing. The impressive gains have been driven by a series of positive financial results, which could see the company’s shares surge beyond the 52-week high of almost $7 they recorded a year ago.

But flashback to the end of 2018 and things hadn’t been looking so rosy for Kogan. After rocketing to an all-time high of nearly $10 in early June, the retailer’s shares quickly fell off a cliff. Concerns over the impact that changes to GST laws might have on the company’s ability to effectively compete with its overseas ecommerce rivals caused many skittish investors to jump ship. In a matter of months, Kogan’s shares lost more than half their value, plunging to well under $3 by mid-November.

But 2019 has so far been a year of significant recovery for Kogan – one in which the company has continued to show that its unconventional growth strategy can deliver impressive (and sometimes unexpected) results.

It surprised investors in December, delivering record sales over a Christmas period many other established retailers like Kathmandu Holdings Limited (ASX: KMD) found especially tough. Kogan demonstrated that it was able to absorb the losses to its Global Brands division caused by the GST changes by generating expansive sales growth in other divisions like Exclusive Brands and Partner Brands.

And this trend has continued throughout 2019. By the end of the fiscal year, Kogan had grown its active customer base by 15.9% to a little over 1.6 million, which drove revenue growth of 6.4% to $438.7 million. Efficient management of marketing costs in particular helped the company expand its margins and drive economies of scale, which meant growth in bottom-line NPAT outstripped the uplift in revenues: it surged 21.9% higher to $17.2 million.

Kogan ended FY19 with a healthy balance sheet too. It had over $27 million of cash in the bank, and of its $75.9 million worth of inventories, 99% was under a year old, showing that customer demand for its products has remained consistently strong. The company also hadn’t drawn down on its $30 million bank debt facility, keeping financing costs low.

In addition to its standard product divisions, Kogan is also attempting to grow its revenues via a series of new – and sometimes surprising – verticals that it has launched over the last year or two. Kogan has expanded into a series of unconventional markets recently, including mobile phone plans, pet and life insurance, internet plans, energy plans, as well as travel and car sales. It also operates its own online marketplace where sellers can partner with Kogan and list their products on the company’s website.

Foolish takeaway

I’ve tended to stay away from retail shares, but Kogan has always felt like a strangely compelling success story to me. It has managed to grow its brand awareness incredibly rapidly, allowing it to cement its position as a leading online Australian retailer. And because it doesn’t have the brick and mortar presence of other major local retailers like JB Hi-Fi Limited (ASX: JBH) or Myer Holdings Limited (ASX: MYR), Kogan has been able to scale its business quickly off a low cost base, giving it an immediate advantage over some of its more established rivals.

Add to that the fact that it has so far managed to fend off competition from major international ecommerce stores like Amazon, and it begins to become quite an attractive investment. But the big drop in its share price towards the end of 2018 does show that there is still a great deal of risk in owning Kogan shares.

Retail is a fickle industry and changes in tax regulations, as well as a slow-growing economy and dips in consumer confidence, can quickly dry up profits and turn off investors. So far Kogan has navigated these waters well, but do be wary of the impacts of these economic trends if you choose to invest.    

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Motley Fool contributor Rhys Brock owns shares of Kogan.com 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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